UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED APRIL 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number -- 0-20490
-------------------------------
THE CARBIDE/GRAPHITE GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 25-1575609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Code)
One Gateway Center, 19th Floor
Pittsburgh, PA 15222
(412) 562-3700
(Address, including zip code, and
telephone number, including area code,
of principle executive offices)
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of the close of business on June 13, 1997, there were 8,632,272 shares of the
Registrant's $.01 par value common stock outstanding.
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC.
INDEX TO FORM 10-Q
ITEM DESCRIPTION PAGE
- ------------ --------------------------------------------------- --------
PART I
1 Index to Financial Statements ..................... 2
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations .......... 12
PART II
1 Legal Proceedings ................................. 17
2 Changes in Securities ............................. *
3 Defaults Upon Senior Securities ................... *
4 Submission of Matters to a Vote of Security Holders *
5 Other Information ................................. *
6 Index to Exhibits and Reports on Form 8-K ......... 18
Signatures ........................................ 20
------------------
* Item not applicable to the Registrant for this filing on Form 10-Q.
1
<PAGE>
PART I
Item 1
INDEX TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
PAGE
------
Condensed Consolidated Balance Sheets
as of April 30, 1997 and July 31, 1996 ............................ 3
Unaudited Consolidated Statements of Operations
for the Quarters and Nine Months Ended April 30, 1997 and 1996 .... 4
Unaudited Consolidated Statement of Stockholders' Equity
for the Nine Months Ended April 30, 1997 .......................... 5
Unaudited Consolidated Statements of Cash Flows
for the Quarters and Nine Months Ended April 30, 1997 and 1996 .... 6
Footnotes to Unaudited Condensed Consolidated Financial Statements ..... 7
2
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of April 30, 1997 and July 31, 1996
(in thousands, except share information)
<TABLE>
<CAPTION>
April 30, July 31,
1997 1996 *
--------------- ----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $9,073 $16,586
Short-term investments .................................................. 15,687 10,138
Accounts receivable -- trade, net of allowance for doubtful
accounts: $2,000 at April 30 and $1,896 at July 31 ................... 49,370 45,392
Inventories (Note 2) ..................................................... 55,857 54,779
Income taxes receivable .................................................. 3,676 4,228
Other current assets ..................................................... 11,484 9,811
--------------- ----------------
Total current assets ................................................. 145,147 140,934
Property, plant and equipment, net ........................................... 76,249 65,177
Other assets ................................................................. 6,439 6,759
--------------- ----------------
Total assets ....................................................... $227,835 $212,870
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses:
Interest ............................................................... $1,571 $3,920
Other current liabilities ................................................ 33,120 32,189
--------------- ----------------
Total current liabilities ............................................ 34,691 36,109
Long-term debt ............................................................... 81,763 81,763
Other liabilities ............................................................ 20,720 20,190
--------------- ----------------
Total liabilities .................................................. 137,174 138,062
--------------- ----------------
Stockholders' equity:
Common stock, $.01 par value; 18,000,000 shares authorized; shares
issued: 9,752,272 at April 30 and 9,397,670 at July 31; shares
outstanding: 8,632,272 at April 30 and 8,277,670 at July 31 .......... 97 94
Additional paid-in capital, net of equity issue costs of $1,398 .......... 34,101 30,153
Retained earnings ....................................................... 61,273 48,381
Other stockholders' equity items ........................................ (4,810) (3,820)
--------------- ----------------
Total stockholders' equity ....................................... 90,661 74,808
--------------- ----------------
Total stockholders' equity ...................................... $227,835 $212,870
=============== ================
</TABLE>
* Summarized from audited fiscal 1996 balance sheet.
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
for the quarters and nine months ended April 30, 1997 and 1996
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Quarter Ended April 30, Nine Months Ended April 30,
------------------------------ ---------------------------------
1997 1996 1997 1996
-------------- ------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales .......................................... $74,923 $65,174 $217,720 $193,486
Operating costs and expenses:
Cost of goods sold ............................. 60,644 53,478 178,371 159,930
Selling, general and administrative ............ 3,417 3,119 10,845 9,268
Early retirement/severance charge (Note 5)....... 1,100 - 1,100 -
Other compensation (Note 5) .................... 318 588 1,232 1,474
Other income (Note 5) .......................... - 24 - (253)
-------------- ------------- --------------- ---------------
Operating income ........................... 9,444 7,965 26,172 23,067
Other costs and expenses:
Interest expense, net .......................... 1,902 2,148 6,099 6,989
Special financing expenses (Note 5).............. - 286 - 889
-------------- ------------- --------------- ---------------
Income before income taxes and
extraordinary loss ....................... 7,542 5,531 20,073 15,189
Provision for taxes on income (Note 3) ............. 2,794 1,551 7,181 4,857
-------------- ------------- --------------- ---------------
Income from operations ..................... 4,748 3,980 12,892 10,332
Extraordinary loss on early
extinguishment of debt, net of $45 and
$1,334 tax benefit for the quarter and nine
months ended, respectively (Note 5) ............. - (67) - (2,000)
-------------- ------------- --------------- ---------------
Net income ............................. $4,748 $3,913 $12,892 $8,332
============== ============= =============== ===============
Earnings per share information (Note 1):
Income from operations ......................... $0.54 $0.46 $1.46 $1.22
Extraordinary loss on early
extinguishment of debt ....................... - (0.01) - (0.24)
-------------- ------------- --------------- ---------------
Net income ............................. $0.54 $0.45 $1.46 $0.98
============== ============= =============== ===============
Common and common
equivalent shares ........................... 8,824,924 8,699,653 8,806,969 8,496,116
============== ============= =============== ===============
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
4
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the nine months ended April 30, 1997
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-In Retained Other Stockholders'
Shares Amount Capital Earnings Equity Items
------------- ----------- ------------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1996 *...... 9,397,670 $94 $30,153 $48,381 ($3,820)
Net income ..................... - - - 12,892 -
Exercise of stock options ...... 354,602 3 3,948 - (1,037)
Stock option compensation ...... - - - - 47
------------- ----------- ------------- ------------ --------------------
Balance at April 30,
1997 (Unaudited) ............. 9,752,272 $97 $34,101 $61,273 ($4,810)
============= =========== ============= ============ ====================
</TABLE>
- ------------------
* Summarized from audited fiscal year 1996 statement of stockholders' equity.
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
5
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the quarters and nine months ended April 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended April 30, Nine Months Ended April 30,
--------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ -------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income .............................................. $4,748 $3,913 $12,892 $8,332
Adjustments for noncash transactions:
Depreciation and amortization ......................... 2,712 2,255 7,831 6,453
Amortization of debt issuance costs ................... 85 89 257 336
Amortization of intangible assets ..................... 79 78 240 239
Deferred revenue ....................................... (34) (34) (101) (101)
Stock option compensation ............................. 7 21 47 66
Adjustments to deferred taxes ......................... 80 453 (530) 1,050
Provision for loss - accounts receivable .............. 30 30 90 90
Extraordinary loss on early extinguishment of debt .... - 112 - 3,334
Increase (decrease) in cash from changes in:
Accounts receivable ................................... 1,690 1,353 (4,068) 2,278
Inventories ........................................... (4,250) (1,364) (1,078) (1,585)
Income taxes .......................................... (1,017) (1,756) 552 (3,609)
Other current assets .................................. (803) 2,486 1,016 4,316
Accounts payable and accrued expenses ................. 2,649 (1,747) (743) (6,595)
Net change in other non-current
assets and liabilities .............................. 133 176 447 (1,871)
------------ ------------ -------------- ---------------
Net cash provided by operations ................... 6,109 6,065 16,852 12,733
------------ ------------ -------------- ---------------
Investing activities:
Capital expenditures .................................. (8,336) (4,003) (19,310) (11,204)
Proceeds from sale (purchases) of short-term
investments, net ................................... - 5,353 (5,409) -
------------ ------------ -------------- ---------------
Net cash provided by (used for) investing activities (8,336) 1,350 (24,719) (11,204)
------------ ------------ -------------- ---------------
Financing activities:
Repurchase of Senior Notes,
including premium of $86 and $2,386 for the
quarter and nine months ended, respectively ......... - (1,047) - (28,098)
Issuance of Common Stock,
net of equity issue costs of $990 .................. - - - 11,106
Proceeds from exercise of stock options ............... 119 846 354 1,489
------------ ------------ -------------- ---------------
Net cash provided by (used for) financing activities 119 (201) 354 (15,503)
------------ ------------ -------------- ---------------
Net change in cash and cash equivalents ................. (2,108) 7,214 (7,513) (13,974)
Cash and cash equivalents, beginning of period .......... 11,181 21,468 16,586 42,656
------------ ------------ -------------- ---------------
Cash and cash equivalents, end of period ................ $9,073 $28,682 $9,073 $28,682
============ ============ ============== ===============
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
6
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The Carbide/Graphite Group, Inc. and Subsidiaries herein are referenced as
the "Company." The Company's current fiscal year ends July 31, 1997.
1. Summary of Significant Accounting Policies:
Interim Accounting
The Company's Annual Report to Stockholders and Form 10-K for the fiscal
year ended July 31, 1996 include additional information about the Company, its
operations and its consolidated financial statements, and contains a summary of
significant accounting policies followed by the Company in preparation of its
consolidated financial statements and should be read in conjunction with this
quarterly report on Form 10-Q. These policies were also followed in preparing
the Unaudited Condensed Consolidated Financial Statements included herein. The
1996 year-end consolidated balance sheet data contained herein was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles.
In the opinion of management, all adjustments which are of a normal and
recurring nature necessary for a fair statement of the results of operations of
these interim periods have been included. Net income for the nine months ended
April 30, 1997 is not necessarily indicative of the results to be expected for
the full fiscal year. The Management Discussion and Analysis which follows these
notes contains additional information on the results of operations and financial
position of the Company. These comments should be read in conjunction with these
financial statements.
Earnings per Share
Primary earnings per share were computed by dividing net income by the
weighted average number of common and common equivalent shares outstanding
during the applicable period. The dilutive effect of common stock equivalents
was considered in the primary earnings per share computation utilizing the
treasury stock method. Fully diluted earnings per share were not presented as
the dilution was not material.
Recently Issued Accounting Pronouncements
On August 1, 1996, the Company adopted Statement of Financial Accounting
Standards #121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS #121). The adoption of SFAS #121 had
no impact on the Company's Unaudited Condensed Consolidated Financial
Statements.
On August 1, 1996, the Company adopted Statement of Financial Accounting
Standards #123, "Accounting for Stock-Based Compensation" (SFAS #123). SFAS #123
establishes compensation measurement and recognition alternatives and disclosure
requirements for stock-based compensation plans. The Company has elected to
continue to use the compensation measurement and recognition principles set
forth in Accounting Principles Board Opinion #25, "Accounting for Stock Issued
to Employees" to account for its stock-based compensation plans, an alternative
available under SFAS #123. The disclosure requirements of SFAS #123 will be
adopted during the Company's preparation of its year-end consolidated financial
statements for fiscal 1997.
In February 1997, the Financial Accounting Standards Board issued SFAS
#128, "Earnings per Share" (SFAS #128). The Company will be required to adopt
SFAS #128 for its fiscal year ending July 31, 1998. SFAS #128 requires the
presentation of basic and diluted earnings per share. Basic earnings per share
will be
7
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--Continued
computed utilizing only the weighted average common shares outstanding during
the relevant period. As a result, basic earnings per share will be materially
higher than primary earnings per share for certain periods restated in
connection with the implementation of SFAS #128. Diluted earnings per share will
be computed utilizing both the weighted average shares and common stock
equivalents outstanding. Diluted earnings per share will not differ materially
from either primary or fully diluted earnings per share amounts previously
disclosed.
2. Inventories:
Inventories consisted of the following (in thousands):
April 30, July 31,
1997 1996
------------ ---------------
Finished goods ........................... $13,104 $11,986
Work in process .......................... 30,936 29,880
Raw materials ............................ 10,033 9,132
------------ ---------------
54,073 50,998
LIFO reserve ............................. (8,884) (6,602)
------------ ---------------
45,189 44,396
Supplies ................................. 10,668 10,383
------------ ---------------
$55,857 $54,779
============ ===============
During the quarter ended January 31, 1996, the Company received a $1.0
million favorable settlement from a utility rate dispute with one of its
electric power suppliers. The $1.0 million payment received has been reflected
as a reduction to cost of goods sold for the nine months ended April 30, 1996.
3. Income Taxes:
The provision for income taxes for the quarters and nine months ended April
30, 1997 and 1996 are summarized by the following effective tax rate
reconciliations:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
April 30, April 30,
-------------------------------- ----------------------------------
1997 1996 1997 1996
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Federal statutory tax rate ................... 35.0% 35.0% 35.0% 35.0%
Effect of:
State taxes, net of federal benefit ..... 1.8 2.2 1.8 2.2
Foreign sales corporation benefit ....... (2.8) (1.3) (2.8) (1.3)
Prior year adjustments .................. 1.7 (7.2) 0.6 (3.8)
Other ................................... 1.3 (0.7) 1.2 (0.1)
------------- ------------- ------------- ---------------
Effective tax rate .................... 37.0% 28.0% 35.8% 32.0%
============= ============= ============= ===============
</TABLE>
The income tax provisions for the quarter and nine months ended April 30,
1997 were recorded based on the Company's projected effective income tax rate
for the fiscal year ending July 31, 1997. The effect of prior year adjustments
during the quarter and nine months ended April 30, 1996 is principally a $0.4
million fiscal 1995 tax benefit from the Company's foreign sales corporation.
8
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--Continued
All federal tax returns prior to fiscal 1995 have been settled with the
Internal Revenue Service. Management does not believe that the settlement of its
open tax years will have a material adverse effect on the Company's future
operating results.
4. Contingencies:
In May 1997, the Company was served with a subpoena issued by a Grand Jury
empanelled by the United States District Court for the Eastern District of
Pennsylvania. The Company was advised by attorneys for the Antitrust Division of
the United States Department of Justice (the DOJ) that the Grand Jury is
investigating price fixing by producers of graphite products in the United
States and abroad during the past five years. The Company is cooperating with
the DOJ in the investigation. The DOJ has granted the Company and certain former
and present senior executives the opportunity to participate in its Corporate
Leniency Program and the Company has entered into an agreement with the DOJ
under which the Company and such executives who cooperate will not be subject to
criminal prosection with respect to the investigation if charges are issued by
the Grand Jury. Under the agreement, the Company has agreed to use its best
efforts to provide for restitution to its domestic customers for actual damages
if any conduct of the Company which violated the Federal Antitrust Laws in the
manufacture and sale of such graphite products caused damage to such customers.
As far as the Company is aware, the DOJ has not made a finding that any person
or company violated the law with respect to the subject matter of the Grand Jury
proceeding. No provision for any liability related to such matters has been made
in the unaudited condensed consolidated financial statements.
In June 1997, Erie Forge and Steel, Inc. filed a purported class action
suit in the United States District Court for the Western District of
Pennsylvania, Erie Division, asserting claims on behalf of purchasers for
violations of the Sherman Antitrust Act. The action, which was filed against the
Company, UCAR International, Inc. and SGL Carbon Corporation, seeks treble
damages. The Company intends to vigorously defend against this action. No
provision for any liability related to such matter has been made in the
unaudited condensed consolidated financial statements.
The Company has investigated the regulatory requirements related to closing
a pond located at its Louisville, KY facility which was used to store
non-hazardous production waste. In November 1993, the Company contacted the
Kentucky Department of Environmental Protection (the Agency) and informed the
Agency that based on the Company's investigations of the historical facts
related to the pond, the Company does not believe that any further remedial
actions are required. The Agency has not yet responded to the Company's
findings.
The Company operates a permitted landfill for the disposal of residual
wastes at its St. Mary's facility. The adoption of new residual waste
regulations in Pennsylvania, coupled with decreasing capacity, will require the
upgrading or closure of this landfill by July 1997. The Company has decided to
close the landfill and contract outside of the Company for disposal services.
The Company's closure plan was approved by the Pennsylvania Department of
Environmental Resources during fiscal 1995 and consists of on-going stage
closure activities through July 1997, followed by a 15 year monitoring
commitment. Total costs related to the landfill closure and monitoring process
are expected to be approximately $0.8 million. The timing of payments related to
these activities, including payments for disposal services, is not expected to
materially impact the Company's cash flow in the future.
During fiscal 1995, the Company was named as a third-party defendant in a
Superfund action in Federal District Court in New Jersey relating to waste
disposal at a landfill located in Sayreville, New Jersey (the Sayreville
Litigation). Carbon Graphite Group, Inc. was named as successor to Airco-Speer
Company (Airco-
9
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--Continued
Speer). Since this landfill was closed prior to the organization of the Company
in 1988, the Company's only possible connection with the Sayreville Litigation
would be if it were a successor to Airco-Speer, a claim which it disputes.
Furthermore, in the Asset Purchase Agreement by which the Company acquired
assets from The BOC Group, plc (BOC), BOC agreed to provide an indemnification
for certain environmental matters. BOC has assumed and commenced the defense of
the Sayreville Litigation and agreed to indemnify the Company for certain losses
associated therewith in accordance with the terms of the Asset Purchase
Agreement. In addition, BOC asserts that the liability in this matter was
settled by a 1992 agreement with the plaintiffs in the present case. Based on
the above, management does not believe that the Company will incur a material
loss with respect to the Sayreville Litigation.
The Company is also party to various legal proceedings considered
incidental to the conduct of its business or otherwise not material in the
judgement of management. Management does not believe that its loss exposure
related to these cases is materially greater than amounts provided in the
unaudited condensed consolidated balance sheet as of April 30, 1997. As of April
30, 1997, a $0.6 million reserve has been recorded to provide for estimated
exposure on claims for which a loss is deemed probable.
5. Other Items:
Other Compensation
Other compensation for the quarter and nine months ended April 30, 1997
included $0.3 million and $1.0 million, respectively, in charges accrued for the
Company's incentive bonus plan. Other compensation for the quarter and nine
months ended April 30, 1996 included $0.3 million and $0.8 million,
respectively, in charges for the vesting of benefits paid under the Company's
performance unit plan at the close of fiscal 1996.
Early Retirement/Severance Charge
Early retirement/severance charges for the quarter ended April 30, 1997
represent costs associated with the retirement of two executives of the Company
during the quarter.
Other Income
In October 1994, the Company formally entered into a long-term contract
with an engineering design and consulting firm to provide process design
expertise and training services related to the construction of a graphite
electrode plant in the People's Republic of China. Revenue related to the
contract is recognized as services are performed for the
process-design-expertise portion of the contract, and using a percentage-of-
contract-completed approach for the training services stage of the contract.
Other income for the quarter and nine months ended April 30, 1996 represents
revenues earned under the process-design-expertise portion of the contract, less
applicable expenses. Total revenues under the contract were expected to be
approximately $5.2 million, $4.1 million of which has been recognized as of
April 30, 1997. At this time, the project has been delayed by the Chinese
Government and management cannot determine whether or not the balance of the
revenue expected under the contract will be realized.
10
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--Continued
Special Financing Expenses
Special financing expenses for the nine months ended April 30, 1996
represent accounting, legal, printing and other fees related to the Company's
public offerings of its Common Stock.
Extraordinary Loss on Early Extinguishment of Debt
During the nine months ended April 30, 1996, the Company repurchased, in
three open market transactions, $16.8 million in aggregate principal amount of
11.5% Senior Notes due 2003 (the Senior Notes) (together, the Repurchase), $1.0
million of which was repurchased during the quarter ended April 30, 1996. The
Repurchase resulted in a $1.2 million net extraordinary charge during the nine
months ended April 30, 1996 for the payment of the premiums associated with the
Repurchase and the write off of unamortized deferred financing fees related to
the original issuance of the Senior Notes.
In November 1995, the Company completed the redemption of $9.0 million in
aggregate principal amount of Senior Notes for 110% of par plus accrued and
unpaid interest (the Redemption). The Redemption was initiated pursuant to the
Senior Note Indenture which permits the redemption of a limited amount of Senior
Notes with proceeds obtained from the Company's initial public offering of its
Common Stock. The Redemption resulted in a $0.8 net extraordinary charge
recorded during the nine months ended April 30, 1996 for the payment of the
premium associated with the Redemption and the write off of deferred financing
fees related to the original issuance of the Senior Notes.
11
<PAGE>
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain financial information for the
quarters and nine months ended April 30, 1997 and 1996 and should be read in
conjunction with the Unaudited Condensed Consolidated Financial Statements,
including the notes thereto, appearing elsewhere in this Quarterly Report on
Form 10-Q:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
April 30, April 30,
---------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------ -------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales:
Graphite electrode products .............. $54,543 $45,136 $157,816 $132,497
Calcium carbide products ................. 20,380 20,038 59,904 60,989
------------ ------------ -------------- ---------------
Total net sales .................... $74,923 $65,174 $217,720 $193,486
============ ============ ============== ===============
Percentage of net sales:
Graphite electrode products .............. 72.8% 69.3% 72.5% 68.5%
Calcium carbide products ................. 27.2 30.7 27.5 31.5
------------ ------------ -------------- ---------------
Total net sales .................... 100.0% 100.0% 100.0% 100.0%
============ ============ ============== ===============
Gross profit as a percentage of segment net sales:
Graphite electrode products .............. 19.7% 17.3% 19.0% 15.8%
Calcium carbide products ................. 17.4 19.5 15.5 20.8
Percentage of total net sales:
Total gross profit ....................... 19.1% 17.9% 18.1% 17.3%
Selling, general and administrative ...... 4.6 4.8 5.0 4.8
Operating income ......................... 12.6 12.2 12.0 11.9
Income from continuing operations ......... 6.3 6.0 5.9 5.3
</TABLE>
------------------
Net sales for the quarter ended April 30, 1997 were $74.9 million versus
$65.2 million in the prior year comparable quarter, a 15.0% increase. Graphite
electrode product sales increased 20.8% over the prior year to $54.5 million,
while calcium carbide product sales were up 1.7% to $20.4 million. Net sales for
the nine months ended April 30, 1997 were $217.7 million versus $193.5 million
in the prior year comparable period, a 12.5% increase. Graphite electrode
product sales increased 19.1% over the prior year to $157.8 million, while
calcium carbide product sales decreased 1.8% to $59.9 million.
Within the graphite electrode products segment, graphite electrode net
sales for the quarter ended April 30, 1997 were $36.7 million, a 13.9% increase
over the prior year comparable quarter as a result of a 10.8% increase in
shipments and a 3.1% increase in the average net sales price of graphite
electrodes. Domestic and foreign electrode shipments as a percentage of total
electrode shipments for the quarter ended April 30, 1997 were 54.3% and 45.7%,
respectively, versus 51.3% and 48.7% in last year's third quarter. The majority
of foreign electrode sales are denominated in foreign currencies, most of which
have recently been weaker in relationship
12
<PAGE>
to the U.S. dollar, resulting in lower price realizations in foreign sales.
Needle coke sales for the quarter ended April 30, 1997 were $8.6 million versus
$4.5 million in the prior year comparable quarter. Needle coke sales were up
substantially over last year's third quarter due primarily to increased
production at the Company's needle coke production facility. The Company
estimates that as a result of capital expenditures during fiscal 1997, its
current effective annual capacity of this facility is 130,000 tons of needle
coke, up 15% over previous levels. In addition, the average net price for needle
coke was 13% higher during the current quarter versus last year's comparable
quarter. Graphite specialty product sales for the quarter ended April 30, 1997
totaled $9.3 million versus $8.4 million a year ago. Included in graphite
specialty product sales in the current quarter and prior-year comparable quarter
were $4.2 million of sales of large graphite rods and plates and other
processing sales to SGL Carbon Corporation (SGL Corp.) at cost under a supply
agreement which began in January 1995 and has a maximum term of three years (the
SGL Supply Agreement). The increase in graphite specialty product sales was
attributed to an increase in granular graphite and bulk graphite shipments.
For the nine months ended April 30, 1997, graphite electrode sales were
$110.5 million, a 10.6% increase over the prior year comparable period as a
result of a 5.0% increase in shipments and a 5.6% increase in the average net
sales price of graphite electrodes. Domestic and foreign electrode shipments as
a percentage of total electrode shipments for the nine months ended April 30,
1997 were 51.8% and 48.2%, respectively, versus 49.4% and 50.6% in the 1996
comparable period. Needle coke sales for the nine months ended April 30, 1997
were $20.7 million versus $11.9 million in the prior year comparable period. The
increase in needle coke sales was due primarily to increased production of
needle coke and a 15.5% higher net sales price. Graphite specialty product sales
for the nine months ended April 30, 1997 were $26.7 million versus $20.7 million
in the prior year comparable period. Sales to SGL Corp. during the nine months
ended April 30, 1997 were $13.2 million versus $11.6 million in the prior year
comparable period. The increase in graphite specialty product sales was
attributed to an increase in granular graphite and bulk graphite shipments.
Calcium carbide product sales for the quarter ended April 30, 1997
increased 1.7% due to an increase in shipments of electrically calcined
anthracite coal. Calcium carbide product sales for the nine months ended April
30, 1997 decreased 1.8% due to a 7.5% decreased in pipeline acetylene sales to
$20.4 million on 8.1% lower shipments.
Gross profit as a percentage of graphite electrode product sales for the
quarter ended April 30, 1997 was 19.7% versus 17.3% in the prior year comparable
quarter. Gross profit as a percentage of graphite electrode product sales for
the nine months ended April 30, 1997 was 19.0% versus 15.8% in the prior year
comparable period. The increase in the gross margins resulted from increased
shipments and selling prices for both graphite electrodes and needle coke, as
well as increased needle coke production during the current fiscal year.
Partially offsetting were the negative effects of increased feedstock costs at
the Seadrift needle coke facilities, which were 11.4% and 19.1% higher during
the quarter and nine months ended April 30, 1997, respectively.
Gross profit as a percentage of calcium carbide product sales for the
quarter ended April 30, 1997 was 17.4% versus 19.5% in the prior year comparable
quarter. The decrease in the calcium carbide gross margin was due to higher
material and labor costs experienced during the current quarter. Gross profit as
a percentage of calcium carbide product sales for the nine months ended April
30, 1997 was 15.5% versus 20.8% in the prior year comparable period. During the
prior year second quarter, the Company received a $1 million favorable
settlement from a utility rate dispute with one of its electric power suppliers.
The $1 million payment received was reflected as a reduction in cost of goods
sold for the nine months ended April 30, 1996. Exclusive of this settlement,
gross profit as a percentage of calcium carbide product sales for the nine
months ended April 30, 1996 was 19.1%. The decrease in the calcium carbide gross
margin was due to lower shipments of pipeline acetylene and higher material and
labor costs during the nine months ended April 30, 1997.
Selling, general and administrative expenditures for the quarter ended
April 30, 1997 were $3.4 million
13
<PAGE>
versus $3.1 million in the comparable 1996 quarter. The increase was due
primarily to increases in employee- related costs. Selling, general and
administrative expenditures for the nine months ended April 30, 1997 were $10.8
million versus $9.3 million in the comparable 1996 period. The increase was
primarily the result of the settlement of a lawsuit in the fiscal 1997 first
quarter and costs associated with the search for a new chief executive officer
for the Company.
Other compensation for the quarter and nine months ended April 30, 1997
included $0.3 million and $1.0 million, respectively, in charges accrued for the
Company's incentive bonus plan. Other compensation for the quarter and nine
months ended April 30, 1996 included $0.3 million and $0.8 million,
respectively, in charges for the vesting of benefits paid under the Company's
performance unit plan at the close of fiscal 1996.
Early retirement/severance charges for the quarter ended April 30, 1997
represents costs associated with the retirement of two executives of the Company
during the quarter.
In October 1994, the Company formally entered into a long-term contract
with an engineering design and consulting firm to provide process design
expertise and training services related to the construction of a graphite
electrode plant in the People's Republic of China. Revenue related to the
contract is recognized as services are performed for the
process-design-expertise portion of the contract, and using a percentage-of-
contract-completed approach for the training services stage of the contract.
Other income for the quarter and nine months ended April 30, 1996 represents
revenues earned under the process-design-expertise portion of the contract, less
applicable expenses. Total revenues under the contract were expected to be
approximately $5.2 million, $4.1 million of which has been recognized as of
April 30, 1997. At this time, the project has been delayed by the Chinese
Government and management cannot determine whether or not the balance of the
revenue expected under the contract will be realized.
Net interest expense for the quarter ended April 30, 1997 was $1.9 million
and included $2.5 million of interest expense associated with the Senior Notes,
less $0.4 million in interest income associated with the Company's cash
equivalents and short-term investments. Interest expense was further reduced by
$0.2 million for interest capitalized in connection with the Company's graphite
electrode modernization program (the Modernization Program). Net interest
expense for the nine months ended April 30, 1997 was $6.1 million, including
$7.4 million of interest expense associated with the Senior Notes, less $1.1
million of interest income and $0.2 million in capitalized interest. The average
outstanding balance of Senior Notes during the current quarter and nine-month
period was $81.8 million. Net interest expense for the quarter ended April 30,
1996 was $2.1 million and included $2.4 million of interest expense associated
with the Senior Notes, less $0.4 million in interest income. The average
outstanding balance of Senior Notes during the fiscal 1996 third quarter was
approximately $85 million. Net interest expense for the nine months ended April
30, 1996 was $7.0 million, including $8.1 million of interest expense associated
with the Senior Notes, less $1.4 million of interest income. The average
outstanding balance of Senior Notes during the nine months ended April 30, 1996
was approximately $94 million.
Special financing expenses for the quarter and nine months ended April 30,
1996 represent accounting, legal, printing and other fees related to the
Company's public offerings of its Common Stock.
The income tax provisions for the quarter and nine months ended April 30,
1997 were based on the Company's projected effective income tax rate for the
fiscal year ending July 31, 1997. The current year effective rate differs from
the federal statutory rate due primarily to state taxes, offset by benefits
derived from the Company's foreign sales corporation. See Note 3 to the
Unaudited Condensed Consolidated Financial Statements for more details on the
Company's effective tax rate.
14
<PAGE>
The extraordinary loss from the early extinguishment of debt recorded
during the quarter and nine months ended April 30, 1996 represent charges
associated with the Repurchase and the Redemption for the payment of premiums
and the write-off of unamortized deferred financing fees related to the original
issuance of the Senior Notes.
Recently Issued Accounting Pronouncements
On August 1, 1996, the Company adopted Statement of Financial Accounting
Standards #121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS #121). The adoption of SFAS #121 had
no impact on the Company's Unaudited Condensed Consolidated Financial
Statements.
On August 1, 1996, the Company adopted Statement of Financial Accounting
Standards #123, "Accounting for Stock-Based Compensation" (SFAS #123). SFAS #123
establishes compensation measurement and recognition alternatives and disclosure
requirements for stock-based compensation plans. The Company has elected to
continue to use the compensation measurement and recognition principles set
forth in Accounting Principles Board Opinion #25, "Accounting for Stock Issued
to Employees" to account for its stock-based compensation plans, an alternative
available under SFAS #123. The disclosure requirements of SFAS #123 will be
adopted during the Company's preparation of its year-end consolidated financial
statements for fiscal 1997.
In February 1997, the Financial Accounting Standards Board issued SFAS
#128, "Earnings per Share" (SFAS #128). The Company will be required to adopt
SFAS #128 for its fiscal year ending July 31, 1998. SFAS #128 requires the
presentation of basic and diluted earnings per share. Basic earnings per share
will be computed utilizing only the weighted average common shares outstanding
during the relevant period. As a result, basic earnings per share will be
materially higher than primary earnings per share for certain periods restated
in connection with the implementation of SFAS #128. Diluted earnings per share
will be computed utilizing both the weighted average shares and common stock
equivalents outstanding. Diluted earnings per share will not differ materially
from either primary or fully diluted earnings per share amounts previously
disclosed.
Liquidity and Capital Resources
Liquidity
The Company's current liquidity needs are primarily for debt service,
capital expenditures and working capital. As previously reported, the Company
has undertaken the Modernization Program with respect to its graphite electrode
production facilities which is expected to result in approximately $34 million
in facility improvements through fiscal 1998. One of the projects under the
Modernization Program will be financed through a seven year operating lease up
to $8.0 million. Also, in April 1997 the Company announced plans to build a $28
million longitudinal graphitizing facility, for which the engineering design
work has begun. The Company presently believes that its liquidity, capital
resources and cash flows from operations will be sufficient to fund all of its
liquidity needs through at least the expiration of its revolving credit facility
on December 1, 1998, subject to extension.
The deferral of principal payments until 2003 under the Senior Note
Indenture significantly reduces the Company's short-term debt service
requirements. However, in the event that the Company's cash flows from
operations and working capital are not sufficient to fund the Company's capital
expenditures (including cash needs for the Modernization Program and the
longitudinal graphitizing project) and service its indebtedness and pay any
other obligation including those that may arise from legal proceedings, the
Company would be required
15
<PAGE>
to obtain additional funding. There can be no assurance that sources of funds
would be available in amounts sufficient for the Company to meet its obligations
or on terms favorable to the Company.
As of April 30, 1997, the Company had cash, cash equivalents and short-term
investments of $24.8 million and had approximately $18.4 million of availability
under its revolving credit facility. As of April 30, 1997, no borrowings were
outstanding under the revolving credit facility; however, approximately $6.6
million of letters of credit were outstanding. Cash Flow Information
Operating activities: Cash flow provided by operations for the quarter
ended April 30, 1997 was $6.1 million, including $7.7 million of cash inflows
from net income plus non-cash items, offset by $1.6 million of net cash outflows
from changes in working capital items. Working capital cash outflows included
$4.3 million from increases in inventory, partially offset by cash inflows of
$2.6 from increases in payables and accrued expenses. Cash flow provided by
operations for the nine months ended April 30, 1997 was $16.9 million. Cash
inflows from net income plus non-cash items of $20.7 million were partially
offset by a $3.9 million net cash outflow due to changes in working capital
items, including a $4.1 million increase in customer accounts receivable and
$1.1 million increase in inventory. Net interest payments during the quarter and
nine months ended April 30, 1997 were $4.6 million and $9.0 million,
respectively. Net tax payments during the quarter and nine months ended April
30, 1997 were $3.1 million and $5.3 million, respectively.
Investing activities: Investing activities for the quarter and nine months
ended April 30, 1997 included $8.3 million and $19.3 million, respectively, in
capital expenditures. Also, investing activities during the nine months ended
April 30, 1997 included a $5.4 million net cash outflow from the purchase of
short-term investments. The Company believes that most of its future investing
activity cash flow requirements will be for capital expenditures, including the
Modernization Program. The Company believes that its current cash reserves,
future cash flow provided by operations, lease financing arrangements currently
entered into and borrowings under its revolving credit facility will be adequate
to fund its currently planned investing needs in the future.
16
<PAGE>
PART II
Item 1
LEGAL PROCEEDINGS
In May 1997, the Company was served with a subpoena issued by a Grand Jury
empanelled by the United States District Court for the Eastern District of
Pennsylvania. The Company was advised by attorneys for the Antitrust Division of
the United States Department of Justice (the DOJ) that the Grand Jury is
investigating price fixing by producers of graphite products in the United
States and abroad during the past five years. The Company is cooperating with
the DOJ in the investigation. The DOJ has granted the Company and certain former
and present senior executives the opportunity to participate in its Corporate
Leniency Program and the Company has entered into an agreement with the DOJ
under which the Company and such executives who cooperate will not be subject to
criminal prosection with respect to the investigation if charges are issued by
the Grand Jury. Under the agreement, the Company has agreed to use its best
efforts to provide for restitution to its domestic customers for actual damages
if any conduct of the Company which violated the Federal Antitrust Laws in the
manufacture and sale of such graphite products caused damage to such customers.
As far as the Company is aware, the DOJ has not made a finding that any person
or company violated the law with respect to the subject matter of the Grand Jury
proceeding. No provision for any liability related to such matters has been made
in the unaudited condensed consolidated financial statements.
In June 1997, Erie Forge and Steel, Inc. filed a purported class action
suit in the United States District Court for the Western District of
Pennsylvania, Erie Division, asserting claims on behalf of purchasers for
violations of the Sherman Antitrust Act. The action, which was filed against the
Company, UCAR International, Inc. and SGL Carbon Corporation, seeks treble
damages. The Company intends to vigorously defend against this action. No
provision for any liability related to such matter has been made in the
unaudited condensed consolidated financial statements.
During fiscal 1995, the Company was named as a third-party defendant in a
Superfund action in Federal District Court in New Jersey relating to waste
disposal at a landfill located in Sayreville, New Jersey (the Sayreville
Litigation). Carbon Graphite Group, Inc. was named as successor to Airco-Speer
Company (Airco- Speer). Since this landfill was closed prior to the organization
of the Company in 1988, the Company's only possible connection with the
Sayreville Litigation would be if it were a successor to Airco-Speer, a claim
which it disputes. Furthermore, in the Asset Purchase Agreement by which the
Company acquired assets from The BOC Group, plc (BOC), BOC agreed to provide an
indemnification for certain environmental matters. BOC has assumed and commenced
the defense of the Sayreville Litigation and agreed to indemnify the Company for
certain losses associated therewith in accordance with the terms of the Asset
Purchase Agreement. In addition, BOC asserts that the liability in this matter
was settled by a 1992 agreement with the plaintiffs in the present case. Based
on the above, management does not believe that the Company will incur a material
loss with respect to the Sayreville Litigation.
The Company is also party to various legal proceedings considered
incidental to the conduct of its business or otherwise not material in the
judgement of management. Management does not believe that its loss exposure
related to these cases is materially greater than amounts provided in the
unaudited condensed consolidated balance sheet as of April 30, 1997. As of April
30, 1997, a $0.6 million reserve has been recorded to provide for estimated
exposure on claims for which a loss is deemed probable.
17
<PAGE>
PART II
Item 6
A. INDEX TO EXHIBITS
Exhibit Page
- ----------- ---------
10.43 Master Lease between the Company and PNC Leasing
Corp. dated January 27, 1997 .............................. *
11.1 Form of Computation of Earnings per Common Share ......... 19
* Filed via the EDGAR electronic filing system.
B. REPORTS ON FORM 8-K
On February 19, 1997, the Company filed a Current Report on Form 8-K dated
February 13, 1997 related to the public release of its earnings for the quarter
ended January 31, 1997. On April 1, 1997, the Company filed a Current Report on
Form 8-K dated April 1, 1997 related to the election of Walter B. Fowler as
Chairman, President and Chief Executive Officer of the Company. On April 23,
1997, the Company filed a Current Report on Form 8-K dated April 21, 1997
related to the announcement of a $28.0 million Longitudinal graphitizing
project.
18
<PAGE>
Exhibit 11.1
FORM OF COMPUTATION OF EARNINGS PER COMMON SHARE for the
quarters and nine months ended April 30, 1997 and 1996
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Quarter Ended April 30, Nine Months Ended April 30,
----------------------------- ---------------------------------
1997 1996 1997 1996
------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
1. Income from operations ................. $4,748 $3,980 $12,892 $10,332
2. Extraordinary loss on early
extinguishment of debt ............. - (67) - (2,000)
------------- ------------- -------------- ---------------
3. Net income (1 + 2)................. $4,748 $3,913 $12,892 $8,332
============= ============= ============== ===============
4. Weighted average
shares outstanding .................. 8,606,439 7,873,503 8,478,605 7,309,715
5. Shares issuable under dilutive
management stock options and
performance units ................... 218,485 826,150 328,364 1,186,401
------------- ------------- -------------- ---------------
6. Common and common equivalent
shares outstanding (4 + 5)........... 8,824,924 8,699,653 8,806,969 8,496,116
============= ============= ============== ===============
Per share information:
Income from operations
(1 / 6).............................. $0.54 $0.46 $1.46 $1.22
Extraordinary loss on debt repayment
(2 / 6).............................. - (0.01) - (0.24)
------------- ------------- -------------- ---------------
Net income (3 / 6)................ $0.54 $0.45 $1.46 $0.98
============= ============= ============== ===============
</TABLE>
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the following authorized officers on June 13, 1997.
Signature Title
- ------------------------------- ---------------------------------------------
/s/ Walter B. Fowler Chief Executive Officer
- ------------------------------- (Principal Executive Officer)
(Walter B. Fowler)
/s/ Stephen D. Weaver Vice President - Finance and Chief Financial
- ------------------------------- Officer (Principal Financial Officer)
(Stephen D. Weaver)
/s/ Jeffrey T. Jones Controller (Principal Accounting Officer)
- -------------------------------
(Jeffrey T. Jones)
20
PNC LEASING CORP
PNCBANK
Master Lease Agreement Lease No. 436
This Master Lease Agreement ("Lease") is made this 27th day of January, 1997, by
and between PNC LEASING CORP (the "Lessor"), a subsidiary of PNC Bank, National
Association (the "Bank"), with an address at Two PNC Plaza, 13th Floor, 620
Liberty Avenue, Pittsburgh, Pennsylvania 15265, and THE CARBIDE/GRAPHITE GROUP,
INC. (the "Lessee") with its address at One Gateway Center, 19th Floor,
Pittsburgh, PA 15222.
1. LEASE AGREEMENT. Lessor hereby leases to Lessee, and Lessee hereby rents from
Lessor, all the machinery, equipment and other personal property (individually
an "Item of Equipment" and collectively the "Equipment") described in Schedules
of Leased Equipment which are or may from time to time hereafter be executed by
Lessor and Lessee and attached hereto or incorporated herein by reference
("Schedules") upon the terms and conditions set forth in this Lease. When used
herein the term "Equipment" shall be deemed to refer to the Equipment described
in a specific Schedule, unless the context clearly indicates otherwise. The
invalidation, fulfillment, waiver, termination, or other disposition of any
rights or obligations of either the Lessee or Lessor, or both of them, arising
from the execution of this Lease in conjunction with any Schedule shall not
affect the status of the rights and/or obligations with either or both of the
parties arising from the execution of this Lease in conjunction with any other
Schedule, so long as the Lessee has not defaulted under the terms and conditions
of this Lease or any Schedule. In the event of any such default by Lessee,
Lessor may declare this Lease and any Schedule to be in default hereunder and
the Lessor may proceed with its remedies against the Lessee in accordance with
paragraph 23 herein, with respect to any particular Schedule or all Schedules.
An executed counterpart of this Lease (including any Schedules, supplements,
amendments, addenda or riders thereto) or a photocopy thereof, together with an
executed original of any numbered Schedule marked "Lessor", shall be the
original "lease" for the Equipment described in such Schedule and together they
shall constitute a separate and enforceable lease. All other executed
counterparts of such numbered Schedule shall be marked and considered a
"Duplicate". To the extent this Lease constitutes chattel paper, as that term is
defined in the Uniform Commercial Code as adopted and in effect in the
Commonwealth of Pennsylvania ("UCC"), no security interest in the Lease may be
created through the transfer of possession of any counterpart other than the
Lessor copy of the numbered Schedule.
2. TERM. The obligations of the parties under this Lease commence upon the
written acceptance hereof by Lessor and shall end upon full performance and
observance of each and every term, condition and covenant set forth in this
Lease and any extensions hereof. The rental term for Equipment listed in each
Schedule shall commence on the date indicated on such Schedule and shall
terminate on the last day of the term stated in such Schedule. Any interim
rental term shall also be set forth in any such Schedule as appropriate.
3. RENT. The rent, including interim rental payments, for the Equipment
described in each Schedule shall be the amount stated in such Schedule. Rent is
an absolute obligation of Lessee due upon the inception of each base or interim
rental term and payable as specified in each applicable Schedule irrespective of
any claims, demands, set-offs, actions, suits or proceedings that Lessee may
have or assert against Lessor or any vendor of Equipment. Rent and interim rent
shall be payable to Lessor at P.O. Box 640306, Pittsburgh, PA 15264-0306, or at
such other place as Lessor or its assigns may designate in writing to Lessee
from time to time.
4. DELINQUENT RENT PENALTY. Each rent or interim rent installment or other
amount due hereunder not paid when due shall bear interest from such due date
until paid at the highest contractual rate enforceable against Lessee under
applicable law but never at a rate higher than five percent (5%) of the amount
due. Such delinquent interest shall be payable upon demand. Interest shall
accrue at said rate whether or not judgment hereon has been entered.
5. DELIVERY AND INSTALLATION. Lessee will select the type, quantity and supplier
of the Equipment, and in reliance thereon, the Equipment will then be ordered by
Lessor from such supplier, or Lessor may at its option elect to accept from
Lessee an assignment of any existing purchase order. Lessor shall not be liable
for loss or damage occasioned by any cause, circumstance or event of whatsoever
nature, including, but not limited to, failure of or delay in delivery, delivery
to wrong location, delivery of improper equipment or property other than the
Equipment, defects in or damage to the Equipment, governmental regulations,
strikes, embargoes or other causes, circumstances or events whether of a like or
unlike nature. In the event that the cost of any Item the Equipment differs from
the price set forth in the purchase order therefor, the monthly rental shall be
changed accordingly to fully reflect any such difference.
Page 1 of 9
<PAGE>
6. WARRANTY OF LESSEE'S QUIET POSSESSION. Lessor warrants and covenants that so
long as Lessee faithfully performs this Lease, Lessee, subject to the disclaimer
of warranties set forth immediately below, may quietly possess and use the
Equipment without interference by the Lessor, or by any party claiming by or
through the Lessor.
7. DISCLAIMER OF WARRANTIES. THE LESSEE ACKNOWLEDGES AND AGREES THAT (i) THE
EQUIPMENT AND EACH PART THEREOF IS OF A SIZE, DESIGN, CAPACITY, AND MANUFACTURE
SELECTED BY AND ACCEPTABLE TO THE LESSEE, (ii) THE LESSEE IS SATISFIED THAT THE
EQUIPMENT AND EACH PART THEREOF IS SUITABLE FOR ITS RESPECTIVE PURPOSE, (iii)
THE LESSOR IS NOT A MERCHANT, MANUFACTURER OR A DEALER IN PROPERTY OF SUCH KIND,
(iv) THE EQUIPMENT AND EACH PART THEREOF IS LEASED HEREUNDER SUBJECT TO ALL
APPLICABLE LAWS AND GOVERNMENTAL REGULATIONS NOW IN EFFECT OR HEREAFTER ADOPTED
AND IN THE STATE AND CONDITION WHEN THE SAME FIRST BECAME SUBJECT TO THIS LEASE,
WITHOUT REPRESENTATION OR WARRANTY OF ANY KIND BY THE LESSOR, AND (v) THE LESSOR
LEASES THE EQUIPMENT, AS IS, WITHOUT WARRANTY OR REPRESENTATION EITHER EXPRESS
OR IMPLIED, AS TO (A) THE CONDITION, FITNESS, DESIGN, QUALITY, CAPACITY,
WORKMANSHIP, OPERATION, AND MERCHANTABILITY OF THE EQUIPMENT, (B) THE LESSOR'S
TITLE THERETO, OR (C) ANY OTHER MATTER WHATSOEVER, IT BEING AGREED THAT ALL SUCH
RISKS, AS AMONG THE LESSOR AND THE LESSEE, ARE TO BE BORNE BY THE LESSEE, AND
THE BENEFITS OF ANY AND ALL IMPLIED WARRANTIES AND REPRESENTATIONS OF LESSOR ARE
HEREBY WAIVED BY LESSEE. Lessor is not responsible or liable for any direct,
indirect, incidental, or consequential damage to, or loss resulting from, the
installation, operation, or use of the Equipment or any product manufactured
thereby. The Lessee's recourse for breach of any representation or warranty of
the vendor or supplier is limited to such vendor or supplier. Lessee will be
subrogated to Lessor's claims, if any, against the manufacturer or supplier of
the Equipment for breach of any warranty or representation and, upon written
request from Lessee, Lessor shall take all reasonable action requested by Lessee
to enforce any such warranty, express or implied, issued on or applicable to any
of the Equipment, which is enforceable by Lessor in its own name, provided,
however, that (a) Lessee is not in default under this Lease and (b) Lessor shall
not be obligated to resort to litigation to enforce any such warranty unless
Lessee shall pay all expenses in connection therewith. Notwithstanding the
foregoing, Lessee's obligations to pay the rentals or otherwise under this Lease
shall be and are absolute and unconditional. All proceeds of any such warranty
recovery from the manufacturer or supplier of the Equipment shall first be used
to repair the affected Equipment.
8. NATURE OF EQUIPMENT. The Equipment shall remain personal property,
notwithstanding the manner in which it may be affixed to any real property.
Lessee shall obtain and cause to be recorded, where appropriate, at its own
expense, from each landlord, owner, mortgagee or any person having an
encumbrance or lien upon the real property where the of Equipment is located, a
waiver of any lien, encumbrance or interest which such person might have or
hereafter obtain or claim with respect to the Equipment. Lessee, at its expense,
will protect and defend Lessor's title to the Equipment and will otherwise take
all action required to keep the Equipment free and clear of all claims, levies,
liens and encumbrances. Lessor assumes no liability and makes no representation
as to the treatment by Lessee of this Lease, the Equipment, or the rental
payments for financial accounting or tax purposes.
9. LESSOR'S RIGHT OF INSPECTION. Lessor, or its authorized agents, shall have
the right during normal business hours to enter upon the premises where the
Equipment is located (to the extent Lessee can permit) for the purpose of
inspection. Provided no Event of Default has occurred and is continuing, Lessor
shall provide Lessee prior notice of such inspection.
10. USE OF EQUIPMENT. Lessee represents that it is leasing the Equipment for a
business or commercial purpose and not for personal, family or household use.
Lessee must use the Equipment in a careful and proper manner in conformity with
(i) all statutes and regulations of each governmental authority having
jurisdiction over the Lessee and/or the Equipment and its use, and (ii) all
policies of insurance relating to the Equipment and/or its use. In addition,
Lessee shall not (i) use the Equipment in any manner that would impair the
applicability of manufacturer's warranties or render the Equipment unfit for its
originally intended use; nor (ii) permit anyone other than authorized and
competent personnel to operate the Equipment.
11. ALTERATIONS. Without the prior written consent of Lessor, Lessee shall make
no alterations, modifications or attachments to the Equipment which impair the
economic value, economic and useful life, or functional utility of the
Equipment. All alterations, modifications and attachments of whatsoever kind or
nature made to the Equipment must be removed without damaging the functional
capabilities or economic value of the affected the Equipment upon the
termination of the Lease. Under no circumstances shall any such alteration,
modification or attachment be encumbered by Lessee or result in the creation of
a mechanic's or materialman's lien, excepting as may arise by operation of law
pending payment within ordinary business terms.
12. MAINTENANCE AND REPAIRS. At its expense Lessee shall maintain, operate,
repair and make all modifications to the Equipment in a manner consistent with
Lessee's general practice and in accordance with good industry practice,
manufacturer's warranty requirements and specifications and Lessee's established
operation, maintenance and repair programs, without discrimination as to
Page 2 of 9
<PAGE>
leased equipment, so as to keep the Equipment in good working order, and so as
to comply with all applicable laws or applicable governmental actions and so as
not to incur liability (whether or not there is a lack of compliance) under any
environmental law or otherwise account for any release of, or exposure to, any
hazardous material. Lessor shall not be required to maintain, repair or replace
the Equipment or part thereto and Lessee hereby waives the right, however
arising, to (i) require Lessor to maintain, repair or replace any of the
Equipment or part thereto, or (ii) make repairs at the expense of the Lessor
pursuant to any applicable law at any time in effect. Lessor may review Lessee's
established operating procedures and maintenance records to assure compliance
with this section. Upon installation, title to replacement parts shall pass to
Lessor, and be deemed part of the Equipment.
13. RISK OF LOSS, DAMAGE AND THEFT.
(a) All risk of loss, damage, theft or destruction, partial or complete, to the
Equipment incurred or occasioned by any cause, circumstance or event of
whatever nature will be borne by Lessee from and after delivery of the
Equipment to a carrier FOB point of origin, whether the terms of shipment
require or authorize the Equipment to be shipped by carrier, to be
delivered to Lessee's place or places of business, or provide that Lessee
accept possession of or title to the Equipment at any other location.
Lessee shall promptly notify Lessor of any theft of or loss or damage to
the Equipment.
(b) Neither total nor partial loss of use or possession of the Equipment shall
abate the rent.
(c) The Equipment shall be deemed subjected to total loss (i) if it has
disappeared regardless of the reason for disappearance or (ii) if it has
sustained physical damage and the estimated cost of repair exceeds 75% of
its fair market value on the date of damage. Lessee's duty to pay rent for
the Equipment subjected to total loss shall be discharged by paying to
Lessor, on demand, all accrued but unpaid rent for such Equipment as of the
date of disappearance or damage, plus the greater of: (i) Lessor's book
value of the Equipment, which shall be deemed to be the Equipment's cost as
set forth in the applicable Schedule minus straight-line depreciation based
on recognized physical life prorated to the date of disappearance or
damage, or (ii) the fair market value of the Equipment as of the date of
disappearance or damage. The amount of applicable insurance proceeds, if
any, actually received by Lessor shall be subtracted from the amount for
which Lessee is liable under this paragraph 13.
(d) Lessee shall cause the Equipment subjected to partial loss to be restored
to original capability. Lessor shall, upon receiving satisfactory evidence
of restoration, promptly pay to Lessee, or such other party as Lessee shall
direct, the proceeds of any insurance or compensation received by Lessor,
by reason of such partial loss.
(e) Lessor shall not be obligated to undertake the collection of any claim
against any person for either total or partial loss of the Equipment. After
Lessee discharges its obligations to Lessor under either paragraph 13(c) or
13(d) above, Lessee may, for Lessee's own account, proceed to recover from
third parties and shall be entitled to retain any amount recovered. Lessor
shall supply Lessee with any necessary assignment of claim.
(f) Notwithstanding anything to the contrary contained herein, so long as no
Event of Default has occurred and is continuing, Lessee shall have the
right, in connection with Minor Partial Losses, to (i) deal exclusively
with insurance carriers, (ii) settle or compromise claims and (iii)
receive, hold and use proceeds from insurance for the purpose of repairing
the Equipment to a condition resulting in the Equipment being of
substantially equal value after completion of such repairs to the value of
the Equipment prior to the Minor Partial Losses. Minor Partial Losses shall
be losses for which the Lessee reasonably estimates that no more than
$500,000.00 of insurance proceeds will be available for repair of the
Equipment.
14. INDEMNIFICATION.
(a) Non-Tax Liability. Lessee assumes liability for, and hereby agrees to
indemnify, protect and hold harmless, Lessor, its agents, servants,
employees, officers, successors and assigns (an "Indemnified Party") from
and against any and all liabilities, obligations, losses, damages,
injuries, claims, demands, penalties, actions, environmental hazards,
incidents or risks, costs and expenses, including reasonable attorney's
fees, of whatsoever kind and nature, whether or not known or unknown to
Lessor, at any time prior to the earlier of (a) the expiration of the lease
term or (b) return of the Equipment to the Lessor pursuant to the terms of
this Lease, (referred to herein collectively as "Losses" and individually
as a "Loss") arising out of the foregoing (i) the manufacture,
installation, use, condition (including, but not limited to, latent and
other defects and whether or not discoverable by Lessee or Lessor),
operation, ownership, selection, delivery, leasing, removal or return of
the Equipment, regardless of where, how and by whom operated, for any Loss
arising, or (ii) any failure on the part of Lessee to perform or comply
with any covenant or condition of this Lease.
(b) Direct Tax Costs. Lessee agrees to indemnify, protect, and hold harmless
each Indemnified Party, from and against any and all taxes, license fees,
assessments and other governmental charges, fees, fines or penalties of
whatsoever kind or character and by whomsoever payable, which are levied,
assessed, imposed or incurred during the lease term, (i) on or relating to
the Equipment, including any tax on the sale, ownership, use, leasing,
shipment, transportation, delivery or operation thereof, (ii) on the
exercise of any option, election or performance of any obligation by the
Lessee hereunder, (iii) of the kind generally referred to in items (i) and
(ii) above which may remain unpaid as of the date of delivery of the
Equipment to the Lessee irrespective of when the same may have been levied,
assessed, imposed or incurred, and (iv) by reason of all gross receipts and
like taxes on or measured by rents payable hereunder levied by any state or
local taxing authority having jurisdiction where the Equipment is located.
The Lessee agrees to comply with all state and local laws requiring the
filing of ad valorem tax returns relating to the Equipment. Any statements
for such taxes received by the Lessor shall be promptly forwarded to the
Lessee. This subparagraph shall not be deemed to obligate the Lessee
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to pay (i) any taxes, fees, assessments and charges which may have been
included in the Lessor's cost of the Equipment as set forth in Schedule(s)
hereto, or (ii) any income or like taxes against the Lessor on or measured
by the net income from the rents payable hereunder or capital stock,
franchise or similar tax. The Lessee shall not be obligated to pay any
amount under this subparagraph so long as it shall, at its expense and in
good faith and by appropriate proceedings, contest the validity or the
amount thereof unless such contest would adversely affect the title of the
Lessor to the Equipment or would subject the Equipment to forfeiture or
sale. The Lessee agrees to indemnify each Indemnified Party against any
loss, claim, demand and expense including legal expense resulting from such
nonpayment or contest.
(c) Indemnity Payment. The amount payable pursuant to subparagraphs 14(a) and
14(b) shall be payable upon demand of the Lessor accompanied by a statement
describing in reasonable detail such loss, liability, injury, claim,
expense or tax and setting forth the computation of the amount so payable.
(d) Survival. The indemnities and assumptions of liabilities and obligations
provided for in this paragraph 14 shall continue in full force and effect
notwithstanding the expiration or other termination of this Lease.
(e) Notwithstanding anything to the contrary contained herein, the
indemnifications provided in this Section 14 shall apply only as to those
Losses which occur prior to the earlier of (i) the return of the Equipment
to Lessor and (ii) the expiration of the Lease term (the "Indemnification
Period"); provided, however, nothing contained in this Subsection shall
limit the right of the Lessor to seek indemnification after the expiration
of the Lease term or the return of the Equipment to Lessor so long as the
Loss giving rise to a right of indemnification occurred during the
Indemnification Period.
15. LESSEE'S ASSIGNMENT. Without the prior written consent of the Lessor, which
shall not be unreasonably withheld or delayed, Lessee shall not assign, bail,
sublease, hypothecate, transfer or dispose of the Equipment or any interest in
this Lease nor impair the Lessor's title to the Equipment. In the event of a
proposed sublease, the Lessee shall be permitted to sublease all, but not less
than all, of the Equipment to a third party provided that Lessee has received
the prior written consent of Lessor, not to be unreasonably withheld or delayed,
as to the sublessee and as to all terms and conditions of the sublease and
provided that Lessee shall not be released or discharged from any of its
obligations hereunder. Lessee shall not assign this Lease, nor shall this Lease
or any rights under this Lease or in the Equipment inure to the benefit of any
trustee in bankruptcy, receiver, creditor, or other successor of Lessee whether
by operation of law or otherwise. Notwithstanding the preceding provisions of
this paragraph 15, provided that Lessee shall be the surviving entity and
continue to be in compliance with all terms, including, without limitation, all
financial covenants of this Lease immediately after such event, any transfer of
its rights and obligations hereunder resulting from the following events shall
be permitted without the consent of Lessor: (i) consolidations or mergers of
other entities into the Lessee or a subsidiary of the Lessee or (ii)
non-substantive intra- corporate restructuring such as a corporate name change
which does not negatively impact the ability of the Lessee to perform its
obligations hereunder or (iii) a transfer of Lessee's rights and interest
hereunder to an affiliate of Lessee, where both Lessee and the affiliate remain
liable for all obligations under the Lease.
16. LESSOR'S ASSIGNMENT. All rights of Lessor hereunder, in the rent and in the
Equipment may be assigned, pledged, mortgaged, transferred, or otherwise
disposed of, either in whole or in part, without notice to Lessee. No such
assignee shall be obligated to perform any duty, covenant, or condition required
to be performed by Lessor under the terms of this Lease unless such assignee
expressly assumes such obligations. Lessor shall remain liable to Lessee
hereunder to perform such duty, covenant, and condition unless such assignee
expressly assumes Lessor's obligations, in which event Lessee hereby releases
Lessor from such obligations. Such assignee shall have all rights, powers and
remedies given to Lessor by this Lease, and shall be named as lender loss payee
or co-insured under all policies of insurance maintained pursuant to paragraph
17 hereof. If Lessor assigns this Lease or the monies due or to become due
hereunder or any other interest herein, Lessee agrees not to assert against
Lessor's assignee any defense, set-off, recoupment, claim or counterclaim which
Lessee may have against Lessor, whether arising under this Lease or any other
transaction between Lessor and Lessee. Subject to paragraph 15 hereof and this
paragraph 16, this Lease inures to the benefit of, and is binding upon, the
heirs, legatees, personal representatives, successors and assigns of the parties
hereto.
17. INSURANCE. Lessee will at its own expense insure the Equipment in compliance
with the terms and conditions of the Schedule, in form satisfactory to Lessor
with insurance carriers approved by Lessor. The proceeds of any insurance claim
due to the theft or loss of or damage to the Equipment shall be applied as
provided in paragraph 13 hereof. In addition to the compliance with the terms
and conditions of the Schedule and the other terms and conditions of this
paragraph 17, the Lessee shall comply with the following conditions:
(a) Lessee, prior to the inception of the term, shall deliver to Lessor all
required policies of insurance or, in the alternative, other proper
evidence of insurance, which shall be sufficiently detailed to advise
Lessor of all types of coverage and inclusions;
(b) Lessee shall cause each insurer to agree by endorsement to the policies
that each insurer will give at minimum thirty (30) days' written notice to
Lessor before any policy will be altered or cancelled for any reason,
including, without limitation, failure of the Lessee to pay premiums;
(c) All coverage must be in effect upon delivery, or when Lessee assumes the
risk of loss, whichever is earlier, and will provide coverage without
geographic limitation;
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(d) All policies must provide that the Lessor is an additional insured for all
aspects of general liability insurance, and is lender loss payee for all
aspects of insurance relating to the theft or loss of or damage to the
Equipment;
(e) Lessee will furnish renewal policies or renewal evidence of insurance
listing Lessor as an additional insured and lender loss payee, as required
by this Lease, no later than thirty (30) days prior to the expiration of
any insurance required hereby.
18. ADDITIONAL DOCUMENTS. If Lessor shall so request, Lessee shall execute and
deliver to Lessor such documents, including UCC financing and continuation
statements, as Lessor shall deem necessary or desirable for purposes of
continuing this Lease or recording or filing to protect the interest of Lessor
in the Equipment. Any such filing or recording shall not be deemed evidence of
any intent to create a security interest. All filing fees and expenses shall be
borne by the Lessee.
19. FURNISHING FINANCIAL INFORMATION. During the term of this Lease and any
extensions or renewals hereof, Lessee will furnish to Lessor:
(a) Within 30 days after the end of each of the first three quarterly periods
of Lessee's fiscal year, a balance sheet, statement of cash flows and a
statement of income of Lessee as of the close of such quarterly period from
the beginning of the fiscal year to the date of such statement, prepared in
accordance with generally accepted accounting principles, consistently
applied, and in such reasonable detail as Lessor may request, certified as
true, complete and correct by an authorized officer of the Lessee.
(b) As soon as practicable, but in any event within 90 days after the end of
each fiscal year, a copy of its annual audit certified without
qualification by a certified public accountant selected by Lessee and
satisfactory to Lessor.
(c) In a timely manner such financial statements, reports and other information
as the Lessee shall send from time to time to its stockholders and/or file
with the Securities and Exchange Commission and/or other materials which
Lessor shall reasonably request. Lessee shall also promptly notify Lessor
of any material adverse change in Lessee's financial condition.
20. INCORPORATION OF COVENANTS BY REFERENCE. Any and all affirmative, negative
and financial covenants which may be set forth in any credit agreement, loan
agreement, promissory note, guaranty or other agreement, instrument or document
entered into between Lessee (or any of its affiliates) as borrower and any
affiliate of Lessor, as lender (the "Loan Documents"), are hereby incorporated
herein by this reference as if set forth herein at length, as any of the
foregoing may be amended or supplemented from time to time (the "Incorporated
Provisions"). Any amendments, modifications, waivers or other changes in the
terms of any of the Incorporated Provisions shall automatically constitute an
amendment to this Lease without any need for further action or documentation. If
any Loan Document terminates or otherwise ceases to be in full force and effect
(a "Termination"), all of the Incorporated Provisions of such Loan Document
shall survive the Termination and shall continue in full force and effect as a
part of this Lease. At any time after a Termination, Lessee shall promptly upon
Lessor's request execute and deliver to Lessor an amendment to this Lease, which
amendment will expressly incorporate into this Lease all or any number of the
Incorporated Provisions of the terminated Loan Document as Lessor in its sole
discretion shall select, as such Incorporated Provisions are in effect
immediately prior to the date of Termination.
21. PERFORMANCE OF OBLIGATIONS OF LESSEE BY LESSOR. If Lessee fails to promptly
perform any of its obligations under this Lease, Lessor may perform the same for
the account of Lessee without waiving Lessee's failure as a default. All sums
paid or expense or liability incurred by Lessor in such performance (including
reasonable legal fees) together with interest thereon at the highest contract
rate enforceable against Lessee, but never at a higher rate than fifteen percent
(15%) per annum simple interest, shall be payable by the Lessee upon demand as
additional rent.
22. EVENTS OF DEFAULT. Any of the following events or conditions shall
constitute an event of default ("Event of Default") hereunder and entitle the
Lessor, at its option, to avail itself of the remedies more fully set forth in
paragraph 23 hereof:
(a) Non-payment by Lessee of any rent or other amount provided for in this
Lease when due and such failure shall continue for a period of ten (10)
days;
(b) Failure of the Lessee to perform any of the non-monetary covenants,
obligations, terms or conditions of this Lease and, if remediable, such
failure shall continue unremedied for a period of thirty (30) days of
either (i) Lessee becoming aware of any such failure or (ii) written notice
from Lessor as to any such failure, provided, however that this thirty (30)
day grace period shall not be applicable to any failure whatsoever as to
(x) any and all environmental or insurance obligations under the terms of
the Lease or any Schedule, including, but not limited to, Paragraph 17
above or (y) as to defaults which can not be remedied by corrective action
by Lessee, as determined by Lessor in its sole discretion; provided further
if Lessor determines that such default is remediable but cannot reasonably
be cured within such 30 day period, then in such event Lessor shall notify
Lessee that Lessee shall not be in default hereunder so long as Lessee
commences corrective action and employs its best efforts to prosecute the
same to completion within a time period designated by Lessor, which shall
be no more than ninety (90) days unless Lessor in its sole discretion
permits a longer period of time for completion under the circumstances.
Notwithstanding the above, it shall be an event of default hereunder for
any such non-monetary obligation to occur twice in any twelve month period
during the term hereof;
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(c) The Lessee shall commence a voluntary case or other proceeding seeking
liquidation, reorganization, or other relief with respect to itself or its
debts under any bankruptcy, insolvency, or other similar law now or
hereafter in effect, or seeking the appointment of a trustee, receiver,
liquidator, custodian, or other similar official of it or any substantial
part of its property, or shall consent to any such relief or to the
appointment of or the taking possession by any official in an involuntary
case or other proceeding commenced against it, or shall make a general
assignment for the benefit of its creditors, or shall fail to pay its debts
as they become due, or shall take any corporate action authorizing any of
the foregoing;
(d) An involuntary case or other proceeding should be commenced against Lessee
seeking liquidation, reorganization, or other relief with respect to it or
its debts under any bankruptcy, insolvency, or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian, or other similar official of it or any substantial
part of its property, and such involuntary case or other proceeding shall
remain undismissed and unstayed for a period of thirty (30) days;
(e) A final judgment for the payment of money in excess of $One Million Dollars
($1,000,000.00) is rendered against the Lessee, or any attachment
proceedings is instituted with respect to any significant portion of the
Lessee's assets or property, and the same shall remain undischarged for a
period of thirty (30) days during which execution shall not be effectively
stayed;
(f) The Lessee, or any guarantor of the Lease, or any affiliate of the Lessee,
shall default in the payment of principal and/or interest when due (whether
by acceleration or otherwise) or shall default in the performance of any
obligation or indebtedness owed to the Bank or to any subsidiary or
affiliate of the Bank, which obligation shall remain in default for lack of
performance or which indebtedness shall remain unpaid and unsatisfied
following the conclusion of any applicable grace period in respect to such
obligation or indebtedness;
(g) Any event described in subparagraphs 22(c) through 22(g) hereof shall occur
with respect to any guarantor or any other party liable for payment or
performance of this Lease;
(h) Any certificate, statement, representation, warranty or financial statement
heretofore or hereafter furnished pursuant to or in connection with this
Lease by or on behalf of Lessee or any guarantor or other party liable for
payment or performance of this Lease is false in any material respect at
the time as of which the facts therein set forth were stated or certified,
or omits any substantial contingent or unliquidated liability or claim
against Lessee or any such guarantor or other party, or, upon the date of
execution of this document or any Schedule, there shall have been any
materially adverse change in any of the facts disclosed by any such
certificate, statement, representation or warranty, which shall not have
been disclosed in writing to Lessor at or prior to the time of execution of
this document or such Schedule;
(i) An event of default shall have occurred under any other lease agreement
wherein Lessor is, at the time of such default, the "lessor" and Lessee is
the "lessee".
23. REMEDIES. Upon the happening of any Event of Default hereunder, the rights
and duties of the parties shall be as set forth in this paragraph. Lessor may
elect, in its sole discretion, to do one or more of the following upon the
occurrence of an Event of Default, and at any time thereafter:
(a) Upon written notice to the Lessee terminate this Lease as to any or all of
the Schedules then in effect;
(b) Demand that Lessee return the Equipment to the Lessor whereupon Lessee
shall promptly deliver the Equipment to Lessor at that place or those
places designated by Lessor. If Lessee does not so deliver the Equipment,
Lessee shall make the Equipment available for retaking and authorizes
Lessor, its employees and agents to enter the premises of the Lessee and
any other premises (insofar as Lessee can permit) for the purpose of
retaking. In the event of retaking, Lessee expressly waives all rights to
possession and all claims for injuries to persons or property suffered
through or loss caused by retaking. Any repossession accomplished under
this paragraph 23(b) shall not release Lessee from liability for damages of
Lessor sustained by reason of Lessee's default hereunder.
(c) Lessor may revoke Lessee's privilege of paying rent in installments causing
acceleration of all remaining rents through the remaining term of the
Lease, and, upon Lessor's demand, as liquidated damages, and not as a
penalty, the Lessee shall promptly pay to the Lessor the aggregate of (i)
all rent accrued and unpaid prior to the date of such Event of Default,
(ii) all future rent due through the end of the basic term or through the
end of the current renewal term, as the case may be, (iii) all costs and
expenses incurred by Lessor in the repossession, recovery, storage, repair,
inspection, appraisal, refurbishing, sale, release or other disposition of
the Equipment, (iv) reasonable attorney's fees and costs, including any
fees or costs incurred by Lessor in defending any action relating to this
Lease or participating in any bankruptcy or insolvency proceeding to which
Lessee is a party, or otherwise incurred due to Lessee's default, (v) the
estimated residual value of the Equipment as of the end of the current term
of the Lease, and (vi) any claim for indemnity, if any, in favor of Lessor
hereunder.
(d) In its sole discretion, Lessor may sell or release the Equipment or any
part thereof, at public auction or by private sale or lease at such time or
times and upon such terms as Lessor may determine, free and clear of any
rights of Lessee and, if notice thereof is required by law, any notice in
writing of such sale or lease by Lessor to Lessee given not less than ten
(10) days prior to the date thereof shall constitute reasonable notice
thereof to Lessee. All proceeds of the sale or releasing, or both, less (i)
all expenses incurred in retaking the Equipment, making necessary repairs
to the Equipment and enforcing this Lease, (ii) all damages that Lessor
shall have sustained by reason of Lessee's default, and (iii) reasonable
attorney's fees and expenses shall be credited against Lessee's liability
hereunder as and when received by Lessor. Sums in excess of Lessee's
liability shall belong to Lessor. The Lessee shall be liable for any
deficiency.
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(e) The provisions of this paragraph 23 shall not prejudice Lessor's right to
recover or prove damages for unpaid rent accrued prior to default, or bar
an action for a deficiency as herein provided, and the bringing of an
action with an entry of judgment against Lessee shall not bar the Lessor's
right to repossess any or all of the Equipment.
(f) Lessor's remedies shall be available to Lessor's successors and assigns,
shall be in addition to all other remedies provided to it under the UCC
(specifically, the remedies set forth in 13 Pa. C.S.ss.ss.2A523(a), (b) and
(c) or by any other applicable law, and may be exercised concurrently or
consecutively. LESSEE WAIVES ANY AND ALL RIGHTS TO NOTICE AND TO JUDICIAL
HEARING WITH RESPECT TO THE REPOSSESSION OF THE EQUIPMENT BY LESSOR IN THE
EVENT OF A DEFAULT HEREUNDER BY LESSEE. LESSEE HEREBY WAIVES ANY RIGHT TO
DEMAND A JURY TRIAL WITH RESPECT TO ANY ACTION OR PROCEEDING INSTITUTED BY
THE LESSOR OR THE LESSEE IN CONNECTION WITH THIS LEASE.
(g) No express or implied waiver by Lessor of any default(s) by Lessee shall
constitute a waiver of any other default(s) by Lessee or waiver of any of
Lessor's rights.
(h) Should Lessor exercise its right to accelerate rental amounts due hereunder
as a result of an Event of Default by Lessee, such sums payable in the
future shall be discounted to a present value, as of the date on which the
default occurred, using as the discount rate the discount rate of the
Federal Reserve Bank of Cleveland provided that such payment shall occur
within ten (10) business days of the demand.
24. LESSEE REPRESENTATIONS AND WARRANTIES. In order to induce Lessor to enter
into this Lease and to lease the Equipment to Lessee, Lessee represents and
warrants, as of the date hereof, and as of the date of execution of each
Schedule hereunder, that:
(a) The Lessee is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation with
corporate power and authority to conduct its business as such business is
presently being conducted, to own or hold property under lease and to enter
into and perform its obligations under this Lease. The Lessee is duly
qualified to do business and is in good standing as a foreign corporation
in all states where its failure to so qualify would have a material adverse
effect on its ability to perform its obligations under this Lease.
(b) The execution, delivery, and performance by the Lessee of this Lease and
all related instruments and the consummation by the Lessee of the
transactions contemplated hereby: (i) have been duly authorized by all
necessary corporate action on the part of the Lessee, (ii) do not require
any stockholder approval or the consent of any trustee or holder of any
indebtedness or obligation of the Lessee (or, if so required, such approval
or consent has been obtained), (iii) do not and will not result in any
material violation of any term of any agreement, instrument, judgment,
decree, franchise, permit, order, law, statute, rule, or governmental
regulation presently applicable to it, (iv) is not in conflict with and
does not constitute a default under any of the terms or provisions of, or
subject the leased Equipment or any part thereof to any lien of, any
indenture, mortgage, lease, contract, or other agreement or instrument
(other than this Lease) to which the Lessee is a party or by which it or
its property is bound or affected, and (v) does not and will not contravene
Lessee's articles of incorporation and by-laws.
(c) The execution, delivery, and performance by the Lessee of this Lease and
all related instruments and documents does not require any consent,
authorization, or approval of, any filing of or registration with, or other
action in respect to any federal, state, governmental authority or agency,
or, if so required, the same have been obtained.
(d) This Lease and all related instruments and documents have been duly
executed and delivered by the Lessee, and assuming the due authorization,
execution, and delivery by the other party thereto, constitute legal,
valid, and binding agreements of the Lessee enforceable against the Lessee
in accordance with their terms.
(e) There are no pending actions or proceedings to which Lessee is a party, and
there are no other pending or threatened actions or proceedings of which
Lessee has knowledge, before any court, arbitrator, or administrative
agency, which either individually or in the aggregate, would materially
adversely affect the financial condition of Lessee, or the ability of
Lessee to perform its obligation hereunder. Further, Lessee is not in
default under any material obligations for the payment of borrowed money,
for the deferred purchase price of property or for the payment of any rent
which, either individually or in the aggregate, would have the same such
effect.
(f) It is intended that under the laws of the state(s) in which the Equipment
is to be located, the Equipment consists solely of personal property for
all purposes and Lessee hereby covenants not to take any action
inconsistent with this intent;
(g) The financial statements of Lessee (copies of which have been furnished to
Lessor) have been prepared in accordance with generally accepted accounting
principles consistently applied, and accurately and completely present
Lessee's financial condition and the results of its operations as of the
date of and for the period covered by such statements in all material
respects, and since the date of such statements there has been no material
adverse change in such conditions or operations.
(h) The address stated on page one of this Lease is the chief place of business
and chief executive office of Lessee; and the Lessee does not conduct
business under a trade, assumed, or fictitious name.
25. FINANCE LEASE.
(a) Acknowledgment. The Lease is intended as a "Finance Lease" as that term is
defined in Section 2A103 of the UCC. Lessee acknowledges that Lessor has
not selected, manufactured or supplied the Equipment; that Lessor has
acquired the Equipment
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at the direction of the Lessee and solely for the purpose of leasing the
Equipment to the Lessee; and that (i) Lessee has selected the supplier or
vendor of the Equipment, (ii) as provided in paragraph 7, Lessee is
entitled to directly enforce against the supplier or vendor of the
Equipment, any and all warranties and promises made to the Lessor by the
supplier or vendor, and (iii) Lessee may communicate directly with the
vendor or supplier to obtain a complete and accurate statement of all such
warranties or promises, including any disclaimers or limitations thereof.
(b) Waiver of Certain of Lessee's Remedies. In recognition that this is a
Finance Lease and that the Lessor has not sold, selected or delivered the
Equipment to the Lessee and has made no warranties or representations in
respect thereto, to the extent permitted by applicable law, Lessee, for
itself and for its successors and assigns, hereby waives any and all rights
or remedies afforded a lessee by Sections 2A503 through 2A522 inclusive, of
the UCC, including, without limitation, Lessee's right to (i) cancel,
terminate or repudiate this Lease or any Schedules hereto; (ii) reject or
revoke acceptance of the Equipment; (iii) recover damages from Lessor for
any breach of warranty or representation in respect to the Equipment; (iv)
assert any security interest in the Equipment in Lessee's possession or
control; (v) deduct, recoup or offset of any claimed damages due to
Lessor's default; (vi) accept partial delivery of the Equipment or to
"cover" by purchasing or leasing replacement equipment; (vii) recover any
general, incidental or consequential damages (including without limitation,
expenses and commissions in connection with the inspection, receipt, caring
for, storing, repair or disposal of any Equipment; or (viii) assert a claim
by way of replevin, detinue, sequestration, claim, delivery, or the like,
for any Equipment.
26. GOVERNING LAW AND CONSENT OF JURISDICTION. This Lease has been delivered and
accepted in the Commonwealth of Pennsylvania. The laws and decisions of said
Commonwealth (including, without limitation, as to the statute of limitations)
will govern and control the construction, enforceability, validity and
interpretation of this Lease, and of all agreements, instruments and documents,
heretofore, now or hereafter executed by Lessee and delivered to Lessor
pertaining or relating to this Lease or the transactions contemplated herein.
The parties agree that any action or proceeding arising out of or relating to
this Lease may be commenced in the Court of Common Pleas of Allegheny County,
Pennsylvania, or in the United States District Court for the Western District of
Pennsylvania and Lessee agrees that, in addition to any other manner of service
prescribed by law or rule of court, a summons and complaint commencing an action
or proceeding in either such Court shall be properly served upon Lessee and
shall confer personal jurisdiction if served personally or by United States
registered mail, return receipt requested, to the Lessee at the address
indicated on the first page of the Lease.
27. CONFLICT OF PROVISIONS. In the event of any conflict of provisions between
any Schedule and this document or between any Schedule and any other document,
the provisions of the Schedule shall control.
28. AMENDMENTS AND WAIVERS. This document, the Schedule(s), the Addendum(s) and
the Acceptance(s) executed by Lessor and Lessee constitute the entire agreement
between Lessor and Lessee with respect to the Equipment and the subject matter
of this Lease. No term or provision of this Lease may be changed, waived,
amended or terminated except by a written agreement signed by both Lessor and
Lessee, except that Lessor may insert on the appropriate Schedule the serial
numbers of the Equipment after delivery thereof. No express or implied waiver by
Lessor of any Event of Default hereunder shall in any way be, or be construed to
be, a waiver of any future and/or subsequent Event of Default whether similar in
kind or otherwise.
29. NOTICES. Except as otherwise provided in paragraph 26 above, service of all
notices under this Lease shall be sufficient if given personally, sent via
facsimile with confirmation of receipt, sent via overnight courier, or sent
certified mail, return receipt requested, to the party involved at its
respective address set forth in the most recent Schedule relating hereto, or at
such address as such party may otherwise provide in writing from time to time.
Any such notice mailed to such address shall be effective when deposited in the
United States mail, duly addressed with first-class postage prepaid.
30. MISCELLANEOUS
(a) Whenever the context of this Lease requires, the neuter gender includes the
masculine and feminine, and the singular number includes the plural.
Whenever the word Lessor is used herein, it shall include all assignees of
Lessor. If there is more than one Lessee named in this Lease, the liability
of each shall be joint and several.
(b) The titles to the paragraphs of this Lease are solely for the convenience
of the parties, shall not be deemed to constitute a part hereof, and are
not an aid in the interpretation of the document.
(c) Time is of the essence in the performance of this Lease and each and all of
its provisions.
(d) If any provision of this Lease is held invalid or unenforceable, the
remaining provisions will not be affected thereby, and to this end, the
provisions of this Lease are declared severable.
(e) As used herein "Lessee," if there be more than one, shall mean all Lessees,
or each of them, and in such case they are jointly and severally bound.
Page 8 of 9
<PAGE>
31. SECURITY INTEREST. If the Lease is deemed at any time to be a lease intended
as security, Lessee hereby grants to the Lessor a security interest in the
Equipment to secure all sums due hereunder, as well as any other obligations or
sums due by Lessee to Lessor, whether now existing or hereafter contracted for
or hereafter arising.
WITNESS the due execution hereof with the intent to be legally bound.
ATTEST/WITNESS:
THE CARBIDE/GRAPHITE GROUP, INC., LESSEE
By: /s/ William M. Thalman By: /s/ Nicholas T. Kaiser
Title: Title: Chairman and CEO
Accepted at Pittsburgh, Pennsylvania by:
PNC LEASING CORP - LESSOR
By: /s/ R. Timothy Evans
Title: Vice President
0788/U.60
final
Page 9 of 9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. </LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Jul-31-1997
<PERIOD-START> Aug-01-1996
<PERIOD-END> Apr-30-1997
<CASH> 9,073
<SECURITIES> 15,687
<RECEIVABLES> 51,370
<ALLOWANCES> (2,000)
<INVENTORY> 55,687
<CURRENT-ASSETS> 145,147
<PP&E> 257,040
<DEPRECIATION> (180,791)
<TOTAL-ASSETS> 227,835
<CURRENT-LIABILITIES> 34,691
<BONDS> 81,763
0
0
<COMMON> 97
<OTHER-SE> 90,564
<TOTAL-LIABILITY-AND-EQUITY> 227,835
<SALES> 217,720
<TOTAL-REVENUES> 217,720
<CGS> 178,371
<TOTAL-COSTS> 189,216
<OTHER-EXPENSES> 2,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,099
<INCOME-PRETAX> 20,073
<INCOME-TAX> 7,181
<INCOME-CONTINUING> 12,892
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,892
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.46
</TABLE>
