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 OCTOBER 31, 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 December 12, 1997, there were 8,702,022 shares of
the Registrant's $0.01 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 ............ 11
PART II
1 Legal Proceedings ................................ 15
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 ........ 16
Signatures ....................................... 18
-----------
* 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
DESCRIPTION PAGE
- ----------- ----
Condensed Consolidated Balance Sheets
as of October 31, 1997 and July 31, 1997 ....................... 3
Unaudited Consolidated Statements of Operations
for the Quarters Ended October 31, 1997 and 1996 ............... 4
Unaudited Consolidated Statement of Stockholders' Equity
for the Quarter Ended October 31, 1997 ......................... 5
Unaudited Consolidated Statements of Cash Flows for the
Quarters Ended October 31, 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 October 31, 1997 and July 31, 1997
(in thousands, except share information)
<TABLE>
<CAPTION>
October 31, July 31,
1997 1997 *
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. - $7,935
Short-term investments ............................................... - 15,912
Accounts receivable -- trade, net of allowance for doubtful
accounts: $2,030 at October 31 and $2,029 at July 31 ............ $48,749 49,088
Inventories (Note 2) .................................................. 61,858 59,445
Other current assets .................................................. 12,762 10,956
----------- -----------
Total current assets .............................................. 123,369 143,336
Property, plant and equipment, net ........................................ 100,872 87,653
Other assets .............................................................. 4,605 4,871
----------- -----------
Total assets .................................................. $228,846 $235,860
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses:
Overdrafts .......................................................... $5,104 -
Interest ............................................................ 144 $3,835
Other current liabilities ........................................... 31,763 38,676
----------- -----------
Total current liabilities ......................................... 37,011 42,511
Long-term debt (Note 4) ................................................... 77,982 80,035
Other liabilities ......................................................... 17,666 17,105
----------- -----------
Total liabilities ............................................... 132,659 139,651
----------- -----------
Stockholders' equity:
Common stock, $0.01 par value; 18,000,000 shares authorized;
shares issued: 9,831,772 at October 31 and 9,752,272 at July 31;
shares outstanding: 8,699,772 at October 31 and 8,632,272 at
July 31 ............................................................ 98 97
Additional paid-in capital, net of $1,398 equity issue costs .......... 35,365 34,163
Retained earnings .................................................... 65,919 66,683
Other stockholders' equity items ..................................... (5,195) (4,734)
----------- -----------
Total stockholders' equity ..................................... 96,187 96,209
----------- -----------
Total liabilities and stockholders' equity .................... $228,846 $235,860
----------- -----------
----------- -----------
</TABLE>
- ----------
* Summarized from audited fiscal 1997 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 ended October 31, 1997 and 1996
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Quarter Ended October 31,
----------------------------------------
1997 1996
------------------- -------------------
(Unaudited)
<S> <C> <C>
Net sales .............................................................. $73,394 $67,716
Operating costs and expenses:
Cost of goods sold ................................................. 59,336 55,900
Selling, general and administrative ................................ 3,519 4,021
Other compensation (Note 6) ........................................ 228 267
------------------ ------------------
Operating income ............................................... 10,311 7,528
Other costs and expenses:
Interest expense, net (Note 4) ...................................... 1,473 2,105
------------------ ------------------
Income before income taxes and extraordinary loss .............. 8,838 5,423
Provision for taxes on income
from continuing operations (Note 3) .................................. 3,185 1,900
------------------ ------------------
Income from continuing operations .............................. 5,653 3,523
Extraordinary loss on early extinguishment of debt,
net of $3,769 tax benefit (Note 4) ................................... (6,417) -
================== ==================
Net income (loss) .......................................... ($764) $3,523
================== ==================
Earnings per share information (Note 1):
Income from continuing operations .................................. $0.64 $0.40
Extraordinary loss on early extinguishment of debt ................. (0.73) -
------------------ -------------------
Net income (loss) ........................................... ($0.09) $0.40
================== ===================
Common and common equivalent shares ................................ 8,897,976 8,777,181
================= ===================
</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 quarter ended October 31, 1997
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Other
-------------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity Items
------------- ----------- ---------------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1997 *...... 9,752,272 $97 $34,163 $66,683 ($4,734)
Net loss ...................... (764)
Exercise of stock options ..... 79,500 1 1,202 (34)
Purchase of treasury stock ..... (427)
------------- ----------- ---------------- ------------- --------------------
Balance at October 31,
1997 (Unaudited) ............ 9,831,772 $98 $35,365 $65,919 ($5,195)
============= =========== ================ ============= ====================
</TABLE>
* Summarized from audited fiscal year 1997 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 ended October 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended October 31,
----------------------------------
1997 1996
--------------- ---------------
(Unaudited)
<S> <C> <C>
Net income (loss) ......................................................... ($764) $3,523
Adjustments for noncash transactions:
Depreciation and amortization .......................................... 3,140 2,502
Amortization of debt issuance costs .................................... 66 85
Amortization of intangible assets ...................................... 84 82
Deferred revenue ........................................................ (34) (34)
Provision for common stock to be issued under options .................. - 20
Adjustments to deferred taxes .......................................... 13 71
Provision for loss - accounts receivable ............................... - 30
Extraordinary loss on early extinguishment of debt ..................... 10,186 -
Increase (decrease) in cash from changes in:
Accounts receivable .................................................... 339 (5,664)
Inventories ............................................................ (2,413) (936)
Income taxes ........................................................... (2,578) 1,566
Other current assets ................................................... 798 (696)
Accounts payable and accrued expenses .................................. (9,994) (4,311)
Net change in other non-current assets and liabilities ................. (120) (28)
--------------- ---------------
Net cash used for operations ....................................... (1,277) (3,790)
--------------- ---------------
Investing activities:
Capital expenditures ................................................... (16,406) (5,181)
Proceeds from (purchase of) short-term investments ..................... 15,750 (5,000)
--------------- ---------------
Net cash used for investing activities ............................. (656) (10,181)
--------------- ---------------
Financing activities:
Repurchase of Senior Notes, including premium of $8,077 ................ (88,030) -
Funds from revolving credit facility ................................... 83,800 -
Repayment on revolving credit facility ................................. (5,900) -
Other .................................................................. 4,128 35
--------------- ---------------
Net cash provided by (used for) financing activities .............. (6,002) 35
--------------- ---------------
Net change in cash and cash equivalents .................................. (7,935) (13,936)
Cash and cash equivalents, beginning of period ........................... 7,935 16,586
=============== ===============
Cash and cash equivalents, end of period ................................. - $2,650
=============== ===============
</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, 1998.
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, 1997 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
1997 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 quarter ended
October 31, 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.
The Company is required to adopt Statement of Financial Accounting
Standards (SFAS) #128, "Earnings per Share" (SFAS #128) for its fiscal second
quarter ending January 31, 1998. SFAS #128 requires the presentation of "basic"
and "diluted" earnings per share, versus the current presentation of primary and
fully diluted earnings per share. Under SFAS #128, 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 annual periods restated in
connection with the adoption of SFAS #128. Diluted earnings per share will be
computed utilizing both the weighted average shares and common stock equivalents
outstanding during the period. Diluted earnings per share will not differ
materially from either primary or fully diluted earnings per share amounts
previously disclosed.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS #130,
"Reporting Comprehensive Income", and SFAS #131, "Disclosure about Segments of
an Enterprise and Related Information." The Company is required to adopt both of
these new reporting standards for its fiscal year ending July 31, 1999. The
Company has not yet evaluated the effects on disclosure of these new reporting
standards.
7
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
2. Inventories:
Inventories consisted of the following (in thousands):
October 31, July 31,
1997 1997
----------------- ------------------
Finished goods ................... $13,988 $13,990
Work in process .................. 32,640 33,074
Raw materials .................... 15,148 11,256
----------------- ------------------
61,776 58,320
LIFO reserve ..................... (10,414) (9,434)
----------------- ------------------
51,362 48,886
Supplies ......................... 10,496 10,559
================= ==================
$61,858 $59,445
================= ==================
3. Income Taxes:
The provision for income taxes for the quarters ended October 31, 1997 and
1996 are summarized by the following effective tax rate reconciliations:
Quarter ended October 31,
-------------------------------------
1997 1996
------------------ -----------------
Federal statutory tax rate ............ 35.0% 35.0%
Effect of:
State taxes, net of federal benefit .. 1.4 1.8
Foreign sales corporation benefit .... (1.6) (2.8)
Other ................................ 1.2 1.0
================== =================
Effective tax rate ........ 36.0% 35.0%
================== =================
The income tax provision for the quarter ended October 31, 1997 was
recorded based on the Company's projected effective income tax rate for the
fiscal year ending July 31, 1998.
4. Long-Term Debt:
On September 26, 1997, the Company completed a tender offer for essentially
all ($79.9 million) of its 11.5% Senior Notes due 2003 (the Senior Notes) (the
Tender). The tender price paid to holders of the Senior Notes was $1,086.20 for
each $1,000 in Senior Note principal. Also, most holders received an additional
$15.00 per $1,000 in Senior Note principal in exchange for their consent to
eliminate substantially all of the restrictive covenants and certain default
provisions in the Senior Note Indenture other than the covenants to pay interest
on and principal of the Senior Notes and the default provisions related to such
covenants. Consents were received by holders of more than a majority of the
outstanding Senior Notes, resulting in the elimination of such restrictive
covenants and default provisions. After the Tender, $0.1 million in Senior Notes
were outstanding.
8
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
In connection with the Tender, the Company entered into an agreement with a
consortium of banks led by PNC Bank for a five year, $150 million revolving
credit facility with a $15 million sub-limit for standby letters of credit (the
1997 Revolving Credit Facility). The 1997 Revolving Credit Facility replaces a
$25 million revolving credit facility with PNC Bank entered into on December 1,
1995 (the 1995 Revolving Credit Facility). Interest under the 1997 Revolving
Credit Facility is based on, at the option of the Company, either PNC Bank's
prime rate or a floating LIBOR rate plus a spread (currently 0.625%) based on a
leverage calculation. As of October 31, 1997, the interest rate on borrowings
outstanding under the 1997 Revolving Credit Facility was 6.8%. Repayment of
funds borrowed under the new credit agreement are not required until the
expiration of the facility on September 25, 2002. The most restrictive covenants
under the 1997 Revolving Credit Facility include a minimum Interest Coverage
Ratio of 3.5 to 1.0, a maximum Consolidated Total Indebtedness to EBITDA Ratio
of 3.0 to 1.0 and a minimum Consolidated Tangible Net Worth ratio, all as
defined in the 1997 Revolving Credit Facility agreement. The 1997 Revolving
Credit Facility is collateralized with receivables and inventory.
As a result of the Tender and revolving credit facility refinancing, the
Company recorded a $6.4 million net extraordinary loss on the early retirement
of debt in the quarter ended October 31, 1997. This extraordinary charge
represents the premium paid to Senior Note holders in connection with the Tender
and the write off of unamortized deferred financing fees associated with the
Senior Notes tendered and the 1995 Revolving Credit Facility.
5. 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 prosecution 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. The proceeding is in its preliminary stages. At this time,
management cannot determine whether a material loss will be incurred as a result
of the proceeding. No provision for any liability related to such matters has
been made in the unaudited condensed consolidated financial statements of the
Company as of October 31, 1997.
Four civil cases have been filed in the United States District Court for
the Eastern District of Pennsylvania in Philadelphia asserting claims on behalf
of purchasers for violations of the Sherman Act. Those cases have been
consolidated. The consolidated case names the Company, UCAR International, Inc.,
SGL Carbon Corporation and SGL Carbon AG as defendants and seeks treble damages.
The Company intends to vigorously defend against this consolidated action. The
case is in its preliminary stages. At this time, management cannot determine
whether a material loss will be incurred as a result of the case. No provision
for any liability related to such matter has been made in the unaudited
condensed consolidated financial statements of the Company as of October 31,
1997.
In April 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
9
<PAGE>
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- CONTINUED
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, pursuant to the Asset Purchase Agreement by
which the Company acquired its operating 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 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. As a result of a motion for summary judgment, the Court has
substantially reduced the scope of claims which may be brought against the
Company. 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 involved in various legal proceedings considered
incidental to the conduct of its business, the ultimate disposition of which, in
the opinion of the Company's management, will not have a material adverse effect
on the financial position, fiscal year operating results, cash flows or business
of the Company. Claims (other than environmental and contract claims and claims
for punitive damages) against the Company are generally covered by insurance
which includes a $250,000 per occurrence self-insured retention. As of October
31, 1997, a $0.4 million reserve has been recorded to provide for estimated
exposure on claims for which a loss is deemed probable.
6. Other Items:
Other Compensation
Other compensation for the quarters ended October 31, 1997 and 1996
included $0.2 million accrued under the Company's Incentive Bonus Plan.
10
<PAGE>
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations for the Fiscal First Quarter ended October 31, 1997
The following table sets forth certain financial information for the
quarters ended October 31, 1997 and 1996 and should be read in conjunction with
the unaudited condensed consolidated financial statements, including the notes
thereto, appearing elsewhere in this Form 10-Q:
<TABLE>
<CAPTION>
Quarter Ended October 31,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
(Unaudited)
Net sales:
Graphite electrode products ........................................ $54,110 $48,313
Calcium carbide products ........................................... 19,284 19,403
------------- -------------
Total net sales .............................................. $73,394 $67,716
Percentage of net sales:
Graphite electrode products ........................................ 73.7 % 71.3 %
Calcium carbide products ........................................... 26.3 28.7
------------- -------------
Total net sales .............................................. 100.0 % 100.0 %
Gross profit as a percentage of segment net sales:
Graphite electrode products ........................................ 20.6 % 18.8 %
Calcium carbide products ........................................... 15.2 14.1
Percentage of total net sales:
Total gross profit ................................................. 19.2 % 17.4 %
Selling, general and administrative ................................ 4.8 5.9
Operating income ................................................... 14.0 11.1
Income from continuing operations .................................. 7.7 5.2
</TABLE>
Net sales for the quarter ended October 31, 1997 were $73.4 million, versus
$67.7 million in the prior year comparable quarter, an 8.4% increase. Graphite
electrode product sales increased 12.0% over the prior year to $54.1 million,
while calcium carbide product sales were relatively unchanged at $19.3 million.
Within the graphite electrode products segment, graphite electrode net
sales were $40.5 million, a 15.0% increase over the prior year comparable
quarter resulting from a 12.1% increase in shipments and a 2.3% increase in the
average net sales price. Graphite electrode shipments increased to 30.1 million
pounds from 26.8 million pounds in the prior year comparable quarter. Domestic
and foreign electrode shipments as a percentage of total electrode shipments for
the quarter ended October 31, 1997 were 51.8% and 48.2%, respectively. An 8.0%
increase in graphite electrode domestic net prices was partially offset by a
4.7% decrease in foreign net prices. The continued strengthening of the U.S.
dollar against foreign currencies resulted in the decrease in net foreign
prices. Needle coke sales were $8.1 million versus $5.1 million a year ago, a
59.6% increase due to a 44.2% increase in shipments and a 10.7% increase in
average net selling prices. Last year's first quarter shipments of needle coke
were unusually low due to a three week maintenance shutdown of the needle coke
facility which temporarily curtailed production. Graphite specialty product
sales during the quarter ended October 31, 1997 were $5.5 million
11
<PAGE>
versus $8.0 million in the prior year comparable quarter. The decrease in
graphite specialty product sales resulted from a $2.7 million decrease in sales
of large graphite rods and plates to SGL Carbon Corporation (SGL Corp.) at cost
under a supply agreement which expires in January 1998 (the SGL Supply
Agreement).
Within the calcium carbide products segment, pipeline acetylene sales
increased 14.6% to $7.3 million due to a 16.3% increase in acetylene deliveries.
Sales of calcium carbide for metallurgical applications increased 3.7% to $6.4
million due to 5.1% increase in shipments. All other calcium carbide product
sales decreased 18.4% to $5.7 million ago primarily due to decreased shipments
of electrically calcined anthracite coal.
Gross profit as a percentage of graphite electrode product sales for the
quarter ended October 31, 1997 was 20.6%, versus 18.8% in the prior year
comparable quarter. The increase in the gross margin was attributable to
increased shipments and improved pricing for both needle coke and graphite
electrodes. Gross profit as a percentage of calcium carbide product was 15.2%,
versus 14.1% a year ago. The increase was due primarily to increased deliveries
of pipeline acetylene.
Selling, general and administrative expenses for the quarter ended October
31, 1997 were $3.5 million, versus $4.0 million in the prior year comparable
quarter. The prior year amount was unusually high due to a settlement of a
lawsuit and the accrual of costs associated with the search for a new chief
executive officer for the Company. Excluding these unusual items, selling,
general and administrative expenses were relatively unchanged compared to a year
ago.
Other compensation for the quarters ended October 31, 1997 and 1996
included $0.2 million accrued under the Company's Incentive Bonus Plan.
Interest expense, net for the quarter ended October 31, 1997 was $1.5
million and included $1.5 million of interest expense associated with the Senior
Notes and $0.5 million of interest expense associated with the 1997 Revolving
Credit Facility, less $0.2 million in interest income earned on cash, cash
equivalents and short-term investments and $0.4 million of capitalized interest.
The decrease in net interest expense for the quarter ended October 31, 1997
versus the prior year comparable quarter was the result of the Tender and a
revolving credit facility refinancing, as well as the effects of capitalized
interest in the current quarter. Interest expense, net for the quarter ended
October 31, 1996 was $2.1 million and included $2.4 million of interest expense
associated with the Senior Notes, less $0.3 million in interest income. The
average outstanding balance of Senior Notes during the prior year quarter was
$81.8 million.
The income tax provision for the quarter ended October 31, 1997 was
recorded based on the Company's projected effective income tax rate for the
fiscal year ending July 31, 1998. 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.
As a result of the Tender and revolving credit facility refinancing, the
Company recorded a $6.4 million net extraordinary loss on the early retirement
of debt in the quarter ended October 31, 1997. This extraordinary charge
represents the premium paid to Senior Note holders in connection with the Tender
and the write off of unamortized deferred financing fees associated with the
Senior Notes tendered and the 1995 Revolving Credit Facility.
Recently Issued Accounting Pronouncements
The Company is required to adopt SFAS #128, "Earnings per Share" for its
fiscal second quarter ending January 31, 1998. SFAS #128 requires the
presentation of "basic" and "diluted" earnings per share, versus the current
presentation of primary and fully diluted earnings per share. Under SFAS #128,
basic earnings per share
12
<PAGE>
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 annual periods
restated in connection with the adoption of SFAS #128. Diluted earnings per
share will be computed utilizing both the weighted average shares and common
stock equivalents outstanding during the period. Diluted earnings per share will
not differ materially from either primary or fully diluted earnings per share
amounts previously disclosed.
In June 1997, the Financial Accounting Standards Board issued SFAS #130,
"Reporting Comprehensive Income", and SFAS #131, "Disclosure about Segments of
an Enterprise and Related Information." The Company is required to adopt both of
these new reporting standards for its fiscal year ending July 31, 1999. The
Company has not yet evaluated the effects on disclosure of these new reporting
standards.
Liquidity and Capital Resources
Liquidity
The Company's liquidity needs are primarily for capital expenditures,
working capital and debt service on its revolving credit facility. The Company
has undertaken a substantial modernization program with respect to its graphite
electrode production facilities and several other major capital projects
expected to increase total capital expenditures to approximately $65 million in
fiscal 1998 and $35 million in fiscal 1999. The Company believes that its cash
flows from operations and availability under its revolving credit facility will
be sufficient to fund all of its planned liquidity needs through at least the
expiration of the 1997 Revolving Credit Facility in September 2002. However, in
the event these resources are not sufficient to fund the Company's capital
expenditures (including cash needs for the modernization program and other major
capital projects), service its indebtedness and pay any other obligation
including those that may arise from pending legal proceedings, the Company would
be required 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.
On September 26, 1997, the Company completed the Tender (See Note 4 to the
unaudited condensed consolidated financial statements). The tender price paid to
holders of the Senior Notes was $1,086.20 for each $1,000 in Senior Note
principal. Also, most holders received an additional $15.00 per $1,000 in Senior
Note principal in exchange for their consent to eliminate substantially all of
the restrictive covenants and certain default provisions in the Senior Note
Indenture other than the covenants to pay interest on and principal of the
Senior Notes and the default provisions related to such covenants. Consents were
received by holders of more than a majority of the outstanding Senior Notes,
resulting in the elimination of such restrictive covenants and default
provisions. After the Tender, $0.1 million in Senior Notes were outstanding.
In connection with the Tender, the Company entered into an agreement with a
consortium of banks led by PNC Bank for the 1997 Revolving Credit Facility. The
1997 Revolving Credit Facility replaces the 1995 Revolving Credit Facility.
Interest under the 1997 Revolving Credit Facility is based on, at the option of
the Company, either PNC Bank's prime rate or a floating LIBOR rate plus a spread
(currently 0.625%) based on a leverage calculation. As of October 31, 1997, the
interest rate on borrowings outstanding under the 1997 Revolving Credit Facility
was 6.8%. Repayment of funds borrowed under the new credit agreement are not
required until the expiration of the facility on September 25, 2002. The most
restrictive covenants under the 1997 Revolving Credit Facility include a minimum
Interest Coverage Ratio of 3.5 to 1.0, a maximum Consolidated Total Indebtedness
to EBITDA Ratio of 3.0 to 1.0 and a minimum Consolidated Tangible Net Worth
ratio, all as defined in the 1997 Revolving Credit Facility agreement. The 1997
Revolving Credit Facility is collateralized with receivables and inventory.
13
<PAGE>
In the process of developing permit applications for facility upgrades, the
Company determined that certain parameters in its air permits do not reflect
current operations. The Company is working to resolve this issue. At this time,
management cannot determine the magnitude of the costs, if any, that may be
incurred.
Cash Flow Information
Cash flow used for operations for the quarter ended October 31, 1997 was
$1.3 million. Cash inflows from net income plus non-cash items of $12.7 million
were offset by a $14.0 million net cash outflow due to changes in working
capital items, including a $10.0 net cash outflow from decreases in accounts
payable and accrued expenses and a $2.4 million net cash outflow from an
increase in inventories. Net interest payments during the quarter totaled $5.3
million. The Company also paid approximately $2.8 million in incentive bonus and
profit sharing awards during the quarter ended October 31, 1997.
Investing activities for the quarter ended October 31, 1997 included
capital expenditures of $16.4 million and $15.7 million in proceeds from the
sale of a short-term investments.
Cash flow used for financing activities for the quarter ended October 31,
1997 were $6.0 million. Cash outflows included $79.9 million for the principal
amount of Senior Notes repurchased in connection with the Tender and $8.1
million for the related tender premium. Partially offsetting these cash outflows
was a $77.9 million net cash inflow from the 1997 Revolving Credit Facility.
14
<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 prosecution 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. The proceeding is in its preliminary stages. At this time,
management cannot determine whether a material loss will be incurred as a result
of the proceeding. No provision for any liability related to such matters has
been made in the unaudited condensed consolidated financial statements of the
Company as of October 31, 1997.
Four civil cases have been filed in the United States District Court for
the Eastern District of Pennsylvania in Philadelphia asserting claims on behalf
of purchasers for violations of the Sherman Act. Those cases have been
consolidated. The consolidated case names the Company, UCAR International, Inc.,
SGL Corp. and SGL Carbon AG as defendants and seeks treble damages. The Company
intends to vigorously defend against this consolidated action. The case is in
its preliminary stages. At this time, management cannot determine whether a
material loss will be incurred as a result of the case. No provision for any
liability related to such matter has been made in the unaudited condensed
consolidated financial statements of the Company as of October 31, 1997.
In April 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, pursuant to the Asset Purchase Agreement by
which the Company acquired its operating assets from 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 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.
As a result of a motion for summary judgment, the Court has substantially
reduced the scope of claims which may be brought against the Company. 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 involved in various legal proceedings considered
incidental to the conduct of its business, the ultimate disposition of which, in
the opinion of the Company's management, will not have a material adverse effect
on the financial position, fiscal year operating results, cash flows or business
of the Company. Claims (other than environmental and contract claims and claims
for punitive damages) against the Company are generally covered by insurance
which includes a $250,000 per occurrence self-insured retention. As of October
31, 1997, a $0.4 million reserve has been recorded to provide for estimated
exposure on claims for which a loss is deemed probable.
15
<PAGE>
PART II
Item 6
A. INDEX TO EXHIBITS
Exhibit Page
- ------- ----
11.1 Form of Computation of Earnings per Common Share ................ 17
B. REPORTS ON FORM 8-K
During the quarter ended October 31, 1997, the Company filed three Current
Reports on Form 8-K. On August 25, 1997, the Company filed a press release dated
July 14, 1997 announcing the planned expansion of production capacity at its
affiliate, Seadrift Coke, L.P. On September 2, 1997, the Company filed an update
on certain legal proceedings and current developments regarding the Tender. On
October 6, 1997, the Company filed a press release dated September 19, 1997
announcing the election of Charles E. Slater to the Company's Board of
Directors.
16
<PAGE>
Exhibit 11.1
FORM OF COMPUTATION OF EARNINGS PER COMMON SHARE for the
quarters ended October 31, 1997 and 1996
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Quarter Ended October 31,
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
1. Income from continuing operations ....................................... $5,653 $3,523
2. Extraordinary loss on the early extinguishment of debt .................. (6,417) -
--------------- ---------------
3. Net income (loss) (1 + 2)............................................ ($764) $3,523
--------------- ---------------
4. Weighted average shares outstanding ..................................... 8,654,772 8,335,522
5. Shares issuable under dilutive management stock options ................ 243,204 441,659
--------------- ---------------
6. Common and common equivalent shares outstanding (4 + 5).................. 8,897,976 8,777,181
--------------- ---------------
Per share information:
Income from continuing operations (1 / 6) .............................. $0.64 $0.40
Extraordinary loss on debt repayment (2 / 6) .......................... (0.73) -
=============== ===============
Net income (3 / 6) ............................................... ($0.09) $0.40
=============== ===============
</TABLE>
17
<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 December 12, 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 - Corporate Finance
- -------------------- (Principal Accounting Officer)
(Jeffrey T. Jones)
18
<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 OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS. </LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Jul-31-1997
<PERIOD-START> Aug-01-1997
<PERIOD-END> Oct-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 50,779
<ALLOWANCES> (2,030)
<INVENTORY> 61,858
<CURRENT-ASSETS> 123,369
<PP&E> 286,951
<DEPRECIATION> (186,079)
<TOTAL-ASSETS> 228,846
<CURRENT-LIABILITIES> 37,011
<BONDS> 77,982
0
0
<COMMON> 98
<OTHER-SE> 96,089
<TOTAL-LIABILITY-AND-EQUITY> 228,846
<SALES> 73,394
<TOTAL-REVENUES> 73,394
<CGS> 59,336
<TOTAL-COSTS> 62,855
<OTHER-EXPENSES> 228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,473
<INCOME-PRETAX> 8,838
<INCOME-TAX> 3,185
<INCOME-CONTINUING> 5,653
<DISCONTINUED> 0
<EXTRAORDINARY> (6,417)
<CHANGES> 0
<NET-INCOME> (764)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
