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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 2000
[ ] 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 its 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
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 562-3700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of the close of business on September 22, 2000 was $14,518,462.
As of the close of business on September 22, 2000 there were 8,331,342
shares of the Registrant's $0.01 par value Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
ITEM 1 BUSINESS
OVERVIEW
The Carbide/Graphite Group, Inc. (the Company or Registrant) is a major U.S.
manufacturer of graphite electrode products and calcium carbide products.
Graphite electrodes are used as consumable conductors of electricity in the
electric arc furnace steel-making process common to all mini-mill steel
producers. Calcium carbide and derivative products, primarily acetylene, are
used in the manufacture of specialty chemicals, as a fuel in metal cutting and
welding and for metallurgical applications such as iron and steel
desulfurization. The Company is the only manufacturer of graphite electrodes
that produces its own requirements of needle coke, the principal raw material
used in the manufacture of graphite electrodes. The Company also sells needle
coke to its competitors in the graphite electrode business. Net sales for the
Company's graphite electrode products segment and calcium carbide products
segment represented 76.6% and 23.4%, respectively, of consolidated net sales for
fiscal 2000. Refer to Note 10 to the Company's consolidated financial statements
for its fiscal year ended July 31, 2000 (incorporated by reference under Item 8
of this Form 10-K) for information regarding sales (including export sales),
operating results and identifiable assets by reportable business segment.
During fiscal 2000, the Company's net prices for graphite electrodes
declined as a result of weaker transactional prices in the United States and in
most export markets, coupled with a significant decline in the value of the Euro
relative to the U.S. dollar. During fiscal 2000, the value of the Euro declined
approximately 13% in U.S. dollar terms. As virtually all of the Company's costs
are denominated in U.S. dollars, this trend had a significant negative impact on
profitability during fiscal 2000. The Company's foreign currency hedging policy
partially mitigated the impact of the negative Euro value trend during fiscal
2000.
Also during fiscal 2000, the demand for needle coke declined as major
electrode producers lowered production and implemented inventory reduction
programs in response to weaker global demand. Shipments and prices fell during
fiscal 2000 as a result of this lower level of demand and increased price
competition in the needle coke market. These negative factors, coupled with a
61% increase in the gross cost of decant oil, the primary raw material in the
production of premium needle coke, had a significant negative impact on the
Company's operating results in fiscal 2000. The Company's commodity hedging
program partially mitigated the impact of the higher decant oil costs incurred
in fiscal 2000.
During fiscal 2000, the Company implemented a working capital improvement
program to help offset the negative effects of the trends described above. In
connection with this program, the Company temporarily reduced graphite electrode
and needle coke production in order to reduce inventory levels and further
improve the Company's cash flow and cost structure. This program had a positive
effect on operating cash flows as cash outflows for raw materials, labor and
utilities were reduced during the period of lower production. However, the
program had a negative impact on the Company's operating results during the
period of reduced production, as the Company did not benefit from operating
efficiencies and fixed cost absorption typical of higher levels of production.
This situation significantly contributed to the Company reporting a net loss
from operations for fiscal 2000. The Company estimates that the working capital
improvement program negatively impacted net operating results by approximately
$6.5 million during fiscal 2000.
In fiscal 2000 and in connection with the working capital improvement
program, the Company began to scale back electrode sales volumes in Europe and
focus on markets where the net pricing was more attractive. As an extension of
this initiative, the Company, effective October 2000, has reduced its graphite
electrode production to approximately 90 million pounds a year, a 15% reduction
from the Company's production capacity in fiscal 2000. The 90 million production
level represents the Company's most efficient, lowest cost electrode production
and the Company expects to generate additional cost and working capital savings
by operating at this lower level of production.
The Company also implemented an early retirement/severance program under
which 35 salaried employees agreed to early retirement or severance packages
during fiscal 2000. In April 2000, the Company recorded a $2.0 million pre-tax
charge to provide for payments to be made under the early retirement/severance
program. The Company estimates that it will realize approximately $3.0 million
in annual savings as a result of this program.
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See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" for information on the
impact of the above factors on the Company's revolving credit facility, as well
as information on various amendments and waivers required to be obtained by the
Company in connection with the revolving credit facility.
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 Department of
Justice (DOJ) that the Grand Jury is investigating price fixing by producers of
graphite products in the United States and abroad during the period 1992 to
1997. 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. 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.
Subsequent to the initiation of the DOJ investigation, four civil cases
were filed in the United States District Court for the Eastern District of
Pennsylvania in Philadelphia asserting claims on behalf of a class of purchasers
for violations of the Sherman Act. These cases, which have been consolidated,
name the Company, UCAR International Inc. (UCAR), SGL Carbon Corporation (SGL
Corp.) and SGL Carbon AG (SGL) as defendants (together, the Named Defendants)
and seek treble damages. On March 30, 1998, a number of purchasers who were
previously included in the purported class of plaintiffs covered by the
consolidated case initiated a separate action in the same District Court which
asserts substantially the same claims and seeks the same relief as the
consolidated case and names the Named Defendants, as well as Showa Denko Carbon,
Inc. (Showa Denko). Thereafter, seven additional groups of purchasers who were
previously included in the purported class of plaintiffs covered by the
consolidated case instituted their own actions against the Named Defendants,
Showa Denko and, in several cases, certain present or former related parties of
UCAR and Showa Denko, asserting substantially the same claims and seeking the
same relief as in the consolidated case. Four such actions were filed in the
United States District Court for the Eastern District of Pennsylvania on April
3, 1998, May 14, 1998, May 28, 1998 and March 31, 1999, respectively. One action
was filed in the United States District Court for the Northern District of Ohio
on April 17, 1998 but was transferred to the Eastern District of Pennsylvania
for pre-trial proceedings. Another action was filed in the United States
District Court for the Western District of Pennsylvania on June 17, 1998 but was
transferred to the Eastern District of Pennsylvania for pre-trial proceedings.
Another action was filed in the United States District Court of the Middle
District of Pennsylvania on April 10, 2000, but was transferred to the Eastern
District of Pennsylvania for pre-trial proceedings. The complaints or amended
complaints in some of the cases have also named as defendants other companies
including Mitsubishi Corporation, Tokai Carbon U.S.A., Inc. and related
companies. On December 7, 1998, the Company was served with a complaint filed by
Chaparral Steel Company against the Named Defendants, Showa Denko and parties
related to Showa Denko and UCAR in state court in Ellis County, Texas alleging
violations of various Texas state antitrust laws and seeking treble damages.
Chaparral Steel Company has filed an amended complaint adding two additional
related plaintiffs, a second amended complaint adding additional defendants
Nippon Carbon Co., Ltd., SEC Corporation, Tokai Carbon Company, Ltd., Tokai
Carbon USA, Inc., VAW Aktiengesellscheft and VAW Carbon GMBH, and third, fourth
and fifth amended complaints.
The Company has reached settlement agreements representing approximately
96% of domestic antitrust claims with the class plaintiffs and the plaintiffs
that filed lawsuits on March 30, 1998, April 3, 1998, April 17, 1998, May 14,
1998, May 28, 1998, June 17, 1998 and March 31, 1999 and other purchasers who
had yet to file lawsuits. The settlement agreement with the class has been
approved by the Court. Although various of the settlements are unique, in the
aggregate they consist generally of current and deferred cash payments and, in a
number of cases, provisions which provide for additional payments under certain
circumstances ("most favored nations" provisions). In addition to the
settlements discussed above, the Company may also settle with various additional
purchasers.
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On February 10, 1999, a U.S. corporation which allegedly made purchases on
behalf of two foreign entities and a group of 22 foreign purchasers which are
based in several foreign countries filed a complaint against the Company, UCAR,
SGL, Tokai Carbon Co., Ltd., Tokai Carbon U.S.A., Inc., Nippon Carbon Co., Ltd.,
SEC Corporation and certain present and former related parties of UCAR in United
States District Court for the Eastern District of Pennsylvania. This complaint
has been amended to add four additional defendants. On September 24, 1999, three
Australian companies and one New Zealand company filed a complaint against the
same parties as are named in the lawsuit filed on February 10, 1999. These cases
assert substantially the same claims and seek the same relief as the
consolidated case. Other foreign purchasers have also made similar claims
against the Company but have not filed lawsuits.
The Company understands that defendants UCAR, SGL and Showa Denko have
reached settlement agreements with the class action plaintiffs, which have been
approved by the court, and have also settled claims brought by various
individual purchasers. The Company further understands that UCAR, Robert P.
Krass, Robert J. Hart, SGL, Robert J. Koehler, Showa Denko, Tokai, SEC
Corporation and Nippon Carbon Co. have pled guilty to antitrust conspiracy
charges filed by the DOJ and have agreed to pay fines and, in the cases of
Messrs. Krass and Hart, to serve prison sentences, in connection with those
guilty pleas. The Company also understands that the DOJ has indicted Mitsubishi
Corporation and Georges Schwegler, a former UCAR employee.
The Company has also advised the Commission of the European Communities
(the European Commission) that it wishes to invoke its Leniency Notice.
Generally under these guidelines, the European Commission may reduce fines and
other penalties if a company sufficiently cooperates with the European
Commission. On January 24, 2000, the European Commission adopted a Statement of
Objections against the Company, SGL, UCAR, VAW Aluminum AG, Showa Denko KK,
Tokai Carbon Co. Ltd., Nippon Carbon Co. Ltd. and SEC Corporation. The Company
has prepared and submitted to the European Commission a response to the
Statement of Objections and has appeared at a hearing regarding the imposition
of fines. The Company understands that the European Commission will determine
fines, if any, at the completion of its proceedings.
On June 18, 1998, a group of Canadian purchasers filed a lawsuit in the
Ontario Court (General Division) claiming a conspiracy and violations of the
Canadian Competition Act. The Canadian lawsuit names the Named Defendants and
Showa Denko, as well as several present or former parents, subsidiaries and/or
affiliates of UCAR, SGL and Showa Denko. The Canadian Competition and Consumer
Law Division (Canadian Division) has initiated an inquiry and the Company is
cooperating fully with the authorities conducting that inquiry pursuant to an
agreement with the Director of Research and Investigation of the Canadian
Division under which the Company and its present and former officers, directors
and employees will not be subject to criminal prosecution.
During fiscal 1998, the Company recorded a $38 million pre-tax charge ($25
million after expected tax benefits) for potential liabilities resulting from
civil lawsuits, claims, legal costs and other expenses associated with the
pending antitrust matters (the Initial Antitrust Charge). During fiscal 1999,
the Company recorded an additional $7 million charge ($4.5 million after
expected tax benefits) for such potential liabilities (the Supplemental
Antitrust Charge). The combined $45 million charge (the Antitrust Charge)
represents the Company's estimate, based on current facts and circumstances, of
the expected cost to resolve pending antitrust claims. The Company understands
that defendants UCAR, SGL and Showa Denko have reached settlements with the
class action plaintiffs and various individual purchasers at amounts
substantially higher than the levels contemplated in the Antitrust Charge. In
light of these and other developments including: (a) possible future settlements
with other purchasers, (b) the outcome of the European Commission antitrust
investigation, (c) potential additional lawsuits by foreign purchasers, (d) the
failure to satisfy the conditions to the class action settlement, and (e)
adverse rulings or judgments in pending litigation, including an adverse final
determination as to the right of the foreign purchasers to relief under U.S.
antitrust laws, the antitrust matters could result in aggregate liabilities and
costs which could differ materially and adversely from the Antitrust Charge and
could affect the Company's financial condition and its ability to service its
currently planned liquidity needs. As of July 31, 2000, $42.2 million in
antitrust settlements and costs had been paid.
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GRAPHITE ELECTRODE PRODUCTS BUSINESS
Products and Markets
The Company's graphite electrode products business segment includes
graphite electrodes, needle coke, bulk graphite, granular graphite (primarily
from machine turnings) and other related miscellaneous sales. The following
table presents the Company's net sales and percentage of segment sales within
its graphite electrode products segment for fiscal 2000, by principal product
category:
<TABLE>
<CAPTION>
FISCAL 2000
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Product Category Net Sales % of Total
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(dollars in thousands)
<S> <C> <C>
Graphite electrodes $117,332 73.9%
Needle coke (third-party sales) 21,496 13.5
Bulk graphite 12,147 7.6
Granular graphite 6,814 4.3
Other 1,029 0.7
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Total graphite electrode product net sales $158,818 100.0%
==================================================================================================================
</TABLE>
The Company's graphite electrode marketing group was re-aligned during
fiscal 2000. The Company's direct domestic sales force, consisting of eight
sales people, are responsible for coordinating all aspects of customer
relationships in the United States and Canada. This includes electrode technical
service as well as arc furnace operations and furnace monitoring solutions. A
network of international sales agents is responsible for coordinating export
customer relationships. Four technical service personnel support both domestic
and international selling and customer service initiatives. The Company also
sells graphite specialty products primarily through two sales people and, to a
lesser degree, international agents.
In the past, the Company has sold a significant amount of its electrode
production into export markets. The Company regularly enters into forward
foreign currency contracts to help mitigate foreign currency exchange rate
exposure. Primarily as a result of the weaker Euro and its negative impact on
net price realizations on sales into Europe, the Company has reduced its
graphite electrode production to approximately 90 million pounds per year. The
Company plans to increase electrode sales efforts to domestic and non-European
export markets. As a result, the Company's graphite electrode sales to customers
in export markets are expected to become a smaller percentage of total electrode
sales for the foreseeable future.
The Company's needle coke affiliate, Seadrift Coke, L.P. (Seadrift) sold
approximately 54% of its needle coke production to eight other graphite
electrode producers during fiscal 2000. The Company's sales of needle coke to
its competitors in the graphite electrode industry is expected to become a more
significant component of sales in the graphite electrode products segment in the
future.
In connection with the fiscal 1995 sale (the Specialty Products Sale) of
the Company's graphite specialty products business (Specialty Products) to SGL
Corp., the Company agreed to continue to produce graphite rods and plates (also
known as bulk graphite), the majority of which were sold to SGL Corp. at prices
approximating the Company's manufacturing cost under a supply agreement that
expired in January 1998 (the SGL Supply Agreement). Sales to SGL Corp. under
this contract in fiscal 1998 were $3.9 million versus $16.7 million in fiscal
1997. The Company also sells these bulk graphite rods and plates, and certain
other graphite products, to other graphite specialty customers. The Company
continues to pursue a strategy to increase its customer base for bulk graphite.
While the Company believes that it will continue to sell bulk graphite to SGL
Corp. and other bulk graphite customers, there can be no assurance that the
Company will be able to achieve bulk graphite sales volumes equal to those sold
while the SGL Supply Agreement was in effect. Bulk graphite sales totaled $12.1
million in fiscal 2000. Granular graphite is primarily turnings from the
machining of graphite electrodes and is used in a variety of industrial
applications, including brake shoe materials and carbon additives for steel
chemistry. Sales of granular graphite are expected to decline as electrode
production volumes are reduced in fiscal 2001. In addition, the Company provides
processing services, which include graphitizing baked rods.
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The steel industry, which constitutes the principal market for the
Company's graphite electrodes and a major market for its calcium carbide for
metallurgical applications, is highly cyclical. As a result, the Company's steel
industry-related products may face periods of reduced demand, which, because of
the generally high fixed costs of the Company's business, could result in
substantial downward pressure on profitability and liquidity. Demand for and
sales of graphite electrodes and needle coke can also fluctuate from quarter to
quarter due to such factors as scheduled plant shutdowns by customers, changes
in customer production schedules in response to seasonal changes in energy
costs, weather conditions, strikes and work stoppages at customer plants and
changes in customer order patterns in response to the announcement of price
increases or decreases.
Manufacturing
The Company's electrodes and other graphite products are manufactured at
its facilities in Niagara Falls, New York and St. Marys, Pennsylvania. Both
plants are equipped with facilities for milling, mixing, homogenizing and
extruding; baking and rebaking; pitch impregnating; graphitizing; and machine
finishing. During fiscal 2000, the Company maintained electrode production
capacity at approximately 105 million pounds per year. However, as a result of
the working capital improvement program, electrode production was reduced to
approximately 94 million pounds during fiscal 2000. In addition, the Company
currently maintains approximately 20 million pounds of annual bulk specialty
graphite production capacity.
The Company manufactures all of its needle coke (the primary raw material
for graphite electrodes) at its affiliate, Seadrift. The Company currently has
the capacity to manufacture approximately 200,000 tons of needle coke annually.
During fiscal 2000, approximately 27% of Seadrift's capacity was used internally
for the production of graphite electrodes. Needle coke is shipped from Seadrift
largely by rail to the Company's St. Marys, Pennsylvania facility and by rail,
barge and overseas vessel to its third-party customers.
During fiscal 2000, the Company implemented a working capital improvement
program, which temporarily reduced graphite electrode and needle coke production
in order to reduce inventory levels and further improve the Company's cash flow
and cost structure. This program had a positive effect on operating cash flows
as cash outflows for raw materials, labor and utilities were reduced during the
period of lower production. As an extension of this initiative, the Company,
effective October 2000, has reduced its graphite electrode production to
approximately 90 million pounds a year, a 15% reduction from the Company's
production capacity in fiscal 2000. The 90 million production level represents
the Company's most efficient, lowest cost electrode production and the Company
expects to generate additional cost and working capital savings by operating at
this lower level of production.
CALCIUM CARBIDE PRODUCTS BUSINESS
Products and Markets
The Company's primary products in this segment are acetylene and calcium
carbide for metallurgical applications such as iron and steel desulfurization
and deoxidation. The following table presents the Company's net sales and
percentage of segment sales within its calcium carbide products segment for
fiscal 2000, by principal product category:
<TABLE>
<CAPTION>
FISCAL 2000
-------------------------------------------
Product Category Net Sales % of Total
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(dollars in thousands)
<S> <C> <C>
Acetylene:
Pipeline acetylene $12,163 25.1%
Fuel gas applications 12,102 24.9
Metallurgical applications 18,271 37.6
Other 6,001 12.4
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Total calcium carbide product net sales $48,537 100.0%
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</TABLE>
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The Company produces acetylene at its Louisville and Calvert City, Kentucky
plants for pipeline delivery to three customers, International Specialty
Products (ISP), Air Products and Chemicals, Inc. (Air Products) and E.I. duPont
de Nemours & Company (DuPont), for use as a feedstock in the manufacture of
specialty chemicals. Each of these customers has been supplied by the Company
for over thirty years. Although relationships with these pipeline customers are
long-standing, there can be no assurance that any of these customers will
continue to operate their adjacent facility or require the Company's acetylene
product. ISP, the Company's largest pipeline acetylene customer, in response to
lower global demand and lower prices for some of its acetylene-based products,
reduced their demand for the Company's acetylene during fiscal 1999 and fiscal
2000 by as much as 75% of its historical levels. This situation has resulted in
the discontinuance of calcium carbide production at the Calvert City, Kentucky
facility. Partially offsetting the sales effect of the lower deliveries to
pipeline acetylene customers is an increase in average pipeline acetylene prices
resulting from the volume/price structure of the Company's acetylene supply
arrangements.
Calcium carbide is sold to industrial gas generators as a raw material for
the production of cylinder acetylene, a fuel gas which is primarily used in the
metal fabrication and construction industries. The acetylene distribution market
is comprised of several large, national distributors of industrial gases with
numerous generating locations, and a large number of small companies that serve
their regional markets. The Company sells to both types of customers.
The Company sells calcium carbide for metallurgical applications, such as
blast furnace hot metal desulfurization, foundry iron desulfurization and
electric furnace slag conditioning and deoxidation. Most calcium carbide
desulfurization products are finely ground and, together with several additives,
are injected into baths of molten iron to reduce the sulfur content of the
material. In addition to selling directly to steel customers, the Company also
sells calcium carbide to major distributors which in turn supply carbide
mixtures and a variety of ancillary services to steel mills for metallurgical
applications.
The Company markets calcium carbide products to all of its end customers
through a sales force of three personnel and through distributors, with
technical service support from a staff of two personnel. Sales to customers
other than pipeline customers are made through purchase orders.
Manufacturing
The Company manufactures its calcium carbide products at plants in Louisville
and Calvert City, Kentucky. Louisville has 120,000 tons of calcium carbide
production capacity. Calvert City has 80,000 tons of calcium carbide production
capacity, but is currently shut down in terms of calcium carbide production.
Both plants operate crushing, screening and packing equipment; acetylene
generators; and grinding facilities. The Louisville plant supplies pipeline
acetylene to DuPont; the Calvert City plant supplies pipeline acetylene to ISP
and Air Products. The Calvert City plant is operated in block-run fashion on an
as needed basis.
COMPETITION
Graphite Electrode Products
The Company's competition in graphite electrodes includes two major producers,
UCAR and SGL, as well as a group of smaller, foreign and U.S. producers,
including Showa Denko, Tokai Carbon Co., Ltd. (of Japan), Nippon Carbon Co. Ltd.
(of Japan), ERFTcarbon AG (of Germany) and Superior Graphite. Participants in
the graphite electrode industry compete on the basis of service and product
quality, reliability, efficiency and price.
UCAR and SGL are market and price leaders, each having worldwide market
shares ranging between 25% and 35%. Both maintain operations in various
international markets. The Company is one of a small group of graphite electrode
producers each having a worldwide market share of 5% to 7%. While the Company
markets its graphite electrodes worldwide, it has no production facility outside
of the United States and, accordingly, has significant transportation, duty cost
and, at times, foreign currency exchange rate disadvantages relative to some of
its competitors who have production facilities located in foreign markets.
From time to time, graphite electrode manufacturers, including the Company,
experience temporary declines in the quality of their graphite electrodes,
sometimes resulting in customer credits and reimbursements. The Company
continually evaluates and implements procedures to improve electrode quality and
believes that its electrode performance meets the quality requirements of its
customers. There can be no assurance, however, that temporary declines in
electrode quality will not recur.
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Outside of Japan, there are currently only three needle coke producers:
Conoco, Inc. (Conoco), UNO-VEN Company (Uno-Ven) and Seadrift. Conoco is the
largest needle coke producer and is the market leader, with annual capacity
currently estimated by the Company to be approximately 400,000 tons. Uno-Ven has
a production capacity of approximately 100,000 tons per year and Seadrift's
production capacity is currently approximately 200,000 tons per year. In Japan,
there are four small producers, one of which is a Conoco affiliate, and two of
which make a different type of coke from coal tar pitch. The Company believes
the three Japanese producers (other than the Conoco affiliate) produce an
aggregate of approximately 200,000 tons per year. Participants in the needle
coke industry compete primarily on price and quality.
The Company has numerous competitors in the sale of granular graphite,
including granular graphite marketed by other electrode manufacturers and a
variety of graphite scrap dealers and granular graphite substitutes. Graphite
blocks and rods (also known as bulk graphite) are produced by a number of
companies throughout the world, including UCAR and SGL. These materials are
marketed on a worldwide basis by the Company.
Calcium Carbide Products
The Company's primary competitor in the manufacture and marketing of calcium
carbide in the United States and Canada is Elkem. Participants in the calcium
carbide market compete on the basis of service and product quality, reliability,
efficiency and price.
The Company sells all of its acetylene to the adjacent specialty chemical
plants of its pipeline customers. These plants are not supplied with acetylene
by any source other than the Company, although certain pipeline acetylene
customers have alternative production facilities producing the same end products
for which they purchase acetylene from the Company. See " Calcium Carbide
Products Business--Products and Markets." For many years, other, less expensive
materials have competed with cylinder acetylene for use in the metal fabrication
and construction industries. Acetylene has maintained its market position
through its versatility and ease of use. Acetylene provides the hottest cutting
flame of all the fuel gases and thus allows for faster, cleaner cutting
operations.
Calcium carbide for metallurgical applications competes with magnesium- and
lime-based desulfurization products and lime spar. The commodity price of
magnesium and the resultant price of magnesium-based desulfurizers affects the
demand for calcium carbide-based desulfurization products.
RAW MATERIALS AND COSTS
Graphite Electrode Products
The significant raw material costs of production for all graphite electrode
manufacturers are needle coke, coal tar pitch, natural gas for the heating of
kilns and electricity for graphitizing. The Company's graphite electrode
business purchases all of its needle coke requirements from Seadrift, an
affiliate of the Company.
Seadrift uses low sulfur decant oil, a by-product of fluid catalytic
cracking units in integrated oil refineries, in the manufacture of needle coke.
Most of this feedstock is purchased from refineries along the U.S. Gulf Coast. A
limited number of refineries on the U.S. Gulf Coast produce decant oil suitable
for use by Seadrift. Due to restraints on local availability, Seadrift also
purchases decant oil on the West and East Coasts at a higher cost (due primarily
to transportation costs) than if obtained from a local refinery. Conoco,
Seadrift's largest needle coke competitor, operates a large, integrated refinery
that has the ability to desulfurize decant oil.
The cost of refinery decant oil is pegged to the U.S. Gulf Coast spot cargo
barge prices for heavy fuel oil and, in certain cases, West Texas Intermediate
crude oil. The Company regularly hedges oil costs by trading in futures
contracts for crude oil and swap agreements for low sulfur fuel oil. The Company
utilizes several suppliers of low sulfur decant oil in an effort to disperse the
risk of availability to some degree. Prices and availability of low sulfur
decant oil may be impacted by many factors, including world crude oil production
and output, global demand for oil products and the production parameters of
Seadrift's decant oil suppliers. While the Company believes that a sufficient
amount of decant oil of an acceptable quality is currently readily available,
there can be no assurance that Seadrift will be able to obtain an adequate
quantity of suitable feedstocks at all times in the future or at acceptable
prices.
During fiscal 2000, the Company purchased a $3.5 million
hydrodesulfurization (HDS) complex in connection with the expected
implementation of an HDS project at Seadrift. In addition, the Company will
spend an additional $1.6 million during fiscal 2001 to dismantle and transport
the HDS unit to Seadrift. The HDS project in total is expected
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to cost approximately $30 million. Once installed, it is expected that the HDS
project will allow Seadrift to purchase virtually all of its decant oil
feedstock needs from the Gulf Coast as it will have the capability to reduce the
sulfur levels of high sulfur feedstocks to acceptable levels. The completion of
the HDS project is strategically critical for the Company and Seadrift as it is
expected to significantly reduce decant oil procurement costs and improve
Seadrift's needle coke quality from a sulfur content perspective. In addition,
the completion of the HDS project should mitigate the risk of feedstock supply
shortages as the potential universe of feedstocks increases significantly once
Seadrift installs HDS capacity. The implementation of the HDS project is
contingent upon securing adequate financing to fund the remaining $25 million
cost of the project. See "Liquidity and Capital Resources" under Item 7 of this
Form 10-K.
During fiscal 2000, the Company's feedstock costs increased approximately
61% per barrel as a result of the worldwide shortage of petroleum products,
particularly crude and heating oils. The Company's commodity hedging program
partially mitigated the impact of the increase in feedstock costs during fiscal
2000. The Company's current financial commodity hedge instruments expire in
December 2000. Based on widely published forward rates for petroleum products,
the Company expects its feedstock costs to steadily decline as fiscal 2001
progresses. However, there can be no assurance that the expected trend in
petroleum prices and, therefore, decant oil costs, will transpire. See
"Liquidity and Capital Resources" under Item 7 of this Form 10-K.
Electricity for graphitizing electrodes represents a major cost to the
Company. At the Company's plant in Niagara Falls, electricity is supplied by the
Power Authority of the State of New York at favorable, pre-determined prices
under a contract that expires in 2006. The St. Marys plant is supplied
electricity under a conventional power contract. Through an electricity
co-generation process, Seadrift is a net power producer, resulting in only
nominal electrical power costs for that facility. The Company purchases natural
gas for heating kilns from either interstate natural gas carriers or from local
gas well operators. During the latter half of fiscal 2000, spot natural gas
prices began to rise as supply levels declined as a result of lower production
levels in the U.S. The Company's financial results for fiscal 2000 were not
significantly impacted by the increase in spot natural gas prices as the Company
had negotiated a fixed price supply contract for its fiscal 2000 natural gas
requirements. Given the current spot prices for natural gas, the Company expects
to experience a significant increase in its natural gas costs during fiscal
2001. However, the increase has been partially mitigated as the Company has
negotiated fixed rate supply contracts for a significant portion of its expected
natural gas requirements in fiscal 2001 at rates substantially lower than
current spot rates. In addition, based on widely published forward rates for
natural gas, the Company expects the cost of its natural gas requirements to
steadily decline as fiscal 2001 progresses as the costs for spot natural gas
purchases are expected to decline. However, there can be no assurance that the
expected trend in natural gas prices will transpire. See "Liquidity and Capital
Resources" under Item 7 of this Form 10-K.
Calcium Carbide Products
Raw materials required for calcium carbide manufacture are lime, coke and large
amounts of electricity for submerged arc electric furnaces. The Company believes
that its raw materials are widely available at satisfactory prices. Both the
Louisville and Calvert City plants are supplied electricity under conventional
power contracts.
EMPLOYEES
The Company employed 907 people as of July 31, 2000. At July 31, 2000, the
Company employed 680 people in its graphite electrode products segment, of which
34% were salaried and 66% were paid hourly. Seadrift is staffed entirely with
salaried personnel. At July 31, 2000, there were 214 people in the calcium
carbide segment, of which 19% were salaried and 81% were paid hourly. At July
31, 2000, the Company employed 13 people in its corporate function, all of whom
were salaried employees.
The Company has various labor agreements with unions representing its
hourly work force. Within the graphite electrode products business, the St.
Marys labor agreement was renegotiated and became effective in June 1999. The
new agreement will expire in June 2001. This agreement was negotiated to terms
deemed satisfactory to the Company. The Niagara Falls labor agreement expires in
January 2004. Within the calcium carbide products business, the Louisville and
Calvert City agreements will expire in July 2001 and February 2001,
respectively. The Company believes that its relationships with the unions are
stable, although there can be no assurance that new agreements will be reached
when the current agreements expire without union action or will be on terms
satisfactory to the Company.
8
<PAGE> 10
PATENTS AND TRADEMARKS
The Company has filed a trademark and copyright application with respect to
software it has developed. The software, to be marketed under the name
ArchiTech, is used in monitoring the operating parameters of electric arc
furnaces.
ENVIRONMENTAL COMPLIANCE
In connection with the agreement under which the Company acquired its operating
assets from The BOC Group, plc (BOC) (the Asset Acquisition), BOC agreed to
indemnify the Company, its successors and assigns, against certain liabilities,
to the extent not disclosed and expressly excluded from the indemnity, arising
from (i) pre-closing operations of its former divisions (regardless of whether
such liabilities arose during or before BOC's ownership thereof); (ii) assets
transferred to the Company pursuant to the Asset Acquisition; and (iii)
pre-closing activities conducted at the real property and leased premises
transferred to the Company pursuant to the Asset Acquisition (the BOC
Environmental Indemnity Agreement). Such indemnification includes certain
liabilities arising out of the use, generation, transportation, storage,
treatment, release or disposal of hazardous materials; the violation of any
environmental regulations; or any claim or cause of action to the effect that
the Company is responsible or liable for acts or omissions of BOC concerning
hazardous materials. Under the indemnity, the Company is required to pay 20% of
the first $2.5 million of costs relating to such environmental claims or
liabilities. Thereafter, BOC is responsible for all of such environmental claims
or liabilities. The BOC indemnity survives with respect to covered claims
brought within 15 years after closing of the Asset Acquisition, which occurred
in July 1988. A number of identifiable costs at the time of the Asset
Acquisition, such as the need for certain pollution control equipment, receipt
of certain discharge permits and the need for continued operation and
maintenance of a landfill used exclusively by the Company at its St. Marys
facility, were disclosed by BOC and were excluded from the indemnification. The
Company has installed much of the pollution control equipment and received the
discharge permits excluded from the BOC indemnity. If any of the pollution
control equipment excluded from the BOC indemnity is required in the future for
reactivation of production equipment or increases in capacity, the costs related
thereto are not believed by the Company to be material.
In connection with the Specialty Products Sale, the Company agreed to
indemnify SGL Corp. for 80% of all environmental costs in excess of an
aggregate $100,000 threshold up to a maximum exposure of $6.0 million for a
five-year period which expired in January 2000. In addition, with respect to the
Company's former subsidiary, Speer Canada, Inc., sold pursuant to the Specialty
Products Sale, the Company agreed to indemnify SGL Corp. for 80% of all
environmental costs, in excess of a $100,000 threshold, relating to such former
subsidiary's operations prior to the consummation of the Specialty Products
Sale, up to a maximum exposure of $1.5 million. No environmental claims were
submitted for indemnification by SGL Corp.
During fiscal 1999, the Company completed an environmental compliance audit
(ECA) of all five of its operating facilities. Such ECA was completed by an
independent, experienced environmental consulting firm which assessed the
compliance status of each facility. In addition to the compliance objectives,
the ECA evaluated the effectiveness of the existing management systems with
respect to environmental compliance as well as the risks associated with
management practices related to the use, storage, and disposal of regulated and
non-regulated materials. All areas of non-compliance identified by the ECA have
been corrected and the Company is in the process of implementing suggestions to
achieve best management practices in an effort to maintain and improve
environmental performance. None of the areas of non-compliance identified by the
ECA were deemed to be material.
The Clean Air Act was amended in 1990 (including Title V). The Clean Air
Act has resulted and it is likely that it will continue to result in revisions
to state implementation plans which may necessitate the installation of
additional controls for certain of the Company's emission sources. The Company's
Title V applications for its five production facilities are in various stages of
completion.
In the process of developing permit applications for facility upgrades at
the St. Marys, PA graphite plant, the Company determined that certain parameters
in its air permits do not reflect current operations. The Company has advised
the appropriate state environmental authorities. The Company is in the process
of implementing a plan of action to achieve resolution of this issue. Such plan
of action includes the installation and ongoing operation of an air emissions
scrubbing unit. The cost estimate for this unit is approximately $4.0 million
installed, with an additional $0.5 million per year in ongoing cash operating
costs. The facility improvements are expected to be made during the Company's
fiscal year ending
9
<PAGE> 11
July 31, 2001. The Company believes that certain costs are subject to
reimbursement under the BOC Environmental Indemnity Agreement. The Company
expects that the fine to be levied in connection with this issue will be
immaterial.
During fiscal 2000, the Company spent approximately $0.6 million on capital
expenditures in order to comply with environmental laws and regulations (which
expenditures are included in the consolidated financial statements, including
the notes thereto, appearing elsewhere in this Form 10-K as additions to
property, plant and equipment). During fiscal 2001, the Company expects to spend
approximately $4.5 million for such projects, a substantial portion of which is
expected to be reimbursed under the BOC Environmental Indemnity Agreement.
ITEM 2 PROPERTIES
The Company maintains its corporate headquarters at One Gateway Center,
Pittsburgh, Pennsylvania under a lease with a term expiring on June 30, 2003.
The Company has the following additional properties, which are owned or leased,
as indicated:
<TABLE>
<CAPTION>
Area
(approximate Owned
Location Use square feet) or Leased
-----------------------------------------------------------------------------------------------------------------------
Graphite electrode products facilities:
<S> <C> <C> <C>
Niagara Falls, New York Electrodes 1,000,000 Owned
St. Marys, Pennsylvania Electrodes 742,000 Owned
Seadrift, Texas Needle coke 743,000 Owned
Calcium carbide products facilities:
Calvert City, Kentucky Carbide products 150,000 Owned
Louisville, Kentucky Carbide products 200,000 Owned
Louisville, Kentucky Carbide sales, technical and finance offices 6,000 Leased
=======================================================================================================================
</TABLE>
The Company owns all of its major manufacturing facilities. The Company
believes that its plants and facilities, which are of varying ages and types of
construction, are generally in satisfactory condition.
Many of the Company's operations are conducted at extremely high
temperatures, exceeding 5,000 degrees Fahrenheit in the case of electrode
graphitizing. In some facilities, a maintenance "turnaround" is conducted
annually; in other facilities, major maintenance is conducted on an ongoing
basis. Maintenance expenditures, which are expensed as incurred, amounted to
approximately $26.1 million, $29.3 million and $37.7 million for the fiscal
years ended July 31, 2000, 1999 and 1998, respectively.
ITEM 3 LEGAL PROCEEDINGS
GENERAL
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 Department of Justice
that the Grand Jury is investigating price fixing by producers of graphite
products in the United States and abroad during the period 1992 to 1997. 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. 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.
Subsequent to the initiation of the DOJ investigation, four civil cases
were filed in the United States District Court for the Eastern District of
Pennsylvania in Philadelphia asserting claims on behalf of a class of purchasers
for violations of the Sherman Act. These cases, which have been consolidated,
name the Company, UCAR, SGL Corp. and SGL
10
<PAGE> 12
as defendants and seek treble damages. On March 30, 1998, a number of purchasers
who were previously included in the purported class of plaintiffs covered by the
consolidated case initiated a separate action in the same District Court which
asserts substantially the same claims and seeks the same relief as the
consolidated case and names the Named Defendants, as well as Showa Denko.
Thereafter, seven additional groups of purchasers who were previously included
in the purported class of plaintiffs covered by the consolidated case instituted
their own actions against the Named Defendants, Showa Denko and, in several
cases, certain present or former related parties of UCAR and Showa Denko,
asserting substantially the same claims and seeking the same relief as in the
consolidated case. Four such actions were filed in the United States District
Court for the Eastern District of Pennsylvania on April 3, 1998, May 14, 1998,
May 28, 1998 and March 31, 1999, respectively. One action was filed in the
United States District Court for the Northern District of Ohio on April 17, 1998
but was transferred to the Eastern District of Pennsylvania for pre-trial
proceedings. Another action was filed in the United States District Court for
the Western District of Pennsylvania on June 17, 1998 but was transferred to the
Eastern District of Pennsylvania for pre-trial proceedings. Another action was
filed in the United States District Court of the Middle District of Pennsylvania
on April 10, 2000, but was transferred to the Eastern District of Pennsylvania
for pre-trial proceedings. The complaints or amended complaints in some of the
cases have also named as defendants other companies including Mitsubishi
Corporation, Tokai Carbon U.S.A., Inc. and related companies. On December 7,
1998, the Company was served with a complaint filed by Chaparral Steel Company
against the Named Defendants, Showa Denko and parties related to Showa Denko and
UCAR in state court in Ellis County, Texas alleging violations of various Texas
state antitrust laws and seeking treble damages. Chaparral Steel Company has
filed an amended complaint adding two additional related plaintiffs, a second
amended complaint adding additional defendants Nippon Carbon Co., Ltd., SEC
Corporation, Tokai Carbon Company, Ltd., Tokai Carbon USA, Inc., VAW
Aktiengesellscheft and VAW Carbon GMBH, and third, fourth and fifth amended
complaints.
The Company has reached settlement agreements representing approximately
96% of domestic antitrust claims with the class plaintiffs and the plaintiffs
that filed lawsuits on March 30, 1998, April 3, 1998, April 17, 1998, May 14,
1998, May 28, 1998, June 17, 1998 and March 31, 1999 and other purchasers who
had yet to file lawsuits. The settlement agreement with the class has been
approved by the Court. Although various of the settlements are unique, in the
aggregate they consist generally of current and deferred cash payments and, in a
number of cases, provisions which provide for additional payments under certain
circumstances ("most favored nations" provisions). In addition to the
settlements discussed above, the Company may also settle with various additional
purchasers.
On February 10, 1999, a U.S. corporation which allegedly made purchases on
behalf of two foreign entities and a group of 22 foreign purchasers which are
based in several foreign countries filed a complaint against the Company, UCAR,
SGL, Tokai Carbon Co., Ltd., Tokai Carbon U.S.A., Inc., Nippon Carbon Co., Ltd.,
SEC Corporation and certain present and former related parties of UCAR in United
States District Court for the Eastern District of Pennsylvania. This complaint
has been amended to add four additional defendants. On September 24, 1999, three
Australian companies and one New Zealand company filed a complaint against the
same parties as are named in the lawsuit filed on February 10, 1999. These cases
assert substantially the same claims and seek the same relief as the
consolidated case. Other foreign purchasers have also made similar claims
against the Company but have not filed lawsuits.
The Company understands that defendants UCAR, SGL and Showa Denko have
reached settlement agreements with the class action plaintiffs, which have been
approved by the court, and have also settled claims brought by various
individual purchasers. The Company further understands that UCAR, Robert P.
Krass, Robert J. Hart, SGL, Robert J. Koehler, Showa Denko, Tokai, SEC
Corporation and Nippon Carbon Co. have pled guilty to antitrust conspiracy
charges filed by the DOJ and have agreed to pay fines and, in the cases of
Messrs. Krass and Hart, to serve prison sentences, in connection with those
guilty pleas. The Company also understands that the DOJ has indicted Mitsubishi
Corporation and Georges Schwegler, a former UCAR employee.
The Company has also advised the Commission of the European Communities
(the European Commission) that it wishes to invoke its Leniency Notice.
Generally under these guidelines, the European Commission may reduce fines and
other penalties if a company sufficiently cooperates with the European
Commission. On January 24, 2000, the European Commission adopted a Statement of
Objections against the Company, SGL, UCAR, VAW Aluminum AG, Showa Denko KK,
Tokai Carbon Co. Ltd., Nippon Carbon Co. Ltd. and SEC Corporation. The Company
has prepared
11
<PAGE> 13
and submitted to the European Commission a response to the Statement of
Objections and has appeared at a hearing regarding the imposition of fines. The
Company understands that the European Commission will determine fines, if any,
at the completion of its proceedings.
On June 18, 1998, a group of Canadian purchasers filed a lawsuit in the
Ontario Court (General Division) claiming a conspiracy and violations of the
Canadian Competition Act. The Canadian lawsuit names the Named Defendants and
Showa Denko, as well as several present or former parents, subsidiaries and/or
affiliates of UCAR, SGL and Showa Denko. The Canadian Competition and Consumer
Law Division (Canadian Division) has initiated an inquiry and the Company is
cooperating fully with the authorities conducting that inquiry pursuant to an
agreement with the Director of Research and Investigation of the Canadian
Division under which the Company and its present and former officers, directors
and employees will not be subject to criminal prosecution.
During fiscal 1998, the Company recorded a $38 million pre-tax charge ($25
million after expected tax benefits) for potential liabilities resulting from
civil lawsuits, claims, legal costs and other expenses associated with the
pending antitrust matters (the Initial Antitrust Charge). During fiscal 1999,
the Company recorded an additional $7 million charge ($4.5 million after
expected tax benefits) for such potential liabilities (the Supplemental
Antitrust Charge). The combined $45 million charge (the Antitrust Charge)
represents the Company's estimate, based on current facts and circumstances, of
the expected cost to resolve pending antitrust claims. The Company understands
that defendants UCAR, SGL and Showa Denko have reached settlements with the
class action plaintiffs and various individual purchasers at amounts
substantially higher than the levels contemplated in the Antitrust Charge. In
light of these and other developments including: (a) possible future settlements
with other purchasers, (b) the outcome of the European Commission antitrust
investigation, (c) potential additional lawsuits by foreign purchasers, (d) the
failure to satisfy the conditions to the class action settlement, and (e)
adverse rulings or judgments in pending litigation, including an adverse final
determination as to the right of the foreign purchasers to relief under U.S.
antitrust laws, the antitrust matters could result in aggregate liabilities and
costs which could differ materially and adversely from the Antitrust Charge and
could affect the Company's financial condition and its ability to service its
currently planned liquidity needs. As of July 31, 2000, $42.2 million in
antitrust settlements and costs had been paid.
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 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 July 31, 2000,
a $0.2 million reserve has been recorded to provide for estimated exposure on
claims for which a loss is deemed probable.
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
This item is not applicable to the Registrant for this Annual Report on
Form 10-K.
12
<PAGE> 14
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System.
The following tables provide information regarding the high and low prices at
which the Company's Common Stock traded for each of the quarterly periods in the
fiscal years ended July 31, 2000 and 1999.
QUARTERLY STOCK INFORMATION
Year Ended July 31, 2000 HIGH LOW
-------------------------------------------------------------------
First $13 7/8 $ 5 3/8
Second 9 1/4 5 3/8
Third 7 3/8 3 7/16
Fourth 5 3/4 2 1/4
-------------------------------------------------------------------
Fiscal Year $13 7/8 $ 2 1/4
===================================================================
Year Ended July 31, 1999 High Low
-------------------------------------------------------------------
First $21 5/8 $ 7 3/4
Second 17 1/8 10 3/4
Third 13 11/16 9 3/8
Fourth 15 11
-------------------------------------------------------------------
Fiscal Year $21 5/8 $ 7 3/4
===================================================================
No cash Common Stock dividends were declared during fiscal 2000 or fiscal
1999. The Company estimates that as of September 22, 2000, there were 100 record
holders and approximately 1,500 beneficial holders of its Common Stock.
DIVIDEND OF PREFERRED SHARE PURCHASE RIGHTS
In fiscal 1999, the Company's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right on each outstanding share of
Common Stock. The dividend distribution was made on June 1, 1999 payable to
stockholders of record on that date. The Preferred Share Purchase Rights are
designed to ensure that all of the Company's stockholders receive fair and equal
treatment in the event of certain takeovers of the Company. The Rights are not
intended to prevent a takeover, but rather to encourage anyone seeking to
acquire the Company to negotiate with the Company's Board of Directors prior to
attempting a takeover.
13
<PAGE> 15
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended July 31, 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts,
percentages and pricing information)
STATEMENTS OF OPERATIONS DATA(1):
<S> <C> <C> <C> <C> <C>
Net sales $ 207,355 $ 240,130 $ 293,751 $ 289,586 $ 259,394
Cost of goods sold 197,619 202,888 242,535 235,401 214,396
Selling, general and administrative 12,100 14,925 14,884 16,031 14,609
Early retirement/severance charge(2) 2,050 -- -- 1,100 --
Other expense (income)(3) -- 15,043 38,000 -- (308)
-------------------------------------------------------------------------------------------------------------
Operating income (loss) (4,414) 7,274 (1,668) 37,054 30,697
Interest expense, net 10,423 6,617 5,130 7,894 9,073
Special financing expenses -- -- -- -- 889
Provision (benefit) for income taxes (5,108) 259 (1,729) 10,732 6,416
-------------------------------------------------------------------------------------------------------------
Income (loss) from operations
and before extraordinary loss $ (9,729) $ 398 $ (5,069) $ 18,428 $ 14,319
============================================================================================================
Per share income (loss) from
operations and before extraordinary loss
applicable to common stock:
Basic $ (1.17) $ 0.05 $ (0.58) $ 2.16 $ 1.90
Diluted (1.17) 0.05 (0.58) 2.09 1.67
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 72,776 $ 75,604 $ 70,129 $ 100,825 $ 104,825
Property, plant and equipment, net 124,910 130,342 137,603 87,653 65,177
Total assets 250,494 274,416 289,099 235,860 212,870
Long-term debt 120,800 110,500 110,232 80,035 81,763
Stockholders' equity 71,470 81,317 84,814 96,209 74,808
OTHER OPERATING DATA(1):
Gross profit margin percentage 4.7% 15.5% 17.4% 18.7% 17.3%
Operating income (loss) margin percentage (2.1) 3.0 (0.6) 12.8 11.8
EBITDA(4) $ 16,319 $ 40,420 $ 50,708 $ 49,354 $ 39,560
Depreciation and amortization(4) 18,683 18,103 14,376 11,200 9,171
Capital expenditures 13,197 15,532 64,306 33,765 15,670
-------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Certain amounts reported in previous years have been reclassified to
conform with current year presentation.
(2) Represents costs associated with the elimination of approximately 35
salaried positions in fiscal 2000 and with the retirement of two executives
in fiscal 1997.
(3) Represents expense related to facility closure activities in fiscal 1999,
expenses related to the Antitrust Reserve in fiscal 1999 and 1998 and
income related to a long-term contract for the construction of a graphite
electrode plant in the People's Republic of China (the China Contract) in
fiscal 1996.
(4) EBITDA is defined as operating income before depreciation and amortization,
early retirement/severance charges and other expense and income. EBITDA is
not presented as a measure of operating results under generally accepted
accounting principles. However, management believes that EBITDA is an
appropriate measure of the Company's ability to service its cash
requirements. Depreciation and amortization included in the computation of
EBITDA includes amortization of certain intangibles.
No cash Common Stock dividends were declared or paid during the five-year period
ended July 31, 2000.
14
<PAGE> 16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW OF RESULTS
The Company's results from operations before extraordinary loss for the fiscal
year ended July 31, 2000 were a loss of $9.7 million, or $1.17 per share,
versus earnings of $0.4 million, or $0.05 per share, for the fiscal year ended
July 31, 1999 and a loss of $5.1 million, or $0.58 per share, for the fiscal
year ended July 31, 1998. During fiscal 1999 and fiscal 1998, the Company
recorded net charges of $4.5 million and $25.0 million, respectively,
representing the Antitrust Charge. Also, the Company recorded a $1.3 million net
charge to provide for an early retirement/severance program during fiscal 2000
and a $5.2 million net charge to provide for the closure of certain graphite
production facilities (the Closure Charge) during fiscal 1999.
An extraordinary loss resulting from the early retirement of the Senior
Notes (as herein defined) during fiscal 1998 reduced the Company's net results
to an $11.5 million loss, or $1.32 per share.
The Company's reportable business segments include graphite electrode
products, which includes graphite electrodes, needle coke and other graphite
specialty products, and calcium carbide products, which includes pipeline
acetylene, calcium carbide for metallurgical applications and calcium carbide
for fuel gas applications. The following table sets forth certain financial
information for the periods discussed below and should be read in conjunction
with the consolidated financial statements, including the notes thereto,
appearing elsewhere in this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Year Ended July 31, 2000 1999 1998
-------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
<S> <C> <C> <C>
Net sales:
Graphite electrode products $ 158,818 $ 183,618 $ 215,767
Calcium carbide products 48,537 56,512 77,984
-------------------------------------------------------------------------------------------------------
Total net sales $ 207,355 $ 240,130 $ 293,751
=======================================================================================================
Percentage of net sales:
Graphite electrode products 76.6% 76.5% 73.5%
Calcium carbide products 23.4 23.5 26.5
-------------------------------------------------------------------------------------------------------
Total percentage of net sales 100.0% 100.0% 100.0%
=======================================================================================================
Gross profit as a percentage of segment net sales:
Graphite electrode products 3.0% 16.4% 18.0%
Calcium carbide products 10.3 12.6 15.9
Percentage of total net sales:
Total gross profit 4.7% 15.5% 17.4%
Selling, general and administrative 5.8 6.2 5.0
Operating income (loss) (2.1) 3.0 (0.6)
Income (loss) from operations and before extraordinary loss (4.7) 0.2 (1.7)
Net income (loss) (4.7) 0.2 (3.9)
=======================================================================================================
</TABLE>
15
<PAGE> 17
FISCAL 2000 VERSUS FISCAL 1999
Net sales for fiscal 2000 were $207.4 million versus $241.1 million in fiscal
1999, a 13.6% decrease. Graphite electrode product net sales declined 13.5% to
$158.8 million, while calcium carbide product net sales declined 14.1% to $48.5
million.
Within the graphite electrode products segment, graphite electrode net
sales were $117.3 million, a 9.9% decrease from fiscal 1999 resulting primarily
from a 9.6% decline in average net electrode prices. Graphite electrode
shipments in fiscal 2000 totaled 103.8 million pounds versus 104.0 million
pounds in fiscal 1999. Domestic and foreign electrode shipments as a percentage
of total electrode shipments during fiscal 2000 were 58.0% and 42.0%,
respectively, versus 57.7% and 42.3%, respectively, in fiscal 1999. Average
domestic electrode prices were down 6.1% in fiscal 2000 primarily as a result of
increased price competition. Average foreign electrode prices declined 13.9%
during fiscal 2000 as a result of increased price competition in certain foreign
markets, coupled with the negative impact of the weaker Euro on the Company's
net price realizations for electrode sales in Europe. The Company expects
shipments of graphite electrodes to decline to approximately 90 million to 95
million pounds per year as a result of its lowering electrode production
beginning in fiscal 2001. In addition, the Company's average net price
realizations are expected to improve as it shifts electrode marketing efforts
away from Europe and into domestic and other export markets which have more
favorable net prices. Needle coke sales during fiscal 2000 were $21.5 million, a
32.5% decrease from fiscal 1999. Needle coke sales volumes in fiscal 2000
declined 22.1% to 61.2 thousand tons, while average needle coke prices declined
13.3% during fiscal 2000. Shipments and average prices for needle coke were
lower during fiscal 2000 due to weaker demand for needle coke and increased
price competition in this market. Graphite specialty product sales during fiscal
2000 totaled $20.0 million, a 7.5% decline from fiscal 1999 primarily as a
result of lower bulk graphite sales.
Within the calcium carbide products segment, acetylene sales (which
includes pipeline acetylene and calcium carbide for fuel gas applications)
during fiscal 2000 declined 22.1% to $24.3 million. The decline was primarily a
result of lower shipments to pipeline acetylene customers. ISP, the Company's
largest pipeline acetylene customer, had begun to reduce their demand for the
Company's acetylene during fiscal 1999 by approximately 75% of its historical
levels. This reduction in demand continued into fiscal 2000. In addition,
shipments of calcium carbide for fuel gas applications were also lower during
fiscal 2000, contributing to the lower net sales in this product area. Sales of
calcium carbide for metallurgical applications during fiscal 2000 declined 7.1%
to $18.3 million due primarily to lower net prices in the desulfurization
product area. Increased price competition in calcium carbide as well as from
substitute products has had a negative impact on price realizations for some
metallurgical applications. However, shipments of calcium carbide for
metallurgical applications improved slightly during fiscal 2000 and the Company
has experienced price increases in certain metallurgical products. The Company
has been successful in realizing price increases in the fuel gas sector as well.
The Company believes this trend may continue into fiscal 2001. All other sales
within calcium carbide product net sales totaled $6.0 million, a 5.4% increase
primarily resulting from increased sales of electrode paste and carbide lime.
Gross profit as a percentage of graphite electrode product net sales for
fiscal 2000 was 3.0% versus 16.4% in fiscal 1999. The effects of the Company's
working capital improvement program negatively impacted the gross profit margin
during fiscal 2000. The Company temporarily reduced graphite electrode and
needle coke production to lower inventory levels during fiscal 2000. The Company
estimates that its cost of goods sold for fiscal 2000 includes approximately $10
million in fixed costs that would have been capitalized into inventory had the
Company been operating at higher production levels during the period. Lower
average prices for graphite electrodes and needle coke as well as lower
shipments of needle coke also contributed to the lower gross profit margins in
fiscal 2000. In addition, depreciation and amortization charges were
approximately $0.6 million higher during fiscal 2000 as a result of the
significant level of capital improvements made during recent fiscal years. Also,
the gross cost of decant oil, the primary raw material in the production of
needle coke, increased approximately 61% during fiscal 2000, contributing to the
lower results. The Company's commodity hedging program partially mitigated the
impact of the higher decant oil costs incurred in fiscal 2000. The high level
of world petroleum prices may continue to have a negative effect on graphite
electrode product gross profit margins for the foreseeable future. Gross profit
as a percentage of calcium carbide product net sales for fiscal 2000 was 10.3%
versus 12.6% in fiscal 1999. The decline in the gross margin is primarily a
result of lower sales in the carbide business.
Selling, general and administrative expenditures for fiscal 2000 were $12.1
million, an 18.9% decline from fiscal 1999. The decrease in expenditures was due
primarily to lower departmental operating costs achieved as a result of the
Company's cost saving programs, coupled with lower employee-related benefit
costs during fiscal 2000.
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During fiscal 2000, the Company recorded a $2.0 million charge to provide
for severance payments and benefits associated with the elimination of
approximately 35 salaried positions. Substantially all of such payments are
expected to be made through April 30, 2001.
Net interest expense for fiscal 2000 was $10.4 million, including $9.7
million of interest expense associated with the Company's revolving credit
facility, $0.3 million in fee amortization and $0.4 million in bank fees and
other costs. Net interest expense for fiscal 1999 was $6.6 million, including
$7.4 million of interest expense associated with the Company's revolving credit
facility and $0.3 million in bank fees and other costs, less $1.1 million in
capitalized interest.
The effective tax rate was 34.4% for fiscal 2000. The effective rate
differs from the federal statutory rate due primarily to state income taxes and
non-deductible expenses.
FISCAL 1999 VERSUS FISCAL 1998
Net sales for fiscal 1999 were $240.1 million versus $293.8 million in fiscal
1998, an 18.3% decrease. Graphite electrode product net sales declined 14.9% to
$183.6 million, while calcium carbide product net sales declined 27.5% to $56.5
million.
Within the graphite electrode products segment, graphite electrode net
sales were $130.2 million, representing an 18.6% decrease resulting from a
12.8% decrease in electrode shipments and a 6.7% decrease in average electrode
prices. Graphite electrode shipments for fiscal 1999 totaled 104.0 million
pounds versus 119.3 million pounds in fiscal 1998. Weakness in certain regions
of the global economy had a negative impact on demand for electric arc furnace
steel and, as a result, lower graphite electrode shipments and prices during
fiscal 1999. Domestic and foreign electrode shipments as a percentage of total
electrode shipments for fiscal 1999 were 57.7% and 42.3%, respectively, versus
55.7% and 44.3%, respectively, in fiscal 1998. Average domestic electrode prices
during fiscal 1999 were down 9.6% from fiscal 1998 due to lower electric arc
furnace steel production in the U.S. market. Average foreign net prices were
down 3.4% due to lower transactional prices overseas and as a result of an
unfavorable U.S. dollar exchange rate. Needle coke sales during fiscal 1999
decreased 6.1% to $31.8 million. A 15.9% increase in needle coke shipments was
more than offset by a 19.0% decrease in needle coke prices. The decrease in
needle coke prices was due primarily to the lower demand for graphite electrodes
described above, which in turn has resulted in weakening demand for needle coke
industry-wide. Graphite specialty product sales during fiscal 1999 were
essentially flat at $21.6 million, although a 37.5% increase in higher-margin
bulk graphite sales essentially offset a 25.9% reduction in lower-margin
granular graphite sales.
During fiscal 1999, one of the Company's graphite customers, Dow Chemical
(Dow), announced its intention to permanently close its magnesium production
facility in Freeport, Texas. The Company previously supplied Dow with all of its
graphite anode needs under a long-term supply agreement. The cancellation of the
supply agreement accounts for approximately 8 million pounds of graphite
production capacity. In connection with a cost savings program (discussed
below), the Company has eliminated a significant amount of the costs associated
with producing the graphite anodes previously supplied to Dow. The cancellation
of this contract contributed to the reported decline in shipments of graphite
electrodes for fiscal 1999.
Within the calcium carbide product segment, pipeline acetylene sales for
fiscal 1999 declined 40.8% to $17.1 million. The decrease was the result of a
significant decrease in shipments to pipeline acetylene customers. ISP, the
Company's largest pipeline acetylene customer, in response to lower global
demand and lower prices for some of its acetylene-based products, reduced their
demand for the Company's acetylene during fiscal 1999 by as much as 75% of its
historical levels. This reduction in demand may be permanent. Partially
offsetting the sales effect of the deliveries to pipeline acetylene customers
was an increase in average pipeline acetylene prices resulting from the
price/volume structure of the Company's acetylene supply contracts. Sales of
calcium carbide for metallurgical applications of $19.7 million represented a
17.0% decrease from fiscal 1998, primarily due to lower shipments. Weakness in
domestic steel production by integrated steel producers, coupled with lower
prices for magnesium (a substitute product) and selective promotion of magnesium
over calcium carbide by a major distributor, resulted in the lower sales levels.
Calcium carbide for fuel gas applications totaled $14.1 million for fiscal 1999,
a 29.8% decrease from fiscal 1998 resulting primarily from lower shipments. All
other calcium carbide product sales for fiscal 1999 increased slightly to $5.7
million as a result of increased shipments of electrode paste.
Gross profit as a percentage of graphite electrode product sales for fiscal
1999 was 16.4% versus 18.0% in fiscal 1998. The decrease in the gross margin was
the result of lower prices of graphite electrodes and needle coke and the
decrease in shipments of graphite electrodes. In addition, depreciation and
amortization increased approximately $4.0 million
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in fiscal 1999, which alone negatively impacted the gross margin by 2.2%.
Partially offsetting the effect of the above was a decline in net decant oil
costs, which were 12.4% lower during fiscal 1999. Gross profit as a percentage
of calcium carbide product sales for fiscal 1999 was 12.6% versus 15.9% in
fiscal 1998. The decrease in the gross margin was the result of lower sales in
the carbide business.
In response to weak demand for many of the Company's products, the Company
initiated a comprehensive cost savings program. A component of this program is
the closure of two high-cost graphite production facilities at the Company's
St. Marys, Pennsylvania plant. This cost savings program, coupled with the
commissioning of two major capital projects in the Company's graphite business
in February 1999, reduced staffing levels by approximately 300 employees Company
wide, representing a reduction in staffing of approximately 24%. The Company
also achieved cost reductions in the areas of raw materials, utilities,
transportation and professional services during fiscal 1999 in an effort to help
offset the negative effect of lower sales. The Company expects to achieve
further cost reductions in fiscal 2000.
Selling, general and administrative expenditures for fiscal 1999 were $14.9
million, unchanged as compared to fiscal 1998. An increase in expenses
associated with the Company's variable incentive compensation plans was
essentially offset by a reduction in general operating expenses, which was the
result of the Company's cost savings program.
During fiscal 1999 and in connection with the Company's cost savings
program discussed above, the Company announced plans to close certain baking and
graphitizing operations at its St. Marys, PA plant resulting in a 12% reduction
in the Company's graphite electrode production capacity. The Company estimates
that it is capable of producing 110 million pounds of graphite electrodes per
year after the facility closure. Other expense in fiscal 1999 includes the
Closure Charge. Included in this charge is $5.7 million for the net write-off of
impaired fixed assets and spare parts inventory, $1.4 million for hourly and
salary workforce severance costs and $0.9 million in other closure-related
costs. Essentially all of these costs were funded in fiscal 1999. Other expense
for fiscal 1999 also includes the $7.0 million Supplemental Antitrust Charge.
Net interest expense for fiscal 1999 was $6.6 million, including $7.4
million of interest expense associated with the Company's revolving credit
facility and $0.3 million in bank fees, less $1.1 million in capitalized
interest. Net interest expense for fiscal 1998 was $5.1 million, including $5.2
million of interest expense associated with the revolving credit facility, $1.5
million of interest expense associated with the 11.5% Senior Notes due 2003 (the
Senior Notes) previously outstanding and $0.4 million in bank fees, less
capitalized interest of $1.7 million and interest income of $0.3 million.
The effective tax rate for fiscal 1999 was 39.4%. The effective rate
differs from the federal statutory rate due primarily to state taxes and
non-deductible expenses, offset by benefits derived from the Company's foreign
sales corporation.
As a result of a tender of the Company's Senior Notes in fiscal 1998 (the
Tender) and a related revolving credit facility refinancing, the Company
recorded a $6.4 million net extraordinary loss on the early extinguishment of
debt during fiscal 1998. 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 a revolving credit facility replaced in connection with the Tender.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective for fiscal 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) #133, "Accounting for Derivative Instruments and
Hedging Activities." The adoption of SFAS #133 resulted in a net of tax
transition gain of $1.6 million recorded by the Company as a cumulative-effect
adjustment to accumulated other comprehensive income to recognize the fair value
of all derivatives. The Company's derivatives consist of foreign exchange
forward contracts, oil futures and swap contracts and interest rate caps and
swap contracts; all are designated as cash-flow hedges. The Company formally
documents all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various hedge
transactions. In this documentation, the Company identifies the asset,
liability, firm commitment, or forecasted transaction that has been designated
as a hedged item and states how the hedging instrument is expected to hedge the
risks related to the hedged item. The Company formally measures effectiveness
of its hedging relationships both at the hedge inception and on an ongoing basis
in accordance with its risk management policy.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition in Financial Statements." SAB 101 outlines the
basic criteria that must be met to recognize revenue, and provides guidelines
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for disclosure related to revenue recognition policies. This guidance is
required to be implemented in the fourth quarter of fiscal 2001. The Company is
currently reviewing this guidance in order to determine the impact of its
provisions, if any, on the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs are primarily for capital expenditures,
working capital (including antitrust settlements) and debt service on its
revolving credit facility. The weakness in certain regions of the global economy
and its impact on demand for the Company's products has resulted in the
deferment of certain discretionary capital projects. The Company currently
estimates that it will spend approximately $12 million in capital improvements
during its fiscal year ending July 31, 2001. This projection includes $1.6
million for the HDS project for Seadrift. The HDS project in total is expected
to cost approximately $30 million, $3.5 million of which has been spent as of
July 31, 2000. The implementation of the HDS project is contingent upon securing
adequate financing to fund the remaining costs of the project. In addition, the
Company paid $18.5 million in antitrust payments during fiscal 2000. The
increase in prices of decant oil (a major raw material for Seadrift) has also
resulted in an increased working capital requirement for this raw material.
During fiscal 2000, the Company implemented a working capital improvement
program whereby the Company temporarily reduced graphite electrode and needle
coke production in order to reduce inventory levels and further improve the
Company's cash flow and cost structure. This program had a positive effect on
operating cash flows as cash outflows for raw materials, labor and utilities
were reduced during the period of lower production. However, the program had a
negative impact on the Company's operating results during fiscal 2000 as the
Company did not benefit from operating efficiencies and fixed cost absorption
typical of normal levels of production. This situation significantly contributed
to the Company reporting a net loss from operations for the fiscal year ended
July 31, 2000.
In connection with the tender of substantially all of the Company's 11.5%
Senior Notes in fiscal 1998 (the Tender), the Company entered into an agreement
with a consortium of banks led by PNC Bank (the Bank Group) for a $150 million
revolving credit facility with a $15 million sub-limit for letters of credit
which will expire in December, 2003 (as amended, the 1997 Revolving Credit
Facility). As a result of the working capital improvement program, the Company
and the Bank Group reduced the amount available under the 1997 Revolving Credit
Facility to $135.0 million as of July 31, 2000. As of July 31, 2000, the Company
had $8.5 million in availability under the 1997 Revolving Credit Facility.
Borrowings outstanding were $120.8 million and letters of credit were $5.7
million as of July 31, 2000. The 1997 Revolving Credit Facility is
collateralized with the Company's receivables, inventory and property, plant
and equipment.
As a result of the decline in the Company's operating results, coupled with
the increased capital needs during fiscal 2000, the Company was not in
compliance with the financial covenants required to be maintained under the 1997
Revolving Credit Facility for the reporting period ended July 31, 2000. On
November 13, 2000 (the Waiver Effective Date), the Company and the Bank Group
agreed to an amendment and waiver with respect to the 1997 Revolving Credit
Facility (the Amendment and Waiver) under which the covenant violations
discussed above were waived until August 6, 2001. In connection with the
Amendment and Waiver, the Company has agreed to issue to the Bank Group warrants
for the Company's Common Stock. Warrants exercisable for nominal consideration
representing 15% of the Company's Common Stock outstanding (1,249,701 shares)
were fully earned on the Waiver Effective Date. The Company can earn back 10% of
such warrants (warrants representing 833,134 shares) if it is able to reduce the
commitment under the 1997 Revolving Credit Facility to $110.0 million on or
before March 31, 2001. The Company can earn back the remaining 5% of such
warrants (warrants representing 416,567 shares) if it is able to reduce the
commitment under the 1997 Revolving Credit Facility to $85.0 million (if the
commitment was reduced to $110.0 million on or before March 31, 2001) or to
$110.0 million (if the commitment was not already reduced to $110.0 million on
or before March 31, 2001) on or before July 31, 2001. The fee associated with
the Amendment and Waiver is 200 basis points, or $2.7 million, fully earned as
of the Waiver Effective Date and payable as follows: $0.3 million on the Waiver
Effective Date; $0.7 million on April 1, 2001; $1.0 million on May 1, 2001; and
$0.7 million on June 1, 2001. The fee is reduced to 100 basis points, or $1.35
million, if the 1997 Revolving Credit Facility is fully repaid by April 30,
2001. As a result of the Amendment and Waiver, interest costs under the 1997
Revolving Credit Facility are computed at a rate of PNC Bank's prime rate plus a
spread of 100 basis points (currently 10.5%). Such spread increases to 200 basis
points if the Company does not reduce the commitment under the 1997 Revolving
Credit Facility by $25 million on March 31, 2001. The issuance of the warrants
associated with the Amendment and Waiver resulted in a $3.4 million non-cash
charge which will be amortized into interest expense over the vesting period of
the warrants which ends on July 31, 2001. The $2.7 million amendment fee has
been capitalized as a deferred debt issuance cost and will be amortized into
interest expense over the remaining life of the 1997 Revolving Credit Facility.
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As a result of the Amendment and Waiver, the commitment under the 1997
Revolving Credit Facility will be reduced by $0.5 million per month beginning on
April 1, 2001. In addition, the Company has agreed to further reduce the
commitment under the 1997 Revolving Credit Facility by an amount equal to the
amount by which the Company's accounts receivable and inventory in total fall
below certain thresholds, as more fully described in the Amendment and Waiver.
Also, the commitment under the 1997 Revolving Credit Facility will be reduced by
two-thirds of any refunds received by the Company from BOC related to the
installation of a sulfur dioxide air emissions scrubbing unit at the Company's
St. Marys, Pennsylvania facility. During the waiver period, the Company is
restricted from issuing any equity (other than preferred share purchase rights)
in the Company unless 100% of the net proceeds of any such issuance is used to
repay and reduce the commitment under the 1997 Revolving Credit Facility. Any
reduction in commitment arising as a result of these provisions is credited
toward the $50 million reduction in commitment required to avoid the vesting of
the warrants as outlined above.
In connection with the Amendment and Waiver, the Company is required to
achieve minimum monthly and quarterly EBITDA levels through July 2001, as well
as sales commitment targets for needle coke and graphite electrodes for calendar
2001, all as more fully described in the Amendment and Waiver. Also, the Company
must not allow its accounts receivable and inventory amounts in total to exceed
certain thresholds and must maintain certain financial ratios with respect to
accounts receivable and inventory, all as more fully described in the Amendment
and Waiver.
In connection with and as a requirement of the Amendment and Waiver, the
Company has engaged Bear Stearns & Company to assist the Company in identifying
strategic options or potential sources of financing to affect the $50 million
reduction in commitment under the 1997 Revolving Credit Facility described above
or otherwise refinance the 1997 Revolving Credit Facility. While the Company
believes that there are certain strategic options or potential sources of
financing available to the Company, there can be no assurance that the Company
will be successful in reducing the commitment under the 1997 Revolving Credit
Facility by $50 million to avoid the significant financial cost of not meeting
the commitment reduction.
The Company's expected operating results and cash flows from operations
could be negatively impacted if demand for the Company's products weakens, if
the U.S. dollar continues to strengthen versus the Euro or if increased oil
costs continue for an extended period of time without increased product pricing.
The negative impact of the operating factors noted above may continue to impact
the Company's compliance with the financial covenants in the 1997 Revolving
Credit Facility in the future. If the Company is not in compliance with such
covenants in the future, the Company would have to obtain additional covenant
violation waivers and amendments from its lenders, refinance the 1997 Revolving
Credit Facility and/or obtain additional sources of financing. Terms and
conditions of any settlements of pending antitrust claims may also adversely
impact the Company's expected liquidity needs in the future. In the event that
the Company's capital resources are not sufficient to fund the Company's planned
capital expenditures, service its indebtedness, fund its working capital needs
and pay any other obligation including those that may arise from pending legal
proceedings and the resolution of current antitrust matters, the Company may be
required to refinance or renegotiate the 1997 Revolving Credit Facility, obtain
additional funding or further delay discretionary capital projects. If the
Company were required to refinance or renegotiate the 1997 Revolving Credit
Facility or obtain additional funding to satisfy its liquidity needs, there can
be no assurance that funds would be available in amounts sufficient for the
Company to meet its obligations or on terms favorable to the Company.
During fiscal 1998, the Company's Board of Directors authorized the
expenditure of up to $10 million to repurchase the Company's Common Stock.
Subject to price and market considerations and applicable securities laws, such
purchases may be made from time to time in open market, privately negotiated or
other transactions. No time limit was placed on the duration of the repurchase
program. The extent and timing of any repurchases will depend on market
conditions and other corporate considerations. During fiscal 2000, the Company
repurchased 25,000 shares of its Common Stock for $0.2 million under its share
repurchase program. Since fiscal 1998, the Company has repurchased an aggregate
492,200 shares of its Common Stock under its share repurchase program at a total
cost of $5.9 million. The 1997 Revolving Credit Facility currently precludes the
Company from repurchasing its Common Stock.
During fiscal 2000, total assets decreased $23.9 million to $250.5 million
as of July 31, 2000. Current assets declined $17.9 million to $118.4 million
primarily due to an $8.1 million decline in current deferred income taxes. In
addition, inventories declined $7.0 million as a result of the Company's working
capital improvement program. Property, plant and equipment declined $5.4 million
to $124.9 million, as capital expenditures of $13.2 million were more than
offset by depreciation of $18.6 million. Total liabilities declined $14.1
million to $179.0 million as of July 31, 2000 primarily due to the Company
having funded $18.5 million in antitrust settlements and related legal costs.
Total debt increased
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$10.3 million to $120.8 million, while non-current deferred income taxes
declined $7.9 million primarily as a result of the benefit of the Company's net
tax operating loss generated in fiscal 2000. Stockholders' equity declined $9.8
million to $71.5 million primarily as a result of the Company's $9.7 million net
loss in fiscal 2000.
Cash flow provided by operations for fiscal 2000 was $5.9 million. Cash
inflows from net loss plus non-cash items of $9.6 million were offset by a $3.7
million net change in working capital items. Major working capital inflows
during fiscal 2000 included $7.0 million from inventories. These inflows were
offset by cash outflows of $12.2 million for accounts payable and accrued
expenses and $3.1 million for accounts receivable. During fiscal 2000, the
Company paid net interest expenses of $8.2 million and received $8.5 million in
net income tax refunds.
The Company's investing activities have historically included capital
expenditures ranging from $13.2 million in fiscal 2000 to $64.3 million in
fiscal 1998. The substantial increase in capital expenditures during fiscal 1998
was due primarily to a modernization program and other significant capital
projects initiated in fiscal 1997. The Company believes that most of its future
investing activity cash flow requirements will be for capital expenditures.
The Company's financing activities have principally represented borrowings
and repayments on its revolving credit facilities, as well as periodic
repurchases of Senior Notes in open market transactions and cash inflows from
exercises of stock options. The Company also repurchased treasury shares in
fiscal 2000, 1999, and 1998 at a cost of $0.2 million, $4.2 million and $1.9
million, respectively. Other financing activities during fiscal 1998 also
included the effects of the Tender.
ITEM 7A QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
The Company is exposed to financial, market and economic risks in many areas of
its business. The Company utilizes several financial instruments and risk
management programs in an effort to mitigate much of this exposure. The
following is a summarization of the programs utilized by the Company in an
attempt to mitigate these risks.
FOREIGN CURRENCY RISKS
Approximately 30% of the Company's net sales during each of the fiscal years
ended July 31, 2000, 1999 and 1998 were to customers located in foreign
countries. The majority of these foreign sales were denominated in local
currencies, subjecting the Company to foreign currency exchange rate risk. The
Company regularly enters into forward foreign currency contracts to help
mitigate foreign currency exchange rate exposure on customer accounts receivable
and sales commitments denominated in foreign currencies. These contracts require
the Company to deliver foreign currencies in the future in order to receive U.S.
dollars owed to it under the contracts at settlement. These contracts generally
mature within 12 months and are principally unsecured contracts with commercial
banks. Gains and losses related to forward foreign currency contracts are
deferred and recognized in income at the time of the sale of the product.
As of July 31, 2000, the Company had $10.6 million in forward foreign
currency contracts outstanding. A hypothetical 10% change in forward rates would
result in a gain or loss of approximately $1.0 million related to the contracts
outstanding as of July 31, 2000, although any gain or loss would be
substantially offset by an inverse change in the value of future collections on
foreign accounts receivable or sales commitments. For purposes of this
sensitivity analysis, the applicable forward rate for each contract as of July
31, 2000 was adjusted by the 10% hypothetical change and applied to the notional
value of the contracts outstanding.
The cash flows from these contracts are classified in a manner consistent
with the underlying nature of the transactions. See Note 2 to the consolidated
financial statements for a detailed description of the Company's foreign
currency exposure, including customer accounts receivable denominated in foreign
currencies and forward foreign currency contracts outstanding.
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COMMODITY PRICE RISKS
The Company's affiliate, Seadrift, currently purchases approximately 2.0 million
barrels of low sulfur decant oil each year to produce needle coke, the key raw
material in the production of graphite electrodes. The cost of refinery decant
oil is pegged to the U.S. Gulf Coast spot cargo barge prices and, in some cases,
West Texas Intermediate crude oil. The Company regularly enters into crude oil
and low sulfur fuel oil futures and swap agreements in order to help mitigate
exposure to fluctuations in the cost of decant oil. These futures and swap
contracts are financial hedges; the Company does not actually take delivery of
the oil product that is the subject of the contracts.
In the case of futures contracts, the Company agrees to purchase crude oil
in the future at a set price, then liquidates the contract prior to settlement.
The difference between the price of crude oil on the date the Company enters
into the contract and the price on the settlement date represents the financial
gain or loss on that contract. In the case of swap contracts, the Company agrees
to pay a fixed price for low sulfur fuel oil and a counter party agrees to pay
the variable market price for a particular month. The difference between the
fixed price and the average market price for the applicable month represents the
financial gain or loss on the contract. Gains and losses associated with these
contracts, when settled, are deferred as an adjustment to Seadrift's oil
inventory values and, ultimately, the carrying cost of needle coke.
As of July 31, 2000, the Company had $3.9 million in low sulfur fuel oil
and West Texas Intermediate crude oil swap contracts. A 10% change in the
futures rates for these petroleum products would result in a $0.5 million gain
or loss related to these contracts, although any gain or loss would be
substantially offset by an inverse change in the purchase price of low sulfur
decant oil expected to be purchased in the future. This hypothetical computation
assumes a parallel shift in the applicable commodity futures prices. For
purposes of this sensitivity analysis, forward low sulfur fuel oil prices for
the months of August 2000 through December 2000 were adjusted by the 10%
hypothetical change and applied to the notional number of barrels being hedged
per the contracts outstanding. An increase in decant oil costs experienced in
fiscal 2000 may continue to have a negative impact on the Company's gross margin
if the higher oil costs continue for an extended period of time or if the
Company is unable to realize needle coke price increases in fiscal 2001. The
Company's commodity hedging program will mitigate the increase in oil costs to
some degree in fiscal 2001.
An additional market risk associated with the commodity product Seadrift
purchases is availability of low sulfur decant oil of an acceptable quality. The
Company utilizes several suppliers of low sulfur decant oil in an effort to try
to mitigate the risk of availability to some degree. Prices and availability of
low sulfur decant oil may be impacted by many factors, including world crude oil
production and output, global demand for oil products and the production
parameters of Seadrift's decant oil suppliers. While the Company believes that a
sufficient amount of decant oil of an acceptable quality is currently readily
available, there can be no assurance that Seadrift will be able to obtain an
adequate quantity of suitable feedstocks at all times in the future or at
acceptable prices. If financing is secured and the project is completed, the HDS
project is expected to significantly mitigate this risk.
See Note 2 to the consolidated financial statements for a detailed
description of the consolidated financial statement impact of the Company's oil
hedging activities during the fiscal years presented therein.
INTEREST RATE RISKS
The Company's indebtedness as of July 31, 2000 is comprised of $120.8 million in
borrowings outstanding under the 1997 Revolving Credit Facility. Interest cost
under the 1997 Revolving Credit Facility is based on PNC Bank's prime rate plus
a spread (currently 1.0%). The Company uses interest rate swap and cap
agreements to hedge a portion of its debt cost in an attempt to strike a
favorable balance between fixed and variable rate debt and keep financing costs
as low as possible. The Company has entered into several interest rate swap and
cap agreements. The interest rate swap agreements effectively fix the Company's
LIBOR rate at approximately 5.7% for a decreasing level of borrowings
outstanding ranging from $55.0 million in fiscal 2001 to $15.0 million in fiscal
2003. The interest rate swap agreements did not have a material impact on the
Company's consolidated financial statements during the fiscal year ended July
31, 2000. The interest rate cap agreements effectively cap the Company's base
LIBOR rate at 7.5% on $20.0 million in borrowings through fiscal 2003. The
interest rate cap agreements did not have a material impact on the Company's
consolidated financial statements for the fiscal year ended July 31, 2000.
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The Company's effective interest rate, which includes actual interest costs
as well as bank fees and amortization of debt transaction costs, for its fiscal
year ended July 31, 2000 was 9.2%. The Company's blended effective interest rate
on borrowings outstanding as of July 31, 2000 was 9.8%. A hypothetical 10%
change in the blended effective interest rate assuming debt levels as of July
31, 2000 would result in a $1.2 million increase or decrease in interest costs.
OTHER MATTERS
CALCIUM CARBIDE JOINT VENTURE
On March 7, 2000, the Company announced that it would form a North American
50/50 joint venture with non ferrum Metallpulver Gesellschaft m.b.H. & Co.KG.
("non ferrum"), based in St. Georgen, Austria, and with "non ferrum" had
executed letters of intent to purchase certain assets of Rossborough
Manufacturing Co., L.P. (Rossborough) and Reactive Metals & Alloys Corporation
(Remacor). On May 4, 2000, the Company announced that it would not pursue the
purchase of Remacor. The joint venture arrangements contemplated that the
Company would contribute its calcium carbide business net assets and debt to the
joint venture while "non ferrum" would invest cash and contribute certain
European magnesium businesses. In addition, Rossborough's management team take a
more direct role in the new joint venture. The formation of the joint venture
has been delayed as a result of operational, currency and other factors and the
Company presently believes that in light of these considerations and the
Amendment and Waiver, it is unlikely that the joint venture will be implemented
in the form originally contemplated.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates, management's beliefs and assumptions made by management. Words
such as "expects," "anticipates," "intends," "plans," "believes," "estimates"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, and
are subject to the safe harbor created thereby. These statements are based on a
number of assumptions that could ultimately prove inaccurate and, therefore,
there can be no assurance that such statements will prove to be accurate.
Factors that could affect actual future results include the developments
relating to the antitrust investigations by the Department of Justice, the
antitrust enforcement authorities of the European Union or related civil
lawsuits as well as the assertion of other claims relating to such
investigations or lawsuits or the subject matter thereof. While the Company
believes that its Antitrust Reserve is adequate, there can be no assurance that
agreements in principle will be finalized or that future developments or other
factors might not adversely affect current estimates. Such factors also include
the possibility that forecasted demand or prices for the Company's products may
not occur or continue, changing economic and competitive conditions (including
currency exchange rate and commodity pricing fluctuations), technological risks
and other risks, costs and delays associated with the start-up and operation of
major capital projects (including the Company's modernization program), changing
governmental regulations (including environmental rules and regulations) and
other risks and uncertainties, including those detailed in the Company's filings
with the Securities and Exchange Commission. The Company does not undertake to
publicly update any forward-looking statement, whether as a result of new
information, future events or otherwise.
23
<PAGE> 25
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
The Carbide/Graphite Group, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of The
Carbide/Graphite Group, Inc. and Subsidiaries (the Company) at July 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended July 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania 15219
September 8, 2000,
except for paragraphs 2 through
5 of Note 6 as to which the
date is November 13, 2000
24
<PAGE> 26
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
THE CARBIDE/GRAPHITE GROUP, INC.
Year Ended July 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share information)
<S> <C> <C> <C>
Net sales $ 207,355 $ 240,130 $ 293,751
Operating costs and expenses:
Cost of goods sold 197,619 202,888 242,535
Selling, general and administrative 12,100 14,925 14,884
Early retirement/severance charge (Note 12) 2,050 -- --
Other expense (Note 12) -- 15,043 38,000
-----------------------------------------------------------------------------------------------------------------------
Operating income (loss) (4,414) 7,274 (1,668)
Other costs and expenses:
Interest expense, net (Note 6) 10,423 6,617 5,130
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary loss (14,837) 657 (6,798)
Provision (benefit) for taxes on income from operations (Note 4) (5,108) 259 (1,729)
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss (9,729) 398 (5,069)
Extraordinary loss on early extinguishment of debt,
net of tax benefit of $3,769 in 1998 (Note 6) -- -- (6,417)
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (9,729) $ 398 $ (11,486)
-----------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE INFORMATION (Note 1)
Income (loss) before extraordinary loss:
Basic $ (1.17) $ 0.05 $ (0.58)
Diluted $ (1.17) $ 0.05 $ (0.58)
-----------------------------------------------------------------------------------------------------------------------
Extraordinary loss on early extinguishment of debt, net:
Basic -- -- (0.74)
Diluted -- -- (0.74)
-----------------------------------------------------------------------------------------------------------------------
Net income (loss):
Basic $ (1.17) $ 0.05 $ (1.32)
Diluted $ (1.17) $ 0.05 $ (1.32)
-----------------------------------------------------------------------------------------------------------------------
Common and common equivalent shares:
Basic 8,327,815 8,391,192 8,699,304
Diluted 8,327,815 8,415,437 8,699,304
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 27
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
THE CARBIDE/GRAPHITE GROUP, INC.
July 31, 2000 1999
---------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share information)
ASSETS
<S> <C> <C>
Current assets:
Accounts receivable--trade, net of allowance for doubtful
accounts: $977 in 2000 and $819 in 1999 (Note 2) $ 40,775 $ 37,997
Inventories (Note 3) 66,575 73,621
Income taxes receivable (Note 4) 4,299 6,592
Deferred income taxes (Note 4) 3,999 12,093
Other current assets 2,787 5,989
---------------------------------------------------------------------------------------------------------------------
Total current assets 118,435 136,292
Property, plant and equipment, net (Note 5) 124,910 130,342
Other assets 7,149 7,782
---------------------------------------------------------------------------------------------------------------------
Total assets $ 250,494 $ 274,416
---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Overdrafts $ 1,236 $ 4,079
Accounts payable, trade 24,148 16,937
Accrued expenses:
Antitrust claims reserve (Note 7) 2,857 21,404
Vacation 2,808 3,242
Workers' compensation 4,438 5,597
Other 10,172 9,429
---------------------------------------------------------------------------------------------------------------------
Total current liabilities 45,659 60,688
Long-term debt (Notes 2 and 6) 120,800 110,500
Deferred income taxes (Note 4) 229 8,107
Retirement benefit plans and other (Note 8) 10,091 11,424
Deferred revenue (Note 1) 2,245 2,380
---------------------------------------------------------------------------------------------------------------------
Total liabilities 179,024 193,099
---------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 7)
---------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred Stock, $0.01 par value; 2,000,000 shares authorized; none issued -- --
Common Stock, $0.01 par value; 18,000,000 shares authorized;
shares issued: 9,955,542 in 2000 and 9,937,042 in 1999 99 99
Additional paid-in capital, net of equity issue costs of $1,398 36,712 36,616
Retained earnings 45,866 55,595
Common Stock to be issued under options (Note 9) -- 39
---------------------------------------------------------------------------------------------------------------------
82,677 92,349
Common Stock held in treasury at cost (Note 14):
1,624,200 shares in 2000 and 1,599,200 shares in 1999 (11,207) (11,032)
---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 71,470 81,317
---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 250,494 $ 274,416
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 28
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE CARBIDE/GRAPHITE GROUP, INC.
Year Ended July 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Net income (loss) $ (9,729) $ 398 $ (11,486)
Adjustments to reconcile net income (loss)
to cash provided by operations:
Depreciation and amortization 18,630 18,022 14,012
Amortization of debt issuance costs 280 160 190
Amortization of intangible assets 53 81 364
Adjustments to deferred taxes 216 7,642 (14,102)
Provision for loss--accounts receivable 301 120 --
Extraordinary loss on early extinguishment of debt -- -- 10,186
Loss on the impairment of assets -- 5,742 --
Increase (decrease) in cash from changes in:
Accounts receivable (3,079) 12,352 (1,381)
Inventories 7,046 (5,782) (9,394)
Income taxes 2,293 (7,438) 1,796
Other current assets 3,211 871 (936)
Accounts payable and accrued expenses (12,186) (14,160) 28,892
Net change in other non-current assets and liabilities (1,168) (311) 50
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 5,868 17,697 18,191
-----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Capital expenditures (13,198) (15,532) (64,306)
Proceeds from (purchases of) short-term investments -- -- 15,750
-----------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (13,198) (15,532) (48,556)
-----------------------------------------------------------------------------------------------------------------------------
Financing activities:
Payments on revolving credit facilities (91,200) (68,670) (75,400)
Proceeds from revolving credit facilities 101,500 69,020 185,550
Repurchase or redemption of Senior Notes,
including premiums of $8,077 in 1998 -- -- (88,030)
Net change in cash overdraft (2,843) 1,622 2,457
Proceeds from exercise of stock options under benefit plans 48 157 619
Purchase of treasury stock (175) (4,207) (1,930)
Other -- (87) (836)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 7,330 (2,165) 22,430
-----------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents -- -- (7,935)
Cash and cash equivalents, beginning of period -- -- 7,935
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period -- -- --
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 29
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THE CARBIDE/GRAPHITE GROUP, INC.
Common
Stock to
Common Stock Additional be Issued
Comprehensive -------------------- Paid-In Retained Under Treasury
Income (Loss) Shares Amount Capital Earnings Options Stock
--------------------------------------------------------------------------------------------------------------------------
(in thousands, except
share information)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1997 9,752,272 $ 97 $ 34,163 $ 66,683 $ 161 $ (4,895)
Net loss $ (11,486) (11,486)
---------------------------------------
Exercise of stock options 132,270 2 678 (61)
Tax benefit on exercise
of stock options 1,402
Purchase of treasury stock (1,930)
---------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1998 9,884,542 99 36,243 55,197 100 (6,825)
Net income $ 398 398
---------------------------------------
Exercise of stock options 52,500 -- 218 (61)
Tax benefit on exercise
of stock options 155
Purchase of treasury stock (4,207)
-----------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1999 9,937,042 99 36,616 55,595 39 (11,032)
Net loss $ (9,729) (9,729)
---------------------------------------
Exercise of stock options 18,500 -- 87 (39)
Tax benefit on exercise
of stock options 9
Purchase of treasury stock (175)
--------------------------------------------------------------------------------------------------------------------------
BALANCE AT JULY 31, 2000 9,955,542 $ 99 $ 36,712 $ 45,866 -- $ (11,207)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 30
FINANCIAL NOTES
THE CARBIDE/GRAPHITE GROUP, INC.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of The
Carbide/Graphite Group, Inc. and its wholly-owned subsidiaries and affiliates.
Intercompany accounts and transactions have been eliminated.
The preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires management to make certain
estimates and assumptions. These may affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the consolidated financial statements. They may also affect the reported
amounts of revenues and expenses during the reporting period. Actual amounts
could differ from those estimates upon resolution of certain matters.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective for fiscal 2001, the Company adopted SFAS #133, "Accounting for
Derivative Instruments and Hedging Activities." The adoption of SFAS #133
resulted in a net of tax transition gain of $1.6 million recorded by the Company
as a cumulative-effect adjustment to accumulated other comprehensive income to
recognize the fair value of all derivatives. The Company's derivatives consist
of foreign exchange forward contracts, oil futures and swap contracts and
interest rate caps and swap contracts; all are designated as cash-flow hedges.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. In this documentation, the Company
identifies the asset, liability, firm commitment, or forecasted transaction that
has been designated as a hedged item and states how the hedging instrument is
expected to hedge the risks related to the hedged item. The Company formally
measures effectiveness of its hedging relationships both at the hedge inception
and on an ongoing basis in accordance with its risk management policy.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition in Financial Statements." SAB 101 outlines the
basic criteria that must be met to recognize revenue, and provides guidelines
for disclosure related to revenue recognition policies. This guidance is
required to be implemented in the fourth quarter of fiscal 2001. The Company is
currently reviewing this guidance in order to determine the impact of its
provisions, if any, on the consolidated financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
under both the actual cost and the last-in, first-out (LIFO) method. The
supplies inventories are valued at the lower of average cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated on a
straight-line basis over the estimated useful service lives of the related
assets. Interest costs associated with the construction of major capital
additions are capitalized as part of the cost of the related assets. Gains or
losses from the sale or retirement of assets are included in income. Repairs and
maintenance are expensed as incurred.
REVENUE RECOGNITION
Net sales to customers are recognized when products are shipped.
DEFERRED REVENUE
The Company has entered into a long-term supply contract to deliver carbide lime
to a customer for which it has received the contract amount in advance. The
Company is recognizing revenue associated with the agreement over the life of
the contract utilizing the straight-line method which approximates actual
shipments.
29
<PAGE> 31
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
ENVIRONMENTAL EXPENDITURES
The Company expenses or capitalizes environmental expenditures that relate to
current operations, as adjusted for indemnity claims against BOC, as
appropriate. Expenditures which do not contribute to future revenues and that
relate to existing conditions caused by past operations are expensed.
Liabilities are recorded when remedial efforts are probable and the costs can be
reasonably estimated.
EARNINGS PER SHARE
The following table provides a reconciliation of the income (loss) and share
amounts for the basic and diluted earnings per share computations for income
(loss) before extraordinary loss for the fiscal years ended July 31, 2000, 1999
and 1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Per Share
Income (Loss) Shares Amount
------------------------------------------------------------------------------------------------------------
2000
<S> <C> <C> <C>
Basic earnings per share $ (9,729) 8,327,815 $ (1.17)
------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Options for common stock -- --
------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ (9,729) 8,327,815 $ (1.17)
------------------------------------------------------------------------------------------------------------
1999
Basic earnings per share $ 398 8,391,192 $ 0.05
------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Options for common stock -- 24,245
------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 398 8,415,437 $ 0.05
------------------------------------------------------------------------------------------------------------
1998
Basic earnings per share $ (5,069) 8,699,304 $ (0.58)
------------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Options for common stock -- --
------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ (5,069) 8,699,304 $ (0.58)
------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average number of options for common stock outstanding for the
fiscal years ended July 31, 2000 and 1998 was 25,151 and 194,694, respectively.
Options assumed to be outstanding for purposes of the dilutive earnings per
share computations were reduced utilizing the treasury stock method. Since the
Company's results were a net loss for the fiscal years ended July 31, 2000 and
1998, common equivalent shares were excluded from the diluted earnings per share
computation for these periods as their effect would have been anti-dilutive.
INTANGIBLES AND DEFERRED CHARGES
Deferred charges and intangibles are recorded at historical cost and amortized
on a straight-line basis over the estimated economic life of the agreement or
contract underlying the assets.
RECLASSIFICATION
Certain amounts previously reported have been reclassified to conform with the
current year presentation.
30
<PAGE> 32
2. FINANCIAL INSTRUMENTS
The Company's financial instruments as of July 31, 2000 included its revolving
credit facility, with an estimated fair value of $111 million as of July 31,
2000. In addition, the Company purchases and currently holds certain derivative
financial instruments as hedging vehicles, as more fully described below.
The Company regularly enters into forward foreign currency contracts to
help mitigate foreign currency exchange rate exposure on customer accounts
receivable and sales commitments denominated in foreign currencies. The
Company's accounts receivable as of July 31, 2000 and 1999 included the
following foreign currency balances (in thousands):
<TABLE>
<CAPTION>
July 31, 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
German Marks $3,179 $4,057
Japanese Yen 2,423 2,234
French Francs -- 1,468
Spanish Pesata 330 592
Italian Lira 640 586
Euros 204 412
British Sterling -- 57
---------------------------------------------------------------------------------------
Total foreign currency accounts receivable $6,776 $9,406
---------------------------------------------------------------------------------------
</TABLE>
As of July 31, 2000 and 1999, the Company held forward foreign currency
contracts in the following foreign denominations (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------------------------- ----------------------------
Market Market
Contract Value Contract Value
July 31, Value Gain (Loss) Value Gain (Loss)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Euros $ 4,730 $ 246 $12,549 $ (213)
German Marks -- -- 5,183 100
Japanese Yen 4,564 270 3,636 (47)
French Francs -- -- 1,694 63
British Sterling 1,354 1 1,907 (24)
Spanish Pesata -- -- 633 30
Italian Lira -- -- 621 68
Belgian Francs -- -- 213 4
------------------------------------------------------------------------------------------------------------------------
Total forward foreign currency contracts $10,648 $ 517 $26,436 $ (19)
------------------------------------------------------------------------------------------------------------------------
</TABLE>
These contracts generally mature within 12 months and are principally
unsecured exchange contracts with commercial banks. Gains and losses related to
forward foreign currency contracts are deferred and recognized in income at the
same time as the sale of the product. The cash flows from these contracts are
classified in a manner consistent with the underlying nature of the
transactions.
31
<PAGE> 33
The Company regularly enters into crude and low sulfur fuel oil futures
contracts and swap agreements. Such contracts and agreements are accounted for
as hedges of decant oil purchases, the primary raw material in the production of
needle coke. As of July 31, 2000 and 1999, the Company held the following oil
swap contracts (in thousands):
<TABLE>
<CAPTION>
2000 1999
--------------------------- -----------------------------
MARKET Market
CONTRACT VALUE Contract Value
July 31, VALUE GAIN (LOSS) Value Gain (Loss)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
West Texas Intermediate swap contracts $1,175 $ 245 -- --
Low sulfur fuel oil swap contracts 2,748 927 $5,972 $1,759
-----------------------------------------------------------------------------------------------------------------
Total commodity hedging contracts $3,923 $1,172 $5,972 $1,759
-----------------------------------------------------------------------------------------------------------------
</TABLE>
As of July 31, 2000 and 1999, deferred gains associated with the Company's
oil hedging activities, including gains not yet recorded in the consolidated
financial statements and gains deferred as an adjustment to the Company's
inventory value totaled $2.1 million and $2.2 million, respectively. Gains and
losses associated with oil hedging activities recognized as an adjustment to
cost of goods sold in the consolidated statements of operations were a gain of
$3.5 million, and losses of $3.4 million and $1.0 million for the fiscal years
ended July 31, 2000, 1999 and 1998, respectively.
The Company has entered into several interest rate swap and cap agreements.
The interest rate swap agreements effectively fix the Company's average LIBOR
borrowing rate at approximately 5.7% for a decreasing level of borrowings
outstanding ranging from $55.0 million in fiscal 2001 to $15.0 million in fiscal
2003. The interest rate swap agreements did not have a material impact on the
Company's consolidated financial statements during the fiscal years ended July
31, 2000, 1999 and 1998. The interest rate cap agreements effectively cap the
Company's base LIBOR rate at 7.5% on $20.0 million in borrowings through fiscal
2003. The interest rate cap agreements did not have a material impact on the
Company's consolidated financial statements for the fiscal years ended July 31,
2000, 1999 and 1998. The fair value of the Company's interest rate swap and cap
agreements was approximately $0.8 million as of July 31, 2000.
3. Inventories
Inventories were as follows (in thousands):
July 31, 2000 1999
--------------------------------------------------------------------------------
Finished goods $ 18,907 $ 22,386
Work in process 34,602 43,723
Raw materials 16,747 13,429
--------------------------------------------------------------------------------
70,256 79,538
LIFO reserve (14,749) (16,487)
--------------------------------------------------------------------------------
55,507 63,051
Supplies 11,068 10,570
--------------------------------------------------------------------------------
Total inventories $ 66,575 $ 73,621
--------------------------------------------------------------------------------
As of July 31, 2000 and 1999, approximately 64.0% and 72.2%, respectively,
of the Company's inventory was valued on a LIFO basis. If valued on a current
cost basis, total inventories would be $14.7 million and $16.5 million higher
as of July 31, 2000 and 1999, respectively.
During fiscal 1999, the Company recorded a $1.0 million pre-tax charge to
write-off supplies inventories that became obsolete upon the closure of certain
graphite production facilities. See Note 12.
32
<PAGE> 34
4. INCOME TAXES
The components of the provision (benefit) for income taxes related to operations
included the following (in thousands):
<TABLE>
<CAPTION>
Year Ended July 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ (5,690) $ (7,827) $ 11,523
State 151 444 850
-----------------------------------------------------------------------------------------------------------------------
(5,539) (7,383) 12,373
Deferred 431 7,642 (14,102)
-----------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (5,108) $ 259 $ (1,729)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of federal statutory income taxes to effective taxes
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended July 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory taxes $(5,193) $ 230 $(2,379)
Tax effect of:
State income taxes, net of federal benefit 112 225 415
Foreign sales corporation benefit -- (232) (394)
Prior year return and audit adjustments (82) (92) 442
Non-deductible expenses 70 69 88
Other (15) 59 99
-----------------------------------------------------------------------------------------------------------------------
Total effective taxes $(5,108) $ 259 $(1,729)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of deferred tax assets and liabilities follow (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------------ -----------------------------
DEFERRED TAX DEFERRED TAX Deferred Tax Deferred Tax
July 31, ASSETS LIABILITIES Assets Liabilities
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Depreciation -- $14,901 -- $11,180
Federal net operating losses $10,850 -- -- --
Antitrust claims reserve 912 -- $ 7,491 --
Employee retirement benefits 1,603 -- 1,784 --
Inventory adjustments 624 -- 790 --
Workers' compensation 1,764 -- 2,213 --
Allowance for doubtful accounts 742 -- 593 --
Vacation reserve 672 -- 792 --
Other 1,504 -- 1,503 --
-----------------------------------------------------------------------------------------------------------------
Total deferred taxes $18,671 $14,901 $15,166 $11,180
-----------------------------------------------------------------------------------------------------------------
</TABLE>
Management believes that the net deferred tax asset as of July 31, 2000
will be realized through reductions to future taxable income. All federal tax
returns prior to fiscal 1997 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.
As of July 31, 2000, the Company had available federal net operating loss
carryforwards of approximately $31.0 million. These net operating loss
carryforwards may be used to offset future federal income taxes through 2020. As
of July 31, 2000, the Company had no net operating loss carryforwards for state
income tax purposes.
33
<PAGE> 35
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
July 31, 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Buildings and improvements $ 53,358 $ 51,647
Machinery and equipment 276,322 272,469
-------------------------------------------------------------------------------------
329,680 324,116
Accumulated depreciation (222,464) (207,506)
-------------------------------------------------------------------------------------
107,216 116,610
Land 7,711 7,711
Construction in progress 9,983 6,021
-------------------------------------------------------------------------------------
Total property, plant and equipment $ 124,910 $ 130,342
-------------------------------------------------------------------------------------
</TABLE>
6. LONG-TERM DEBT
In connection with the tender of substantially all of the Company's 11.5% Senior
Notes in fiscal 1998 (the Tender), the Company entered into an agreement with a
consortium of banks led by PNC Bank (the Bank Group) for a $150 million
revolving credit facility with a $15 million sub-limit for letters of credit
which will expire in December, 2003 (as amended, the 1997 Revolving Credit
Facility). The Company and the Bank Group reduced the amount available under the
1997 Revolving Credit Facility to $135.0 million as of July 31, 2000. As of July
31, 2000, the Company had $8.5 million in availability under the 1997 Revolving
Credit Facility. Borrowings outstanding were $120.8 million and letters of
credit were $5.7 million as of July 31, 2000. The 1997 Revolving Credit
Facility is collateralized with the Company's receivables, inventory and
property, plant and equipment.
As a result of the decline in the Company's operating results, coupled with
the increased capital needs during fiscal 2000, the Company was not in
compliance with the financial covenants required to be maintained under the 1997
Revolving Credit Facility for the reporting period ended July 31, 2000. On
November 13, 2000 (the Waiver Effective Date), the Company and the Bank Group
agreed to an amendment and waiver with respect to the 1997 Revolving Credit
Facility (the Amendment and Waiver) under which the covenant violations
discussed above were waived until August 6, 2001. In connection with the
Amendment and Waiver, the Company has agreed to issue to the Bank Group warrants
for the Company's Common Stock. Warrants exercisable for nominal consideration
representing 15% of the Company's Common Stock outstanding (1,249,701 shares)
were fully earned on the Waiver Effective Date. The Company can earn back 10% of
such warrants (warrants representing 833,134 shares) if it is able to reduce the
commitment under the 1997 Revolving Credit Facility to $110.0 million on or
before March 31, 2001. The Company can earn back the remaining 5% of such
warrants (warrants representing 416,567 shares) if it is able to reduce the
commitment under the 1997 Revolving Credit Facility to $85.0 million (if the
commitment was reduced to $110.0 million on or before March 31, 2001) or $110.0
million (if the commitment was not already reduced to $110.0 million on or
before March 31, 2001) on or before July 31, 2001. The fee associated with the
Amendment and Waiver is 200 basis points, or $2.7 million, fully earned as of
the Waiver Effective Date and payable as follows: $0.3 million on the Waiver
Effective Date; $0.7 million on April 1, 2001; $1.0 million on May 1, 2001; and
$0.7 million on June 1, 2001. The fee is reduced to 100 basis points, or $1.35
million, if the 1997 Revolving Credit Facility is fully repaid by April 30,
2001. As a result of the Amendment and Waiver, interest costs under the 1997
Revolving Credit Facility are computed at a rate of PNC Bank's prime rate plus a
spread of 100 basis points (currently 10.5%). Such spread increases to 200 basis
points if the Company does not reduce the commitment under the 1997 Revolving
Credit Facility by $25 million on March 31, 2001. The issuance of the warrants
associated with the Amendment and Waiver resulted in a $3.4 million non-cash
charge which will be amortized into interest expense over the vesting period of
the warrants which ends on July 31, 2001. The $2.7 million amendment fee has
been capitalized as a deferred debt issuance cost and will be amortized into
interest expense over the remaining life of the 1997 Revolving Credit Facility.
As a result of the Amendment and Waiver, the commitment under the 1997
Revolving Credit Facility will be reduced by $0.5 million per month beginning on
April 1, 2001. In addition, the Company has agreed to further reduce the
commitment under the 1997 Revolving Credit Facility by an amount equal to the
amount by which the Company's accounts receivable and inventory in total fall
below certain thresholds, as more fully described in the Amendment and Waiver.
Also, the commitment under the 1997 Revolving Credit Facility will be reduced by
two-thirds of any refunds received by the Company from BOC related to the
installation of a sulfur dioxide air emissions scrubbing unit at the Company's
34
<PAGE> 36
St. Marys, Pennsylvania facility. During the waiver period, the Company is
restricted from issuing any equity (other than preferred share purchase rights)
in the Company unless 100% of the net proceeds of any such issuance is used to
repay and reduce the commitment under the 1997 Revolving Credit Facility. Any
reduction in commitment arising as a result of these provisions is credited
toward the $50 million reduction in commitment required to avoid the vesting of
the warrants as outlined above.
In connection with the Amendment and Waiver, the Company is required to
achieve minimum monthly and quarterly EBITDA levels through July 2001, as well
as sales commitment targets for needle coke and graphite electrodes for calendar
2001, all as more fully described in the Amendment and Waiver. Also, the Company
must not allow its accounts receivable and inventory amounts in total to exceed
certain thresholds and must maintain certain financial ratios with respect to
accounts receivable and inventory, all as more fully described in the Amendment
and Waiver.
In connection with and as a requirement of the Amendment and Waiver, the
Company has engaged Bear Stearns & Company to assist the Company in identifying
strategic options or potential sources of financing to affect the $50 million
reduction in commitment under the 1997 Revolving Credit Facility described above
or otherwise refinance the 1997 Revolving Credit Facility. While the Company
believes that there are certain strategic options or potential sources of
financing available to the Company, there can be no assurance that the Company
will be successful in reducing the commitment under the 1997 Revolving Credit
Facility by $50 million to avoid the significant financial cost of not meeting
the commitment reduction.
Interest expense for the fiscal year ended July 31, 1998 was reduced by
$0.3 million of interest income earned on cash, cash equivalents and short-term
investments. Also, during fiscal 1999 and 1998 the Company capitalized $1.1
million and $1.7 million, respectively, in interest costs associated with
capital expenditures. The Company's effective interest rate, which includes
actual interest costs as well as bank fees and amortization of debt transaction
costs, for its fiscal year ended July 31, 2000 was 9.2%. The Company's blended
effective interest rate on borrowings outstanding as of July 31, 2000 was 9.8%.
7. COMMITMENTS AND CONTINGENCIES
The Company leases various types of machinery, equipment and real estate, which
are accounted for as operating leases. Future minimum rental payments under
non-cancellable operating leases are as follows (in thousands):
Year Ending July 31,
--------------------------------------------------------------------------------
2001 $2,015
2002 1,865
2003 1,669
2004 1,247
Thereafter 470
--------------------------------------------------------------------------------
Consolidated rent expense for the years ended July 31, 2000, 1999 and 1998
amounted to approximately $3.0 million, $3.3 million and $2.9 million,
respectively.
The Company purchases electricity from various local producers under
long-term contracts which expire at various dates through 2007. These contracts
require the Company to make future minimum payments aggregating approximately
$4.0 million through the end of the contracts, whether or not the Company takes
power in the future.
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 Department of Justice
(DOJ) that the Grand Jury is investigating price fixing by producers of graphite
products in the United States and abroad during the period 1992 to 1997. 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. 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.
Subsequent to the initiation of the DOJ investigation, four civil cases
were filed in the United States District Court for the Eastern District of
Pennsylvania in Philadelphia asserting claims on behalf of a class of purchasers
for violations
35
<PAGE> 37
of the Sherman Act. These cases, which have been consolidated, name the Company,
UCAR International Inc. (UCAR), SGL Carbon Corporation (SGL Corp.) and SGL
Carbon AG (SGL) as defendants (together, the Named Defendants) and seek treble
damages. On March 30, 1998, a number of purchasers who were previously included
in the purported class of plaintiffs covered by the consolidated case initiated
a separate action in the same District Court which asserts substantially the
same claims and seeks the same relief as the consolidated case and names the
Named Defendants, as well as Showa Denko Carbon, Inc. (Showa Denko). Thereafter,
seven additional groups of purchasers who were previously included in the
purported class of plaintiffs covered by the consolidated case instituted their
own actions against the Named Defendants, Showa Denko and, in several cases,
certain present or former related parties of UCAR and Showa Denko, asserting
substantially the same claims and seeking the same relief as in the consolidated
case. Four such actions were filed in the United States District Court for the
Eastern District of Pennsylvania on April 3, 1998, May 14, 1998, May 28, 1998
and March 31, 1999, respectively. One action was filed in the United States
District Court for the Northern District of Ohio on April 17, 1998 but was
transferred to the Eastern District of Pennsylvania for pre-trial proceedings.
Another action was filed in the United States District Court for the Western
District of Pennsylvania on June 17, 1998 but was transferred to the Eastern
District of Pennsylvania for pre-trial proceedings. Another action was filed in
the United States District court of the Middle District of Pennsylvania on April
10, 2000, but was transferred to the Eastern District of Pennsylvania for
pre-trial proceedings. The complaints or amended complaints in some of the cases
have also named as defendants other companies including Mitsubishi Corporation,
Tokai Carbon U.S.A., Inc. and related companies. On December 7, 1998, the
Company was served with a complaint filed by Chaparral Steel Company against the
Named Defendants, Showa Denko and parties related to Showa Denko and UCAR in
state court in Ellis County, Texas alleging violations of various Texas state
antitrust laws and seeking treble damages. Chaparral Steel Company has filed an
amended complaint adding two additional related plaintiffs, a second amended
complaint adding additional defendants Nippon Carbon Co., Ltd., SEC Corporation,
Tokai Carbon Company, Ltd., Tokai Carbon USA, Inc., VAW Aktiengesellscheft and
VAW Carbon GMBH, and third, fourth and fifth amended complaints.
The Company has reached settlement agreements representing approximately
96% of domestic antitrust claims with the class plaintiffs and the plaintiffs
that filed lawsuits on March 30, 1998, April 3, 1998, April 17, 1998, May 14,
1998, May 28, 1998, June 17, 1998 and March 31, 1999 and other purchasers who
had yet to file lawsuits. The settlement agreement with the class has been
approved by the Court. Although various of the settlements are unique, in the
aggregate they consist generally of current and deferred cash payments and, in a
number of cases, provisions which provide for additional payments under certain
circumstances ("most favored nations" provisions). In addition to the
settlements discussed above, the Company may also settle with various additional
purchasers.
On February 10, 1999, a U.S. corporation which allegedly made purchases on
behalf of two foreign entities and a group of 22 foreign purchasers which are
based in several foreign countries filed a complaint against the Company, UCAR,
SGL, Tokai Carbon Co., Ltd., Tokai Carbon U.S.A., Inc., Nippon Carbon Co., Ltd.,
SEC Corporation and certain present and former related parties of UCAR in United
States District Court for the Eastern District of Pennsylvania. This complaint
has been amended to add four additional defendants. On September 24, 1999, three
Australian companies and one New Zealand company filed a complaint against the
same parties as are named in the lawsuit filed on February 10, 1999. These cases
assert substantially the same claims and seek the same relief as the
consolidated case. Other foreign purchasers have also made similar claims
against the Company but have not filed lawsuits.
The Company understands that defendants UCAR, SGL and Showa Denko have
reached settlement agreements with the class action plaintiffs, which have been
approved by the court, and have also settled claims brought by various
individual purchasers. The Company further understands that UCAR, Robert P.
Krass, Robert J. Hart, SGL, Robert J. Koehler, Showa Denko, Tokai, SEC
Corporation and Nippon Carbon Co. have pled guilty to antitrust conspiracy
charges filed by the DOJ and have agreed to pay fines and, in the cases of
Messrs. Krass and Hart, to serve prison sentences, in connection with those
guilty pleas. The Company also understands that the DOJ has indicted Mitsubishi
Corporation and Georges Schwegler, a former UCAR employee.
The Company has also advised the Commission of the European Communities
(the European Commission) that it wishes to invoke its Leniency Notice.
Generally under these guidelines, the European Commission may reduce fines and
other penalties if a company sufficiently cooperates with the European
Commission. On January 24, 2000, the European Commission adopted a Statement of
Objections against the Company, SGL, UCAR, VAW Aluminum AG, Showa Denko KK,
Tokai Carbon Co. Ltd., Nippon Carbon Co. Ltd. and SEC Corporation. The Company
has prepared
36
<PAGE> 38
and submitted to the European Commission a response to the Statement of
Objections and has appeared at a hearing regarding the imposition of fines. The
Company understands that the European Commission will determine fines, if any,
at the completion of its proceedings.
On June 18, 1998, a group of Canadian purchasers filed a lawsuit in the
Ontario Court (General Division) claiming a conspiracy and violations of the
Canadian Competition Act. The Canadian lawsuit names the Named Defendants and
Showa Denko, as well as several present or former parents, subsidiaries and/or
affiliates of UCAR, SGL and Showa Denko. The Canadian Competition and Consumer
Law Division (Canadian Division) has initiated an inquiry and the Company is
cooperating fully with the authorities conducting that inquiry pursuant to an
agreement with the Director of Research and Investigation of the Canadian
Division under which the Company and its present and former officers, directors
and employees will not be subject to criminal prosecution.
During fiscal 1998, the Company recorded a $38 million pre-tax charge ($25
million after expected tax benefits) for potential liabilities resulting from
civil lawsuits, claims, legal costs and other expenses associated with the
pending antitrust matters (the Initial Antitrust Charge). During fiscal 1999,
the Company recorded an additional $7 million charge ($4.5 million after
expected tax benefits) for such potential liabilities (the Supplemental
Antitrust Charge). The combined $45 million charge (the Antitrust Charge)
represents the Company's estimate, based on current facts and circumstances, of
the expected cost to resolve pending antitrust claims. The Company understands
that defendants UCAR, SGL and Showa Denko have reached settlements with the
class action plaintiffs and various individual purchasers at amounts
substantially higher than the levels contemplated in the Antitrust Charge. In
light of these and other developments including: (a) possible future settlements
with other purchasers, (b) the outcome of the European Commission antitrust
investigation, (c) potential additional lawsuits by foreign purchasers, (d) the
failure to satisfy the conditions to the class action settlement, and (e)
adverse rulings or judgments in pending litigation, including an adverse final
determination as to the right of the foreign purchasers to relief under U.S.
antitrust laws, the antitrust matters could result in aggregate liabilities and
costs which could differ materially and adversely from the Antitrust Charge and
could affect the Company's financial condition and its ability to service its
currently planned liquidity needs. As of July 31, 2000, $42.2 million in
antitrust settlements and costs had been paid.
The Company is also party to various legal proceedings considered
incidental to the conduct of its business or otherwise not material in the
judgment of management. Management does not believe that its loss exposure
related to these cases is materially greater than amounts provided in the
consolidated balance sheet as of July 31, 2000. As of July 31, 2000, a $0.2
million reserve has been recorded to provide for estimated exposure on claims
for which a loss is deemed probable.
8. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company maintains defined benefit pension, postretirement health care and
life insurance benefit plans covering substantially all of its hourly employees.
The benefits under the pension plans are based primarily on years of service and
benefit rates established by union contracts. For the pension plans, the
Company's funding policy is to contribute annually the amount recommended by its
consulting actuary, subject to statutory provisions. The postretirement
healthcare and life insurance plans (the OPEB Plans) are currently unfunded and
require the employee to pay a portion of the benefit cost.
The following is a reconciliation of the beginning and ending benefit
obligations for the Company's pension plans and OPEB Plans (in thousands):
<TABLE>
<CAPTION>
Pension Plans OPEB Plans
------------------------- ------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation as of the beginning of the year $ 26,487 $ 23,944 $ 4,073 $ 3,652
Service cost 851 960 108 95
Interest cost 1,883 1,684 276 246
Actuarial loss (gain) (912) 227 (166) 390
Plan amendments -- 281 -- --
Plan curtailments -- 133 -- (48)
Benefits paid to retirees (903) (742) (241) (262)
--------------------------------------------------------------------------------------------------------------------
Benefit obligation as of the end of the year $ 27,406 $ 26,487 $ 4,050 $ 4,073
--------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 39
The following is a reconciliation of the beginning and ending fair values
of plan assets for the Company's pension plans (in thousands):
<TABLE>
<CAPTION>
Pension Plans
---------------------------------
2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan assets as of the beginning of the year $ 19,769 $ 17,613
Actual return on plan assets 2,547 1,821
Employer contributions 2,656 1,077
Benefits paid to retirees (903) (742)
-----------------------------------------------------------------------------------------------------------
Fair value of plan assets as of the end of the year $ 24,069 $ 19,769
-----------------------------------------------------------------------------------------------------------
</TABLE>
Components of each of the plan's assets included primarily U.S. government
obligations and common stocks.
The following is a reconciliation of the funded status of the Company's
pension plans and OPEB Plans as of July 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Pension Plans OPEB Plans
--------------------------- ----------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligations $ 27,406 $ 26,487 $ 4,050 $ 4,073
Fair value of plan assets 24,069 19,769 -- --
------------------------------------------------------------------------------------------------------------------
Unfunded status (3,337) (6,718) (4,050) (4,073)
Unrecognized transition obligation 313 412 -- --
Unrecognized prior service cost 4,731 5,234 (28) (31)
Unrecognized net actuarial loss (gain) (1,045) 741 101 273
------------------------------------------------------------------------------------------------------------------
Net funded (unfunded) status recognized $ 662 $ (331) $ (3,977) $ (3,831)
------------------------------------------------------------------------------------------------------------------
Accrued benefit liability $ (2,634) $ (5,803) $ (3,977) $ (3,831)
Intangible asset 3,296 5,472 -- --
------------------------------------------------------------------------------------------------------------------
Net funded (unfunded) status recognized $ 662 $ (331) $ (3,977) $ (3,831)
------------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of the amount of net periodic benefit cost recognized
in the consolidated statement of operations for the years ended July 31, 2000,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Pension Plans OPEB Plans
----------------------------------- ----------------------------------
2000 1999 1998 2000 1999 1998
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
Service cost $ 851 $ 960 $ 829 $ 108 $ 95 $ 107
Interest cost 1,883 1,684 1,407 276 246 239
Expected return on plan assets (1,673) (1,433) (1,296) -- -- --
Plan curtailments -- 680 -- -- (48) --
Recognized net actuarial gain -- -- (10) -- -- (8)
Net amortization 602 598 486 3 (4) (4)
---------------------------------------------------------------------------------------------------------------------
Total net periodic benefit cost $ 1,663 $ 2,489 $ 1,416 $ 387 $ 289 $ 334
---------------------------------------------------------------------------------------------------------------------
</TABLE>
The net gain and loss associated with plan curtailments during fiscal 1999
were the result of the curtailment of the St. Marys, Pennsylvania hourly
workforce pension plan and OPEB Plans. The curtailment was the result of the
severance of hourly employees at the St. Marys plant in connection with closure
of certain graphite production facilities (see Note 12).
38
<PAGE> 40
The following assumptions were used in the accounting for the Company's pension
plans and OPEB Plans:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate:
Net periodic benefit cost 7.50% 7.00% 7.50%
Benefit obligation 7.50 7.00 7.00
Expected return on plan assets 8.00 8.00 8.00
---------------------------------------------------------------------------------------------------------------
</TABLE>
For estimated OPEB Plan expense and liability measurement purposes, the
health care cost trend rate was assumed to be 7.0% in fiscal 2001, with the rate
of increase declining evenly each year to 5.0% in fiscal 2004 and thereafter.
If the assumed health care cost trend rate was increased by one percent, the
fiscal 2000 OPEB Plan benefit cost would have increased 2.2% while the OPEB Plan
benefit obligation as of July 31, 2000 would have increased approximately 3.1%.
SAVINGS INVESTMENT PLAN
The Company has a defined contribution savings investment plan for substantially
all salaried employees. Employee contributions up to a maximum of 6% of employee
compensation are matched 50% by the Company. Additional employer contributions
may be made at the discretion of the Board of Directors based on the Company's
current year performance. The cost of these Company contributions was $0.4
million, $1.8 million and $1.5 million for the fiscal years ended July 31,
2000, 1999 and 1998, respectively.
9. OTHER COMPENSATION
MANAGEMENT STOCK OPTION PLANS
The Company has adopted several incentive or non-qualified, compensatory stock
option plans or agreements, participation in which is limited to officers,
directors and/or key employees of the Company (collectively, the MSOP). Options
granted under the MSOP generally vest over three years and expire ten years from
the date of grant. The table below summarizes option activity for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended July 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year:
<S> <C> <C> <C>
Number 692,300 479,000 446,250
Weighted-average exercise price $ 18.08 $ 18.79 $ 13.67
Granted:
Number 230,000 269,800 177,000
Weighted-average exercise price $ 5.11 $ 13.94 $ 21.69
Weighted-average fair value* $ 3.05 $ 5.78 $ 9.08
Exercised:
Number (18,500) (52,500) (132,250)
Weighted-average exercise price $ 2.61 $ 3.00 $ 4.68
Forfeited or expired:
Number (45,400) (4,000) (12,000)
Weighted-average exercise price $ 16.28 $ 22.31 $ 22.31
-----------------------------------------------------------------------------------------------------------------
Options outstanding, end of year
Number 858,400 692,300 479,000
Weighted-average exercise price $ 15.03 $ 18.08 $ 18.79
-----------------------------------------------------------------------------------------------------------------
</TABLE>
* The weighted-average fair value disclosed was computed utilizing the
measurement alternatives suggested in SFAS #123.
Such alternatives were not adopted by the Company for compensation measurement
purposes.
39
<PAGE> 41
The following is a summary of the characteristics of the options outstanding as
of July 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Range 1 Range 2 Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number 553,400 305,000 858,400
Weighted-average exercise price $ 10.59 $ 23.10 $ 15.03
Range of exercise prices $3.56-$18.25 $21.53-$28.87 $3.56-$28.87
Remaining weighted-average contractual life (in months) 106 89 100
Number of options currently exercisable 205,928 258,333 464,261
Weighted-average exercise price of options exercisable $ 13.63 $ 23.38 $ 19.06
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of July 31, 2000, 860,400 shares were reserved for issuance under the
MSOP. Options granted under the MSOP for the fiscal years presented were granted
at the fair market value of the Company's Common Stock as quoted on the NASDAQ
National Market System on the date of grant.
The Company adopted the disclosure requirements of SFAS #123, "Accounting
for Stock-Based Compensation." The measurement alternatives of SFAS #123 were
not adopted. SFAS #123 requires the disclosure of pro forma net income (loss)
and earnings per share amounts calculated as if the measurement alternatives
suggested by SFAS #123 had been adopted. The following table summarizes the
required pro forma disclosures for the fiscal years ended July 31, 2000, 1999
and 1998 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------- ---------------------- ---------------------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (9,729) $ (10,603) $ 398 $ (326) $ (11,486) $ (11,848)
Earnings (loss) per share $ (1.17) $ (1.27) $ 0.05 $ (0.04) $ (1.32) $ (1.36)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Significant assumptions used in determining fair value and compensation
cost for stock options in accordance with SFAS #123 included the following:
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free rate of return 6.7% 5.5% 5.3%
Expected volatility 63.3% 53.6% 44.8%
Expected dividend yield 0.0% 0.0% 0.0%
Expected life of option 5 years 3 to 4 years 4 to 5 years
-----------------------------------------------------------------------------------------------------------------
</TABLE>
BONUS PLANS
The Company recorded $1.3 million and $0.2 million in compensation expense for
the fiscal years ended July 31, 1999 and 1998, respectively, associated with
bonuses for executives and certain key employees of the Company. The bonus
amounts were determined by the Company's Board of Directors. No bonuses were
awarded for fiscal year 2000.
40
<PAGE> 42
10. SEGMENT INFORMATION
The Company has three operating segments organized around its major product
groups: graphite products, the Company's affiliate, Seadrift Coke, L.P. and
calcium carbide products. Two of these operating segments, graphite products and
Seadrift Coke, L.P., have been combined into one reportable segment: graphite
electrode products. The other reportable segment is calcium carbide products.
Such aggregation and presentation of reportable segments is consistent with the
approach utilized by the Company in previous fiscal years.
The graphite electrode products segment manufactures and markets graphite
electrodes, primarily to electric arc furnace steel producers. In addition, this
segment manufactures and markets needle coke, the principal raw material used in
the manufacture of graphite electrodes, as well as certain other graphite
specialty products. The calcium carbide products segment manufactures and
markets calcium carbide and its direct derivatives, primarily acetylene gas,
that are used in the further manufacturing of specialty chemicals, in fuel gas
applications, and in metallurgical applications such as ductile iron and steel
desulfurization.
Net sales to the Company's top ten customers as a percentage of total sales
were approximately 26%, 30%, and 30% in each of the fiscal years ended July 31,
2000, 1999 and 1998, respectively. Sales of graphite electrodes and calcium
carbide for metallurgical applications to customers in the steel and ductile
iron industries accounted for approximately 60% of net sales in each of the
fiscal years presented. Amounts due from customers in the steel industry at July
31, 2000 and 1999 were approximately $28 million and $29 million, respectively.
41
<PAGE> 43
Segment information is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended July 31, 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
NET SALES TO CUSTOMERS BY PRODUCT LINE:
<S> <C> <C> <C>
Graphite electrodes $ 117,332 $ 130,182 $ 159,997
Needle coke 21,496 31,833 33,907
Bulk graphite 12,147 12,750 9,273
Granular graphite 6,814 7,155 9,627
Other 1,029 1,698 2,963
----------------------------------------------------------------------------------------------------------------------
Total graphite electrode product net sales 158,818 183,618 215,767
----------------------------------------------------------------------------------------------------------------------
Acetylene:
Pipeline acetylene 12,163 17,085 28,863
Fuel gas applications 12,102 14,056 20,009
Metallurgical applications 18,271 19,679 23,712
Other 6,001 5,692 5,400
----------------------------------------------------------------------------------------------------------------------
Total calcium carbide product net sales 48,537 56,512 77,984
----------------------------------------------------------------------------------------------------------------------
Total net sales to customers 207,355 240,130 293,751
----------------------------------------------------------------------------------------------------------------------
Intersegment sales, at prevailing market prices:
Graphite electrode products 114 152 338
Eliminations (114) (152) (338)
----------------------------------------------------------------------------------------------------------------------
Total net sales $ 207,355 $ 240,130 $ 293,751
---------------------------------------------------------------------------------------------------------------------
TOTAL NET SALES TO GEOGRAPHIC AREAS:
United States $ 143,896 $ 157,118 $ 202,557
Europe 32,985 51,157 45,237
Other Americas 20,525 22,853 32,585
Asia/Far East 9,949 9,002 13,372
----------------------------------------------------------------------------------------------------------------------
Total net sales 207,355 $ 240,130 $ 293,751
----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS):
Graphite electrode products* $ (586) $ 24,710 $ 32,813
Calcium carbide products 2,979 5,079 10,470
Unallocated corporate expenses (6,807) (22,515) (44,951)
----------------------------------------------------------------------------------------------------------------------
Total operating income (loss) $ (4,414) $ 7,274 $ (1,668)
----------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION:
Graphite electrode products $ 16,949 $ 16,371 $ 12,365
Calcium carbide products 1,593 1,545 1,553
Unallocated corporate 141 187 458
----------------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 18,683 $ 18,103 $ 14,376
----------------------------------------------------------------------------------------------------------------------
EBITDA:**
Graphite electrode products $ 16,363 $ 41,081 $ 45,178
Calcium carbide products 4,572 6,624 12,023
Unallocated corporate expenses (4,616) (7,285) (6,493)
----------------------------------------------------------------------------------------------------------------------
Total EBITDA $ 16,319 $ 40,420 $ 50,708
----------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
Graphite electrode products $ 213,273 $ 224,773 $ 238,399
Calcium carbide products 24,689 27,888 29,332
Corporate assets 12,532 21,755 21,368
----------------------------------------------------------------------------------------------------------------------
Total assets $ 250,494 $ 274,416 $ 289,099
----------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES:
Graphite electrode products $ 12,458 $ 13,718 $ 62,698
Calcium carbide products 739 1,814 1,608
----------------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 13,197 $ 15,532 $ 64,306
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Excludes other expense in fiscal 1999 and 1998, which are included in
"Unallocated Corporate Expenses" (see Note 12).
** EBITDA is defined as operating income before depreciation and amortization,
early retirement/severance charges and other expense. EBITDA is not presented
as a measure of operating results under generally accepted accounting
principles. However, management believes that EBITDA is an appropriate
measure of the Company's ability to service its cash requirements. EBITDA is
an important measure in assessing the performance of the Company's business
segments.
42
<PAGE> 44
11. CASH FLOW INFORMATION
Net cash payments for interest and income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended July 31, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest $8,191 $7,572 $10,196
Income taxes (received) paid (8,463) 106 6,627
--------------------------------------------------------------------------------------------------------------------
</TABLE>
12. OTHER ITEMS
EARLY RETIREMENT/SEVERANCE CHARGE
Early retirement/severance charge for fiscal 2000 represents costs associated
with the elimination of approximately 35 salaried employees during fiscal 2000.
OTHER EXPENSE
During fiscal 1999, the Company announced plans to close certain baking and
graphitizing operations at its St. Marys, Pennsylvania plant. Other expense for
fiscal 1999 includes the Closure Charge, an $8.0 million pre-tax charge to
provide for the estimated cost of the facility closure activities. Included in
this charge is $5.7 million for the net write-off of impaired fixed assets and
spare parts inventory, $1.4 million for hourly and salary workforce severance
costs and $0.9 million in other closure-related costs. Essentially all of these
costs were funded in fiscal 1999. Other expense for fiscal 1999 and 1998 also
includes charges of $7.0 million and $38.0 million, respectively, representing,
in total, the Antitrust Charge (see Note 7).
43
<PAGE> 45
13. QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain unaudited consolidated quarterly
operating information of the Company (in millions, except per share
information):
<TABLE>
<CAPTION>
Year Ended July 31, 2000: 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FISCAL YEAR
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 51.1 $ 53.6 $ 51.3 $ 51.4 $ 207.4
Gross profit 6.4 (1.3) 1.4 3.2 9.7
Operating income (loss) 3.4 (4.5) (3.2)* (0.1) (4.4)
Net income (loss) 0.9 (4.6) (3.8) (2.2) (9.7)
Per diluted share:
Net income (loss) 0.11 (0.55) (0.45) (0.28) (1.17)
-----------------------------------------------------------------------------------------------------------------------
Year Ended July 31, 1999:
Net sales $ 69.3 $ 58.2 $ 58.3 $ 54.3 $ 240.1
Gross profit 10.0 8.7 8.7 9.8 37.2
Operating income (loss) (1.6)** 5.3 4.5 (0.9)*** 7.3
Net income (loss) (2.0) 2.5 1.8 (1.9) 0.4
Per diluted share:
Net income (loss) (0.23) 0.30 0.22 (0.23) 0.05
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes a $2.1 million pre-tax charge for an early retirement/severance
program (see Note 12)
** Includes an $8.0 million pre-tax charge for facility closure activities (see
Note 12).
*** Includes a $7.0 million pre-tax charge for potential antitrust liabilities
(see Note 7).
14. SHARE REPURCHASE PROGRAM
During fiscal 1998, the Company's Board of Directors authorized the expenditure
of up to $10 million to repurchase the Company's Common Stock. Subject to price
and market considerations and applicable securities laws, such purchases may be
made from time to time in open market, privately negotiated or other
transactions. No time limit was placed on the duration of the repurchase
program. The extent and timing of any repurchases will depend on market
conditions and other corporate considerations. During fiscal 2000, the Company
repurchased 25,000 shares of its Common Stock for $0.2 million under its share
repurchase program. Since fiscal 1998, the Company has repurchased an aggregate
492,200 shares of its Common Stock under its share repurchase program at a total
cost of $5.9 million.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
This item is not applicable to the Registrant for this Annual Report on Form
10-K.
44
<PAGE> 46
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
THE BOARD OF DIRECTORS AND OFFICERS OF THE COMPANY
The following is information as to each director, executive officer, and certain
other officers of the Company as of September 22, 2000.
<TABLE>
<CAPTION>
Name Age Position
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Walter B. Fowler(3)(5) 46 Chairman, President and Chief Executive Officer and Director
Stephen D. Weaver 46 Senior Vice President and General Manager-Electrodes and Graphite Specialty Products
Walter E. Damian 60 Vice President-Human Resources
Ararat Hacetoglu 45 Vice President and General Manager-Carbide Products
Jim J. Trigg 51 Vice President and General Manager-Seadrift Coke, L.P.
Nicholas T. Kaiser(3)(5) 66 Director
James R. Ball(1)(2)(5) 57 Director
Paul F. Balser(1)(4) 58 Director
Robert M. Howe(3)(4) 60 Director
Ronald B. Kalich(1)(2)(5) 52 Director
Charles E. Slater(3)(4) 66 Director
Roger Mulvihill 64 Secretary
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Member of the Board's Compensation Committee.
(2) Member of the Board's Stock Option Committee.
(3) Member of the Board's Nominating Committee.
(4) Member of the Board's Audit Committee.
(5) Member of the Board's Governance Committee.
Officers of the Company are elected annually by the Board for a term
expiring at the next annual meeting of the Board or as otherwise determined by
the Board.
Walter B. Fowler was elected as the Company's Chairman, President and Chief
Executive Officer in March 1997 and has been a director of the Company since
September 1995. Previously, Mr. Fowler was President-Electrodes and Graphite
Specialty Products of the Company from March 1995 to March 1997 and had been
Vice President-General Manager, Graphite Electrode Products of the Company from
January 1995 to March 1995 and Vice President-General Manager, Graphite
Specialties of the Company from July 1991 to March 1995. He served as Chief
Financial Officer and Treasurer of the Company from October 1988 to October
1991, and Vice President-Finance and Assistant Secretary from August 1988 to
July 1991.
Stephen D. Weaver has been Senior Vice President and General
Manager-Electrodes and Graphite Specialty Products since May 2000. Previously,
Mr. Weaver was the Company's Vice President-Finance and Chief Financial Officer
of the Company since October 1991.
Walter E. Damian has been the Company's Vice President-Human Resources
since August 1988.
Ararat Hacetoglu has been Vice President and General Manager, Carbide
Products since April 1997. Previously, Mr. Hacetoglu was Vice President and
Plant Manager-Louisville in the Carbide Products segment of the Company from
March 1993 to April 1997 and Plant Manager-Louisville from August 1992 to March
1993.
Jim J. Trigg has been Vice President and General Manager, Seadrift Coke,
L.P. since June 1994. Previously, Mr. Trigg was Vice President and Plant
Manager-Seadrift of the Company from February 1993 to June 1994 and Production
Manager-Seadrift from August 1988 to February 1993.
Nicholas T. Kaiser has been a member of the Company's Board of Directors
since August 1988. Mr. Kaiser was the Company's Chairman of the Board and Chief
Executive Officer from October 1994 to March 1997 and was President of the
Company from October 1991 to March 1997. Mr. Kaiser received $20,000 in
compensation for his services as a director of the Company for fiscal 2000.
James R. Ball was elected to the Company's Board in March 1994. From July
1992 to December 1994, Mr. Ball was President and Chief Executive Officer of
Vista Chemical Company. Since 1995, he has been a consultant and private
45
<PAGE> 47
investor. Mr. Ball also currently serves on the Board of Directors of Quanta
Services, Inc. and he previously served on the Board of Rexene Corporation from
April 1996 to August 1997. Mr. Ball received $21,000 in compensation for his
services as a director of the Company for fiscal 2000.
Paul F. Balser has been a member of the Company's Board since August 1988
and was Vice President of the Company from August 1988 until June 1992. He was a
partner of Centre Partners L.P., the managing general partner of Centre Capital
Investors L.P. (CCI) from 1986 until August 1995. In August 1995, Mr. Balser
resigned as an officer of the managing general partner of Centre Partners L.P.,
to become a founding partner of Generation Capital Partners L.P., a private
investment partnership. Mr. Balser currently serves on the Boards of Directors
of Kansas City Southern Industries, Inc., Scientific Games Holdings, Inc. and a
number of privately held companies. Mr. Balser received $23,500 in compensation
for his services as a director of the Company for fiscal 2000.
Robert M. Howe has been a member of the Company's Board since April 1996.
From March 1986 to December 1995, Mr. Howe was the President, Chief Operating
Officer and a director of MAPCO, Inc. Mr. Howe is also currently a director of
T.D. Williamson, Inc. Mr. Howe received $23,500 in compensation for his services
as a director of the Company for fiscal 2000.
Ronald B. Kalich was elected to the Company's Board in March 1994. Mr.
Kalich is currently President and Chief Executive Officer of Fabristeel
Holdings, Inc., a position he has held since September 2000. Previously he was
President and Chief Executive Officer of National-Standard Company. From 1993 to
1998 he served as a Group Executive in the Marmon Group, Inc. Mr. Kalich is also
currently a director of Thomas and Betts, Inc. and National-Standard Company.
Mr. Kalich received $24,000 in compensation for his services as a director of
the Company for fiscal 2000.
Charles E. Slater was elected to the Company's Board in September 1997. Mr.
Slater is currently the President and Chief Executive Officer of the Concrete
Reinforcing Steel Institute, a position he has held since March 1998.
Previously, Mr. Slater was the Executive Director of the Iron & Steel Society, a
position he held since 1992. Mr. Slater received $24,500 in compensation for his
services as a director of the Company for fiscal 2000.
Roger Mulvihill has been a Secretary of the Company since August 1988. He
has been a partner with the law firm of Dechert since December 1991.
COMMITTEES OF THE BOARD OF DIRECTORS
The committees of the Board of Directors for fiscal 2000 are described below.
Compensation and Stock Option Committees
The Compensation Committee consists of three directors and is responsible
for policies, procedures and other matters relating to compensation of the
executive officers as a group and the chief executive officer individually. In
addition, the Compensation Committee reviews the operations of the Company's
pension plans and its medical insurance plans. During fiscal 2000, the
Compensation Committee held three meetings.
The Stock Option Committee consists of two directors and has authority to
grant options pursuant to the Company's stock option plans. During fiscal 2000,
the Stock Option Committee held two meetings.
Nominating Committee
The Nominating Committee consists of four directors, a majority of whom may
not be employees of the Company. The Nominating Committee is responsible for
nominating individuals for election as directors of the Company. During fiscal
2000, the Nominating Committee did not hold any meetings.
Audit Committee
The Audit Committee consists of three directors. The Audit Committee is
responsible for policies, procedures and other matters relating to accounting,
internal financial controls and financial reporting, including the engagement of
independent auditors and the planning, scope, timing and cost of any audit and
any other services they may be asked to perform, and will review with the
auditors their report on the Company's financial statements following completion
of each such audit. During fiscal 2000, the Audit Committee held four meetings.
46
<PAGE> 48
Governance Committee
The Governance Committee consists of four members. The Governance Committee
is responsible for Board governance matters, such as Board compensation,
evaluation and committee assignments. During fiscal 2000, the Governance
Committee held one meeting.
The Board has also formed a special committee, which currently consists of
Messrs. Ball, Balser, Howe, Kalich and Slater, to review and make
recommendations to the Board regarding various aspects of certain antitrust
claims involving the Company that are the subject of previously reported Grand
Jury proceedings and several civil antitrust actions currently pending.
In September 1998, the Board also formed a committee that currently
consists of Messrs. Howe, Kalich and Slater to explore various strategic
opportunities.
The Board held eight meetings during fiscal 2000. Each incumbent director
attended at least 75% of the aggregate number of meetings of the Board and the
committees of the Board on which such director served.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and change in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% shareholders are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on the review of the copies of such forms furnished to the
Company, the Company believes that during fiscal 2000 all Section 16(a) filing
requirements applicable to its directors, officers and greater than 10%
beneficial owners were filed on a timely basis.
47
<PAGE> 49
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
received by the chief executive officer and each of the most highly compensated
executive officers who received compensation in excess of $100,000
(collectively, the Named Executive Officers) for services rendered in all
capacities during the Company's indicated fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------- -------------
Common Stock
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus(1) Compensation Options(2) Compensation
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Walter B. Fowler 2000 $350,004 -- -- 33,000 $ 12,201(3)
Chairman of the Board, President 1999 350,004 $195,831 -- 40,000 26,137
and Chief Executive Officer 1998 316,668 -- -- 30,000 23,307
Stephen D. Weaver (4) 2000 208,503 -- -- 25,000 7,278(5)
Senior Vice President & 1999 206,004 69,926 -- 20,000 16,800
General Manager-Electrodes 1998 191,341 -- -- 15,000 16,687
and Graphite Specialty Products
Walter E. Damian 2000 162,000 -- -- 17,000 6,474(6)
Vice President-Human Resources 1999 162,000 54,839 -- 20,000 13,562
1998 151,000 -- -- 15,000 14,962
Ararat Hacetoglu 2000 170,004 -- -- 17,000 4,412(7)
Vice President & General 1999 170,004 53,262 -- 20,000 12,465
Manager-Carbide Products 1998 151,667 -- -- 15,000 12,545
Jim J. Trigg 2000 170,000 -- -- 17,000 7,141(8)
Vice President & General 1999 170,000 56,765 -- 20,000 14,134
Manager-Seadrift Coke L.P. 1998 151,538 -- -- 15,000 15,294
Michael F. Supon(9) 2000 297,507 -- -- 16,000 5,708(10)
Former Vice President & 1999 170,004 56,289 -- 20,000 14,225
General Manager-Electrodes 1998 151,667 -- -- 15,000 13,426
and Graphite Specialty Products
====================================================================================================================
</TABLE>
(1) All amounts shown in this column represent bonuses earned in fiscal 1999
under the Incentive Bonus Plan. See Bonus Plans below.
(2) Options were granted under the 1998 Plan and the 1995 Plan. All options
granted in fiscal 2000 have an exercise price of either $5.53125 per share
or $3.5625 per share depending on the date of grant. All options granted in
fiscal 1999 have an exercise price of $13.9375 per share. All options
granted in fiscal 1998 have an exercise price of $21.53125 per share. All
options granted in the fiscal years presented vest and become exercisable
at a rate of one-third per year beginning with the anniversary date of the
grant. All options granted under the 1998 Plan and the 1995 plan expire in
ten years from the grant date.
(3) All other compensation for 2000 includes: $576 of premiums for group term
life insurance; and $11,625 of Company match contributions under the
Company's savings investment plan adopted pursuant to Section 401(k) of the
Internal Revenue Service Code of 1986, as amended (the Savings Investment
Plan).
(4) Mr. Weaver became the Company's Senior Vice President and General
Manager-Electrodes and Graphite Specialty Products effective May 2000.
(5) All other compensation for 2000 includes: $320 of premiums for group term
life insurance; and $6,958 of Company match contributions under the Savings
Investment Plan.
(6) All other compensation for 2000 includes: $625 of premiums for group term
life insurance; and $5,849 of Company match contributions under the Savings
Investment Plan.
(7) All other compensation for 2000 includes: $92 of premiums for group term
life insurance; and $4,320 of Company match contributions under the Savings
Investment Plan.
(8) All other compensation for 2000 includes: $342 of premiums for group term
life insurance; and $6,799 of Company match contributions under the Savings
Investment Plan.
(9) Mr. Supon resigned from his position of Vice President and General
Manager-Electrodes and Graphite Specialty Products effective April 2000.
Included in Mr. Supon's salary for fiscal 2000 was $127,503 in regular
salary and $170,004 in salary benefits accrued by the Company in connection
with Mr. Supon's s severance. Except for 5,000 options granted during
fiscal 1998, all options granted to Mr. Supon during the fiscal years
presented were canceled as a result of his severance.
(10) All other compensation for 2000 includes: $194 of premiums for group term
life insurance; and $5,514 of Company match contributions under the Savings
Investment Plan.
48
<PAGE> 50
The following table sets forth certain information regarding awards of options
for Common Stock to the Named Executive Officers during fiscal 2000.
COMMON STOCK OPTIONS GRANTED IN FISCAL 2000
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------
Potential Realizable
% of Total Value at Assumed
Options Annual Rates of Stock
Shares Granted to Price Appreciation
Underlying Employees for Option Term(3)
Options in Fiscal Exercise Expiration -----------------------
Name Granted(1) Year Price(2) Date 5% 10%
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Walter B. Fowler 33,000 14.3% $5.47 (4) $113,555 $287,770
Stephen D. Weaver 25,000 10.9 4.82 (4) 75,821 192,146
Walter E. Damian 17,000 7.4 5.42 (4) 57,898 146,724
Ararat Hacetoglu 17,000 7.4 5.42 (4) 57,898 146,724
Jim J. Trigg 17,000 7.4 5.42 (4) 57,898 146,724
Michael F. Supon (5) -- -- -- -- -- --
=============================================================================================================
</TABLE>
(1) Options granted during fiscal 2000 were granted on February 28, 2000 and
May 1, 2000 under the 1998 Plan. All options vest and become exercisable at
a rate of one-third per year beginning with the anniversary date of the
grant.
(2) Represents the weighted average exercise price of options granted during
fiscal 2000. Options granted on February 28, 2000 and May 1, 2000 have an
exercise price of $5.53125 and $3.5625 per share, respectively.
(3) The dollar amounts are the result of calculations at the 5% and 10% annual
capital appreciation rates prescribed by the Securities and Exchange
Commission and are not intended to forecast any possible appreciation of
the Company's stock price.
(4) Options granted under the 1998 Plan expire in ten years from the date of
grant.
(5) Options granted to Mr. Supon during fiscal 2000 were canceled in connection
with his severance in April 2000.
The following table provides information related to options exercised by the
Named Executive Officers during fiscal 2000 and the number and value of options
held as of July 31, 2000.
AGGREGATE OPTION EXERCISES IN FISCAL 2000 AND FISCAL YEAR END-OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised
Options as of In-the-Money Options
Shares July 31, 2000 as of July 31, 2000(1)
Acquired Value ----------------------------------------------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ararat Hacetoglu 11,000 $48,688(2) 35,667 35,333 -- $750
Walter B. Fowler -- -- 78,333 69,667 -- 750
Stephen D. Weaver -- -- 37,667 43,333 -- 6,750
Walter E. Damian -- -- 37,167 34,333 -- 750
Jim J. Trigg -- -- 39,667 35,333 -- 750
Michael F. Supon -- -- 19,000 -- -- --
===============================================================================================================================
</TABLE>
(1) Value is calculated based on the difference between $4.3125, the fair
market value of the Company's Common Stock on July 31, 2000, and the
exercise price of options outstanding. Options with an exercise price
greater than $4.3125 per share were not included in this computation.
(2) Options exercised had an exercise price of $2.00 per share. 5,000 of the
options were exercised when the fair value of the Company's Common Stock
was $7.50 per share and 6,000 of the options were exercised when the fair
value of the Company's Common Stock was $5.53125 per share.
49
<PAGE> 51
PERFORMANCE GRAPH
The following graph compares the cumulative total return on the Company's Common
Stock with the cumulative total return of the companies listed in the NASDAQ
Stock Market--US Index (the NASDAQ Index) and the S&P Iron and Steel Index (the
S&P Index) for the period from September 14, 1995, the date on which the Common
Stock began public trading, to July 31, 2000. As compared to a basis of $100 as
of September 14, 1995, the Company's index was $29, the NASDAQ Index was $377
and the S&P Index was $62, all as of July 31, 2000.
COMPARISON OF 58-MONTH CUMULATIVE TOTAL RETURN AMONG THE CARBIDE/GRAPHITE GROUP,
INC., THE NASDAQ STOCK MARKET (US) INDEX, AND THE S&P IRON & STEEL INDEX
THE
CARBIDE/GRAPHITE NASDAQ STOCK
GROUP, INC. MARKET (U.S.) S&P IRON & STEEL
--------------------------------------------------------------------------------
9/95 100 100 100
10/95 88 102 92
1/96 107 104 110
4/96 118 117 104
7/96 107 107 84
10/96 109 120 86
1/97 139 136 94
4/97 151 124 95
7/97 193 158 115
10/97 238 158 102
1/98 227 161 95
4/98 215 186 115
7/98 147 186 87
10/98 83 177 84
1/99 83 252 84
4/99 87 252 100
7/99 93 265 90
10/99 47 299 84
1/00 45 394 77
4/00 23 385 73
7/00 29 377 62
================================================================================
* $100 invested on 9/14/95 in stock or index--including reinvestment of
dividends. Fiscal year ending July 31.
COMPENSATION OF DIRECTORS
Refer to "The Board of Directors and Officers of the Company" section for
details on compensation of each outside director for fiscal 2000. A portion of
directors' fees earned by each outside director were credited to a deferred
compensation plan. Such deferral was at the discretion of the director, subject
to limitations summarized in the plan documents (see the "Deferral Plan"
described below). Mr. Fowler received no compensation for his service as
Chairman of the Board and a director of the Company in fiscal 2000.
Non-employee directors receive a $5,000 per year retainer for services as
members of the Board. Also, each Board committee chair receives a $1,500 per
year chairmanship fee. For Board activities, each non-employee director receives
$2,000 for in-person Board meetings, $1,000 for conference call Board meetings,
$1,000 for in-person Board committee meetings and $500 for conference call Board
committee meetings.
During fiscal 1996, the Company adopted the Non-Employee Director
Stock-Based Incentive Compensation Plan (the Director Plan). Options granted
under the Director Plan generally have a term of ten years and are granted with
an exercise price equal to the fair market value of the Company's Common Stock
on the date of grant. Such options
50
<PAGE> 52
vest and become exercisable on the one-year anniversary date of the option
grant, with the stipulation that the non-employee director receiving the option
continues as a director of the Company on such anniversary date. Options under
the Director Plan may be exercised for cash and, under certain circumstances,
Common Stock and additional unexercised options of the Company.
There have been four annual option grants under the Director Plan since its
inception. Except for Mr. Slater, option grants of 1,700, 2,000, 2,000 and 3,400
per outside director occurred on August 26, 1996 and July 31, 1997, 1998 and
1999, respectively. The exercise price of such options was $18.25, $28.875,
$21.53125 and $13.9375 per share, respectively. In the case of Mr. Slater,
option grants of 2,000, 2,000 and 3,400 occurred on September 9, 1997 and July
31, 1998 and 1999, respectively. The exercise price of such options was
$34.6875, $21.53125 and $13.9375 per share, respectively.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company is a party to employment, termination or severance agreements with
Messrs. Fowler, Weaver, Damian, Trigg, Hacetoglu, Supon and Kaiser as set forth
below.
In September 1999, Mr. Fowler entered into an employment agreement with the
Company as Chief Executive Officer which will terminate on August 31, 2001.
Pursuant to the terms of the agreement, he is to receive annual cash
compensation of at least $350,000 and incentive compensation in the form of
stock options to purchase shares of Common Stock and annual incentive awards up
to 100% of his base pay pursuant to the terms of the Incentive Bonus Plan. In
the event of termination of his employment by the Company for other than death,
disability or cause, or other than by virtue of a change in control, as defined
therein, Mr. Fowler is to receive severance in a lump sum equal to twice the
amount of his base salary plus twice the amount of the average of his bonus plan
payouts for the previous two years. If terminated due to a change of control
event, Mr. Fowler would receive a lump sum payment equal to 2.99 times his base
salary plus, subject to certain exceptions, 2.99 times the average of his bonus
plan payouts for the previous two years at the time of termination. The
agreement also provides for certain payments in the event of Mr. Fowler's death
or disability.
Effective February 1, 2000, Mr. Weaver entered into an employment
agreement. Such employment agreement was amended effective May 1, 2000 in
connection with Mr. Weaver's promotion to Senior Vice President-Electrodes and
Graphite Specialty Products. Pursuant to the terms of the amended agreement, he
is to receive annual cash compensation of at least $216,000 and incentive awards
of up to 60% of his base pay pursuant to the terms of the Incentive Bonus Plan.
In the event of termination of his employment by the Company for other than
death, disability or cause, as defined therein, Mr. Weaver is to receive
severance in a lump sum equal to twice the amount of his base salary plus twice
the amount of the average of his bonus plan payouts for the previous two years.
If terminated due to a change of control event, Mr. Weaver will receive a lump
sum payment equal to 2.99 times his base salary, plus, subject to certain
exceptions, 2.99 times the average of his bonus plan payouts for the previous
two years, at the time of termination. The agreement also provides for certain
payments in the event of Mr. Weaver's death or disability.
The Company entered into severance agreements with Messrs. Trigg, Damian
and Hacetoglu with respect to their employment as, respectively, Vice President
and General Manager-Seadrift Coke, L.P., Vice President-Human Resources and Vice
President and General Manager-Calcium Carbide Products. Pursuant to the terms of
the agreements, Messrs. Trigg, Damian, and Hacetoglu will each be granted one
year of severance pay and medical coverage if terminated other than for cause.
In connection with his agreement, Mr. Supon is to receive one year of severance
pay and medical coverage as a result of his severance in April 2000.
In March 1997, Mr. Kaiser retired from his positions with the Company,
other than his position as a director. Pursuant to his March 1997 revised
employment agreement, the Company will provide for the continuation of Mr.
Kaiser's health insurance benefits until January 1, 2001.
SAVINGS INVESTMENT PLAN
The Company has adopted the Savings Investment Plan for substantially all
salaried employees, including the Named Executive Officers. Employee
contributions of not more than 6% of employee compensation are matched at a rate
of 50% by the Company in lieu of a pension plan. Additional employer
contributions may be made at the discretion of the Board based on the Company's
current year performance.
51
<PAGE> 53
Deferral Plan
The Company has implemented a compensation deferral plan (the Deferral Plan) for
the benefit of its directors and officers, currently 17 individuals, including
the Named Executive Officers. The Deferral Plan became effective for
compensation that would otherwise be paid on or after January 1, 1996. Under the
Deferral Plan, participants are allowed to defer a portion or all of their base
salary, director's fees or bonuses. Contributions to the Deferral Plan are
invested, as the participants direct, into a variety of fixed income, balanced
and equity funds. The Deferral Plan also restores the Saving Investment Plan
matching contribution lost on deferred compensation up to $235,840 (as such
amounts may be increased under Section 415(d) of the Internal Revenue Code).
Distributions from the Deferral Plan generally will be made upon retirement,
disability or upon termination of employment, unless further deferred by the
participant.
1995 STOCK-BASED INCENTIVE COMPENSATION PLAN
General. The Board adopted the 1995 Stock-Based Incentive Compensation Plan (the
1995 Plan) in April 1995, and the shareholders of the Company approved the 1995
Plan in August 1995. The purpose of the 1995 Plan is to assist the Company, and
its subsidiaries and affiliates, in attracting and retaining valued employees by
offering them a greater stake in the Company's success and a closer identity
with it, and to encourage ownership of the Company's Common Stock by such
employees. The 1995 Plan permits awards of stock options and/or stock
appreciation rights (SARs) to eligible employees that qualify as
"performance-based compensation" under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the Internal Revenue Code).
The total number of shares of the Company's Common Stock available for
awards under the 1995 Plan is 400,000 shares (subject to adjustments for stock
splits, stock dividends and the like). No employee may be granted (i) an award
of, or exercisable for, more than a specified number of shares of Common Stock
in any one calendar year, or (ii) incentive stock options first exercisable in
any one calendar year for shares of Common Stock having an aggregate fair market
value in excess of $100,000.
The following summary description of the 1995 Plan is qualified in its
entirety by the full text of the 1995 Plan, as amended, copies of which may be
obtained by the Company's stockholders upon request to the Office of the
Secretary of the Company.
Administration. The Stock Option Committee (the Committee) designated by
the Board has full power to interpret and administer the 1995 Plan and full
authority to act in selecting the employees to whom awards of options or SARs
under the 1995 Plan (Awards) shall be granted, in determining the type and
amount of Awards to be granted to each such employee, the terms and conditions
of Awards granted under the 1995 Plan and the terms and agreements that shall be
entered into with employees to whom an Award is granted (the Holders). Effective
August 1996, all grants under the 1995 Plan must be approved by the Committee.
The Committee members must be Board members who are not employees of the Company
and, for periods prior to August 1996, who are not eligible to participate in
the 1995 Plan. The Board has the power to amend, suspend or terminate the 1995
Plan at any time except that stockholder approval is required to increase the
total number of shares available for issuance pursuant to the 1995 Plan, change
the class of employees eligible to be Holders, decrease the price at which the
Common Stock may be purchased upon the exercise of an option, withdraw the
administration of the 1995 Plan from the Committee, change the provisions of
Section 9 of the 1995 Plan, or take any other action that requires stockholder
approval under Section 16(b) of the Securities Exchange Act of 1934.
Eligibility. Any employee is eligible to receive an Award, except that any
employee employed by an affiliate (any entity (other than a 50% or more
subsidiary)) in which the Company has a substantial direct or indirect equity
interest, as determined by the Board) shall not be eligible to receive an
incentive stock option. For these purposes, "employee" means an officer or other
key employee, consultant or advisor of the Company, a subsidiary or an
affiliate, including a director who is such an employee, consultant or advisor.
Awards. Under the 1995 Plan, eligible employees may be awarded stock
options and/or SARs. Stock options may be either incentive stock options or
non-qualified stock options. Incentive stock options are intended to be
"incentive stock options" under Section 422 of the Internal Revenue Code;
non-qualified stock options are intended to be those stock options which do not
qualify under Section 422 of the Internal Revenue Code. The price at which
shares of Common Stock may be purchased upon the exercise of an option is
determined by the Committee but must be at
52
<PAGE> 54
least equal to the fair market value of such shares on the date of the award.
Payment of the option price must be paid in full in cash at the time of exercise
or, with the consent of the Committee, in whole or in part in shares of Common
Stock valued at fair market value. With the consent of the Committee, payment
upon the exercise of a non-qualified stock option may be made in whole or in
part by the delivery of additional, unexercised non-qualified stock options
(based on the difference between the fair market value of the Common Stock for
which they are exercisable and the exercise price of such additional
non-qualified stock options) or by a "cashless exercise."
An SAR entitles the recipient to receive a payment equal to the excess of
the fair market value of the shares of Common Stock covered by the SAR on the
date of exercise over the exercise price of the SAR. Such payment may be in
cash, in shares of Common Stock, or any combination thereof, as the Committee
may determine. An SAR may be awarded in tandem with options or separately.
Stock options and SARs will be exercisable over a period to be designated
by the Committee, but not prior to six months or more than ten years (or five
years for certain incentive stock options) after the date of the award. All
options and SARs awarded under the 1995 Plan are non-transferable other than by
will or by operation of the laws of descent and distribution.
As of September 22, 2000, all 400,000 options for Common Stock available
for grant under the 1995 Plan had been granted or cancelled. Of the 400,000
options granted under the 1995 Plan, 353,500 options for Common Stock,
representing 4.2% of the Common Stock outstanding, had not yet been exercised as
of September 22, 2000. The closing price of the Company's Common Stock as
reported on the NASDAQ National Market System on September 22, 2000 was $3.6875
per share. The average exercise price of outstanding options granted under the
1995 Plan is $21.34 per share.
Term. The 1995 Plan became effective in May 1995 and will remain in full
force and effect until the earlier of May 1, 2005 or the date it is terminated
by the Board.
Performance-Based Compensation. It is intended that all compensation income
recognized by any Holder as the result of the exercise of options or SARs, or
the disposition of shares of common stock acquired on exercise of options or
SARs, will be considered performance-based compensation excludable from such
Holder's "applicable employee remuneration" pursuant to Section 162(m)(4)(C) of
the Internal Revenue Code.
Federal Tax Treatment. Under the present federal tax laws, the federal
income tax treatment of stock options and SARs under the 1995 Plan is as
follows:
An employee recognizes no taxable income and the Company is not entitled to
a deduction when an incentive stock option is awarded or exercised. If an
employee sells Common Stock acquired upon exercise, after complying with
requisite holding periods, any gain or loss realized upon such sale will be
long-term capital gain or loss. The Company will not be entitled to take a
deduction as a result of any such sale. If the employee disposes of such Common
Stock before complying with requisite holding periods, the employee generally
will recognize ordinary income equal to the difference between the fair market
value of the Common Stock on the date of exercise and the exercise price, and
the Company will be entitled to a corresponding income tax deduction.
An employee recognizes no taxable income and the Company is not entitled to
an income tax deduction when a non-qualified option is awarded. Upon exercise of
a non-qualified option, an employee generally will realize ordinary income in an
amount equal to the excess of the fair market value of the Common Stock over the
exercise price, and, provided that the applicable conditions of Section 162(m)
of the Internal Revenue Code are met, the Company will be entitled to a
corresponding income tax deduction. Upon sale of the Common Stock acquired, the
employee will realize short-term or long-term capital gain or loss, depending
upon whether the Common Stock has been held for more than one year, equal to the
difference between the sale price of the Common Stock and the fair market value
of the Common Stock on the date that the employee recognizes income with respect
to the option exercise.
An employee recognizes no taxable income and the Company is not entitled to
an income tax deduction when an SAR is awarded. Upon exercise of an SAR, an
employee generally will realize ordinary income in an amount equal to the
difference between the fair market value of the Common Stock on the date of
exercise and the exercise price under the SAR, and, provided the applicable
conditions of Section 162(m) of the Internal Revenue Code are met, the Company
will be entitled to a corresponding income tax deduction.
53
<PAGE> 55
THE 1998 STOCK-BASED INCENTIVE COMPENSATION PLAN
General. The 1998 Stock-Based Incentive Compensation Plan (the 1998 Plan) was
approved by the Company's stockholders in December 1998. The purpose of the 1998
Plan is to assist the Company, and its subsidiaries and affiliates, in
attracting and retaining valued employees by offering them a greater stake in
the Company's success and a closer identity with it, and to encourage ownership
of the Company's Common Stock by such employees. No employee may be granted
incentive stock options first exercisable in any one calendar year for shares of
Common Stock having an aggregate fair market value in excess of $100,000. The
aggregate number of shares of the Company's Common Stock issued under the 1998
Plan will not exceed 450,000 shares (subject to adjustments for stock splits,
stock dividends and the like).
The 1998 Plan permits awards to eligible employees of stock options and/or
SARs that qualify as "performance-based compensation" under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the Internal Revenue Code).
Section 162(m) of the Code limits the deductibility of compensation paid to the
Company's Chief Executive Officer and to each of the next four most highly paid
officers unless that compensation is "performance based."
The following summary description of the 1998 Plan is qualified in its
entirety by the full text of the 1998 Plan, copies of which may be obtained by
the Company's stockholders upon request to the Office of the Secretary of the
Company.
Administration. The Committee has full power to interpret and administer
the 1998 Plan and full authority to act in selecting the employees to whom
awards of options or SARs under the 1998 Plan (Awards) are granted, in
determining the type and amount of Awards to be granted to each such employee,
the terms and conditions of Awards granted under the 1998 Plan and the terms and
agreements entered into with employees to whom an Award is granted (the
Holders). All grants under the 1998 Plan must be approved by the Committee. The
Committee members must be Board members who are not employees of the Company or
any parent, subsidiary, or Seadrift or any affiliate. No Committee member can
receive any compensation from the Company except in his capacity as director.
All have to otherwise qualify as "outside directors" under Section 162(m) of the
Internal Revenue Code and "non-employee directors" under Rule 16b-3 promulgated
by the Securities and Exchange Commission. The Board has the power to amend,
suspend or terminate the 1998 Plan at any time, except that stockholder approval
is required to increase the total number of shares available for issuance
pursuant to the 1998 Plan, change the class of employees eligible to be Holders,
withdraw the administration of the 1998 Plan from the Committee, change the
provisions of the 1998 Plan describing when a shareholder vote is required for
plan modification, or take any other action that would require stockholder
approval under the "short swing profit recapture" rules of Section 16(b) of the
Securities Exchange Act of 1934.
Eligibility. Employees, consultants and advisors of the Company, or a
subsidiary or Seadrift or any other affiliate, including any director who is an
employee, consultant or advisor, are eligible to receive Awards. Directors,
consultants and advisors who are not employees, and employees of Seadrift or any
other affiliate (any entity (other than a 50% or more subsidiary) in which the
Company has a substantial direct or indirect equity interest, as determined by
the Board), are not, however, eligible to receive incentive stock options.
Employees, consultants, and advisors of the Company or a subsidiary would be
eligible to receive incentive stock options as well as non-qualified options and
SARs.
Awards. Under the 1998 Plan, eligible employees can be awarded stock
options and/or SARs. Stock options may be either incentive stock options or
non-qualified stock options. Incentive stock options are intended to be
"incentive stock options" under Section 422 of the Internal Revenue Code.
Non-qualified stock options are those options that do not qualify under Section
422 of the Internal Revenue Code. The price at which shares of Common Stock can
be purchased upon the exercise of an option is determined by the Committee, but
has to be at least equal to the fair market value of such shares (or 110% of
fair market value for certain incentive stock options) on the date of the Award.
Payment of the option price has to be made in full in cash at the time of
exercise or, with the consent of the Committee, in whole or in part in shares of
Common Stock valued at fair market value. With the consent of the Committee,
payment upon the exercise of a non-qualified stock option can be made in whole
or in part by the delivery of additional, unexercised non-qualified stock
options (based on the difference between the fair market value of the Common
Stock for which they are exercisable and the exercise price of such additional
non-qualified stock options) or by a "cashless exercise."
An SAR entitles the recipient to receive a payment equal to the excess of
the fair market value of the shares of Common Stock covered by the SAR on the
date of exercise over the exercise price of the SAR. Such payment may be in
cash, in shares of Common Stock, or in any combination thereof, as the Committee
may determine. An SAR may be awarded in tandem with options or separately.
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<PAGE> 56
Stock options and SARs may be exercisable over a period to be designated by
the Committee, but not prior to six months or more than ten years (or five years
for certain incentive stock options) after the date of the Award. All incentive
stock options awarded under the 1998 Plan are non-transferable other than by
will or by operation of the laws of descent and distribution.
As of September 22, 2000, 448,000 of the 450,000 options for Common Stock
available for grant under the 1998 Plan had been granted or cancelled. None of
the options granted under the 1998 plan have been exercised as of September 22,
2000. Options for Common Stock granted under the 1998 Plan represent
approximately 5.4% of the Common Stock outstanding as of September 22, 2000. The
closing price of the Company's Common Stock as reported on the NASDAQ National
Market System on September 22, 2000 was $3.6875 per share. The average exercise
price of outstanding options that were granted under the 1998 Plan is $9.41 per
share.
The Committee retains the power to amend the terms of, or cancel and
regrant, stock options and SARs for the benefit of any Holder. All terms of the
options and SARs can be amended, subject to the specific limitations set forth
in the Plan. Any incentive stock option amended by the Committee becomes a
non-qualified option.
In the event of a dissolution or liquidation of the Company, a merger or
consolidation in which the Company is not the surviving corporation, or any
other transaction wherein the Company's stockholders give up all their equity
interest in the Company, the successor company, if any, may substitute its own
substantially similar options and SARs, or it could elect to terminate the Plan.
Termination would result in expiry of all awards at such a time and on such
conditions as the Board determines.
Term. The 1998 Plan became effective December 3, 1998 and will remain in
full force and effect until the earlier of December 3, 2008 or the date it is
terminated by the Board.
Performance-Based Compensation. It is intended that all compensation income
recognized by any Holder as the result of the exercise of options or SARs, or
the disposition of shares of Common Stock acquired on exercise of options or
SARs, be considered performance-based compensation excludable from such Holder's
"applicable employee remuneration" pursuant to section 162(m)(4)(C) of the
Internal Revenue Code.
Federal Tax Treatment. Under the present federal tax laws, the federal
income tax treatment of stock options and SARs under the 1998 Plan is as
follows:
An employee recognizes no taxable income and the Company is not entitled to
a deduction when an incentive stock option is awarded or exercised. If an
employee sells Common Stock acquired upon exercise, after complying with
requisite holding periods, any gain or loss realized upon such sale is a
long-term capital gain or loss. The Company is not entitled to take a deduction
as a result of any such sale. If the employee disposes of such Common Stock
before complying with requisite holding periods, the employee generally will
recognize ordinary income equal to the difference between the fair market value
of the Common Stock on the date of exercise and the exercise price, and the
Company will be entitled to a corresponding income tax deduction.
An option holder recognizes no taxable income and the Company is not
entitled to an income tax deduction if a non-qualified option is awarded. Upon
exercise of a non-qualified option, the Holder generally would realize ordinary
income in an amount equal to the excess of the fair market value of the Common
Stock over the exercise price, and, provided that the applicable conditions of
Section 162(m) of the Internal Revenue Code are met, the Company will be
entitled to a corresponding income tax deduction. Upon sale of the Common Stock
acquired, the Holder would realize short-term or long-term capital gain or loss,
depending upon whether the Stock had been held for more than one year, equal to
the difference between the sale price of the Common Stock and the fair market
value of the Common Stock on the date that the Holder recognizes income with
respect to the option exercise.
The employee, director, consultant or advisor recognizes no taxable income
and the Company is not entitled to an income tax deduction if an SAR is awarded.
Upon exercise of an SAR, the Holder generally would realize ordinary income in
an amount equal to the difference between the fair market value of the Common
Stock on the date of exercise and the exercise price under the SAR, and,
provided any applicable conditions of Section 162(m) of the Internal Revenue
Code were met, the Company will be entitled to a corresponding income tax
deduction.
55
<PAGE> 57
BONUS PLANS
The Company has adopted an incentive bonus plan for certain executives,
including the Named Executive Officers (the Incentive Bonus Plan). The Incentive
Bonus Plan provides for the award of annual bonuses based on the Company's
meeting or exceeding personal goals, as well as performance targets relating to
earnings before interest, taxes, depreciation and amortization (EBITDA) which
are established annually by the Board. Satisfaction of EBITDA targets will
trigger awards equal to 10%, 20%, 30% or 50% of base pay depending on management
levels. EBITDA in excess of the established targets will increase bonus awards
subject to maximum awards of 20%, 40%, 60% or 100%, respectively, depending on
management levels. Approximately 31 salaried employees are currently eligible to
participate in the Incentive Bonus Plan, including the Named Executive Officers.
The Company has also adopted a discretionary bonus plan for salaried
employees not eligible for the Incentive Bonus Plan (the Discretionary Bonus
Plan). The Discretionary Bonus Plan provides for the payment of an aggregate
amount equal to up to 2% of the total annual salaries of non-executive
employees. Awards under the Discretionary Bonus Plan are made solely at
management's discretion.
The Company did not pay any bonuses under the Incentive Bonus Plan or the
Discretionary Bonus Plan for fiscal 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is comprised of Messrs.
Ball, Balser and Kalich, none of whom currently is an executive officer of the
Company; however, Mr. Balser served as an officer of the Company in the past.
Executive officer compensation is determined by the Compensation Committee.
STOCK OPTION COMMITTEE
The Stock Option Committee of the Board of Directors is comprised of Mr. Ball
and Mr. Kalich, neither of whom currently is an executive officer of the Company
or receives any compensation from the Company in any capacity other than as a
director. Awards under the 1998 Plan are determined by the Stock Option
Committee.
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<PAGE> 58
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee, which is currently comprised of three
non-employee directors, is responsible for guiding the Company in the
development and implementation of the Company's compensation policies, plans and
programs. The intended purposes of these programs are to: (i) promote the
interests of the Company and its stockholders by attracting and retaining
officers and other key employees of exceptional ability; (ii) maximize the
Company's long-term success and investment returns to stockholders; (iii)
provide officers and key employees who are important to the Company's sustained
growth with a proprietary interest in, and greater incentives to contribute to
the success of the Company through ownership of the Company's Common Stock and
stock options; and (iv) provide incentives for officers and other key employees
which are competitive with those offered by other corporations in the business
and geographic areas in which the Company operates. The Compensation Committee
reviews and recommends the annual compensation of the Company's executive
officers and other members of management, which consists principally of base
salary, annual bonuses and stock option grants. The Compensation Committee
considers, among other things, compensation statistics for executives of
companies that are similar in size and other characteristics to the Company in
determining the compensation of its executives. Messrs. Fowler, Weaver, Damian,
Trigg and Hacetoglu have entered into employment and/or severance agreements
with the Company.
Base Salary. Base salary is designed to compensate executives and other key
employees for individual performance. Such base salaries are intended to (a)
take into consideration the relative intrinsic value of the subject executive
position to the Company, as measured by the position's scope of responsibility,
strategic importance, technological requirements and complexity; (b) competitive
salaries; and (c) individual performance. Executives and other key employees may
or may not receive annual base salary increases, depending upon performance in
the prior year and upon the achievement of individual and corporate performance
goals.
Annual Incentive Awards. Annual incentive awards will be granted under the
Incentive Bonus Plan and are based on achieving personal goals and EBITDA
targets which have been established by the Board. Meeting such objectives will
trigger awards as a percentage of base pay dependent on management level of 10%,
20%, 30% or 50%. Exceeding such targets will increase bonuses subject to maximum
payments of 20%, 40%, 60% or 100% depending on management levels. EBITDA results
in excess of targets, but below maximum levels, will result in awards calculated
linearly between such points.
Long-term Incentives. Long-term incentives are provided through annual
stock option grants to executives, principally through the 1995 and 1998 Plans.
Generally, stock options have a term of 10 years and vest ratably over three
years. Option exercise prices equal the fair market value of the Common Stock on
the date of grant. Incentive stock options are granted to the extent permitted
by applicable tax law and options granted in excess of such amounts will be
non-qualified options. Outstanding options held by an employee are considered in
connection with the award of new options.
CEO Compensation. Mr. Fowler, the Chief Executive Officer of the Company,
is compensated pursuant to the terms of his Employment Agreement with the
Company. In developing Mr. Fowler's compensation, the Compensation Committee
considered Mr. Fowler's prior performance in senior managerial roles with the
Company's electrodes unit, its largest business unit. Mr. Fowler served as
President of the Electrodes and Graphite Specialty Products of the Company from
March 1995 through March 1997, as Vice President-General Manager, Graphite
Electrode Products of the Company from January 1995 through March 1995 and as
Vice President-General Manager, Graphite Specialties of the Company from July
1991 to March 1995. The Committee also considered Mr. Fowler's contributions
with respect to the Company's significant capital expenditure program, including
its modernization plan and his management of the Company in recent periods under
difficult business conditions.
Respectfully Submitted,
Compensation Committee
/S/ James R. Ball
/S/ Paul F. Balser
/S/ Ronald B. Kalich
57
<PAGE> 59
DIRECTORS AND OFFICERS LIABILITY INSURANCE
The Company maintains $20 million of insurance under primary and secondary layer
policies providing payment either to the Company for indemnification provided to
its directors or officers, or directly to its directors and officers, for
certain liabilities which the Company's directors and officers may incur in such
capacities. The premiums and fees paid under such policies in fiscal 2000
totaled $231,417. Coverage was extended for fiscal 2001 for premiums totaling
$224,035. The insurance policies are issued by National Union Fire Insurance
Company and Twin City Fire Insurance Company.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of September 22, 2000 with respect
to each stockholder who beneficially owns 5% or more of the Company's
outstanding Common Stock. Except as set forth below, each stockholder has sole
voting and investment power with respect to all shares shown to be beneficially
owned by such stockholder. This information is based upon the latest written
report furnished to the Company or filed with the Securities and Exchange
Commission by such stockholder on or before September 22, 2000 and may not be
current. Common Stock outstanding as of September 22, 2000 was 8,331,342 shares.
<TABLE>
<CAPTION>
Number of Shares Percent
Name Beneficially Owned of Class
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Southeastern Asset Management, Inc. (1) 1,740,000 20.9%
6075 Poplar Avenue, Suite 900
Memphis, Tennessee 38119
James J. Filler 827,600 9.9
c/o Jefferson Iron & Metal Brokerage Company
P.O. Box 131449
Birmingham, Alabama 35213
Jennison Associates LLC 761,900 9.1
466 Lexington Avenue
New York, New York 10017
Dimensional Fund Advisors, Inc. 524,400 7.7
1299 Ocean Avenue
Santa Monica, California 90401-1038
======================================================================================================
</TABLE>
(1) Shares are owned by Longleaf Partners Small-Cap Fund for which Southeastern
Asset Management, Inc. is the investment adviser.
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<PAGE> 60
OWNERSHIP OF SECURITIES BY DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN OTHER
OFFICERS
The following is a summary of the beneficial ownership of the Company's Common
Stock as of September 22, 2000 by the Company's directors, executive officers
and by all such officers and directors as a group. Each of the Company's
officers and directors can be reached through the Company's corporate offices
located at One Gateway Center, 19th Floor, Pittsburgh, PA 15222.
<TABLE>
<CAPTION>
Number of Shares Percentage
Name of Officer or Director Beneficially Owned(1) of Class(2)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Officers:
Walter B. Fowler (3) 206,000 2.4%
Ararat Hacetoglu (4) 99,227 1.2
Jim J. Trigg (5) 90,915 1.1
Stephen D. Weaver (6) 89,403 1.1
Walter E. Damian (7) 81,087 1.0
Roger Mulvihill 8,000 0.1
Directors:
Nicholas T. Kaiser (8) 209,400 2.5
Paul F. Balser (9) 35,100 0.4
James R. Ball (10) 34,100 0.4
Ronald B. Kalich (11) 19,100 0.2
Robert M. Howe (12) 12,100 0.1
Charles E. Slater (13) 10,400 0.1
All executive officers and directors as a group (12 persons) 894,832 10.1
=====================================================================================================
</TABLE>
(1) Unless otherwise noted, each stockholder has or will have sole voting and
investment power with respect to the shares shown.
(2) Shares issuable upon the exercise of Common Stock options were added to the
Company's total Common Stock outstanding for purposes of this computation,
if applicable.
(3) Number of shares indicated includes 58,000 shares of Common Stock, 78,333
shares of Common Stock issuable upon the exercise of fully vested stock
options and 69,667 shares of Common Stock issuable upon the exercise of
non-vested stock options.
(4) Number of shares indicated includes 28,227 shares of Common Stock, 35,667
shares of Common Stock issuable upon the exercise of fully vested stock
options and 35,333 shares of Common Stock issuable upon the exercise of
non-vested stock options.
(5) Number of shares indicated includes 15,915 shares of Common Stock, 39,667
shares of Common Stock issuable upon the exercise of fully vested stock
options and 35,333 shares of Common Stock issuable upon the exercise of
non-vested stock options.
(6) Number of shares indicated includes 8,403 shares of Common Stock, 37,667
shares of Common Stock issuable upon the exercise of fully vested stock
options and 43,333 shares of Common Stock issuable upon the exercise of
non-vested stock options.
(7) Number of shares indicated includes 9,587 shares of Common Stock, 37,167
shares of Common Stock issuable upon the exercise of fully vested stock
options and 34,333 shares of Common Stock issuable upon the exercise of
non-vested stock options.
(8) Number of shares indicated includes 195,000 shares of Common Stock and
14,400 shares of Common Stock issuable upon the exercise of vested stock
options.
(9) Number of shares indicated includes 26,000 shares of Common Stock and 9,100
shares of Common Stock issuable upon the exercise of fully vested stock
options.
(10) Number of shares indicated includes 25,000 shares of Common Stock and 9,100
shares of Common Stock issuable upon the exercise of fully vested stock
options.
(11) Number of shares indicated includes 10,000 shares of Common Stock and 9,100
shares of Common Stock issuable upon the exercise of fully vested stock
options.
(12) Number of shares indicated includes 3,000 shares of Common Stock and 9,100
shares of Common Stock issuable upon the exercise of fully vested stock
options.
(13) Number of shares indicated includes 3,000 shares of Common Stock and 7,400
shares of Common Stock issuable upon the exercise of vested stock options.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS AND RELATIONSHIPS
Pursuant to an agreement entered into in connection with the Company's initial
public offering of Common Stock in September 1995, the Company filed a
registration statement under the Securities Act of 1933, as amended (the
Securities Act), which became effective in March 1996, with respect to the sale
of certain shares of Common Stock held by management stockholders and agreed to
keep such registration in effect for at least 36 months. Shares of Common Stock
owned by the Company's directors are also covered by such registration
statement.
59
<PAGE> 61
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) List of Financial Statements
The following consolidated financial statements, including the notes
thereto, of the Company and the Report of Independent Accountants set forth on
pages 25 through 44 and page 24, respectively, of this Annual Report on Form
10-K, are incorporated by reference into this Item 14 of Form 10-K by Item 8
hereof:
- Consolidated Balance Sheets as of July 31, 2000 and 1999.
- Consolidated Statements of Operations for the Years Ended July 31, 2000,
1999 and 1998.
- Consolidated Statements of Stockholders' Equity for the Years Ended July
31, 2000, 1999 and 1998.
- Consolidated Statements of Cash Flows for the Years Ended July 31, 2000,
1999 and 1998.
- Report of Independent Accountants dated September 8, 2000, except for
paragraphs 2 through 5 of Note 6 as to which the date is November 13, 2000.
(a)(2) List of Financial Statement Schedules
The following financial statement schedule of the Company and the Report of
Independent Accountants are included on pages 66 and 67, respectively, of this
Annual Report on Form 10-K and are incorporated by reference into this Item 14
on Form 10-K:
- Report of Independent Accountants dated September 8, 2000, except for
paragraphs 2 through 5 of Note 6 as to which the date is November 13, 2000.
- Schedule II--Valuation and Qualifying Accounts for the Years Ended July 31,
2000, 1999 and 1998.
All other financial statement schedules are not required, are not
applicable or the information called for therein is included elsewhere in the
consolidated financial statements or related notes thereto.
60
<PAGE> 62
(a)(3) List of Exhibits
EXHIBIT NO. DESCRIPTION
------------------------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-91002)
3.2* Amended and Restated By-Laws of the Company (incorporated herein by
reference to Exhibit 3.2 to the Company's Registration Statement on Form
S-1, Registration No. 33-91002)
3.3* Restated Stockholders' Agreement dated as of September 19, 1995 among
the Company and the Management Stockholders (incorporated herein by
reference to Exhibit 3.3 to the Company's Registration Statement on Form
S-1, Registration No. 33-31408)
3.4* Rights Agreement, including the associated Form of Rights Certificate
and Form of Certificate of Designation for Series A Junior Participating
Preferred Stock, dated as of May 21, 1999, between The Carbide/Graphite
Group, Inc. and State Street Bank (incorporated herein by reference to
Exhibit 1 of the Company's Current Report on Form 8-K dated May 21, 1999
and filed on June 1, 1999)
4.1* Specimen Certificate for Common Stock of the Company (incorporated
herein by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-91102)
4.2* Indenture dated August 26, 1993 between the Company and State Street
Bank and Trust Company, as trustee, relating to 11 1/2% Senior Notes Due
2003, including the form of Senior Note included therein (incorporated
herein by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1, Registration No. 33-91102)
4.3* Supplemental Indenture No. 2 dated as of September 15, 1997 between the
Company and State Street Bank and Trust Company, as trustee, related to
the elimination of substantially all of the restrictive covenants and
certain default provisions in the Senior Note Indenture (incorporated
herein by reference to Exhibit 4.3 to the Company's Annual Report on
Form 10-K for its fiscal year ended July 31, 1997, Commission File No.
0-20490)
10.1* Securities Purchase Agreement dated as of September 25, 1991 between the
Company and BOC (incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1, Registration No. 33-65150)
10.2* Asset Transfer Agreement dated as of July 9, 1988 among the Company, BOC
and Centre Capital Investors, L.P. (incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1,
Registration No. 33-65150)
10.3* Asset Purchase Agreement dated as of January 17, 1995 among the Company,
The C/G Specialty Products Business Trust, Materials Technology
Corporation and SGL Carbon Corporation (incorporated herein by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K dated January
17, 1995)
10.4* Share Purchase Agreement dated as of January 17, 1995 between the
Company and 9012-9677 Quebec Inc. (incorporated herein by reference to
Exhibit 2.2 to the Company's Current Report on Form 8-K dated January
17, 1995)
10.5* Revolving Credit Agreement and Letter of Credit Issuance dated September
25, 1997 by and among the Company, PNC Bank, N.A. and the Financial
Institutions party thereto (incorporated herein by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for its fiscal year
ended July 31, 1997, Commission File No. 0-20490)
10.6* Second Amendment to Revolving Credit and Letter of Credit Issuance
Agreement and Waiver between the Company and PNC Bank, N.A. dated April
30, 1998 (incorporated herein by reference to Exhibit 10.49 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
April 30, 1998, Commission File No. 0-20490)
61
<PAGE> 63
EXHIBIT NO. DESCRIPTION
------------------------------------------------------------------------------
10.7* Third Amendment to the Revolving Credit and Letter of Credit Issuance
Agreement and Amendment to Revolving Credit Notes among The
Carbide/Graphite Group, Inc., the Lenders which are Parties thereto,
and PNC Bank, N.A., as the Issuing Bank and as the Agent for the
Lenders dated April 30, 1999 (incorporated herein by reference to
Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended April 30, 1999)
10.8* Fourth Amendment to the Revolving Credit and Letter of Credit
Issuance Agreement among The Carbide/Graphite Group, Inc., the
Lenders which are Parties thereto, and PNC Bank, N.A., as the Issuing
Bank and as the Agent for the Lenders dated September 8, 1999
(incorporated herein by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for its fiscal year ended July 31, 1999,
Commission File No. 0-20490
10.9* Fifth Amendment to the Revolving Credit and Letter of Credit Issuance
Agreement among The Carbide/Graphite Group, Inc., the Lenders which
are Parties thereto, and PNC Bank, N.A., as the Issuing Bank and as
the Agent for the Lenders dated December 10, 1999 (incorporated
herein by reference to Exhibit 10.32 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1999,
Commission File No. 0-20490)
10.10* Letter Amendment and Waiver to the Revolving Credit and Letter of
Credit Issuance Agreement among The Carbide/Graphite Group, Inc., the
Lenders which are Parties thereto, and PNC Bank, N.A., as the Issuing
Bank and as the Agent for the Lenders dated May 22, 2000
(incorporated herein by reference to Exhibit 10.33 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April
30, 2000, Commission File No. 0-20490)
10.11(a) Letter Amendment and Waiver to the Revolving Credit and Letter of
Credit Issuance Agreement among The Carbide/Graphite Group, Inc., the
Lenders which are Parties thereto, and PNC Bank, N.A., as the Issuing
Bank and as the Agent for the Lenders dated November 13, 2000
10.11(b) Warrant Agreement between The Carbide/Graphite Group, Inc. and the
Warrantholders parties thereto dated November 13, 2000
10.11(c) Form of Warrant, Series A associated with the Warrant Agreement dated
November 13, 2000
10.11(d) Form of Warrant, Series B associated with the Warrant Agreement dated
November 13, 2000
10.12* Employment Agreement dated September 1, 1999 between the Company and
Walter B. Fowler (incorporated herein by reference to Exhibit 10.10
to the Company's Annual Report on Form 10-K for its fiscal year ended
July 31, 1999, Commission File No. 0-20490)
10.13 Employment Agreement dated February 1, 2000 between the Company and
Stephen D. Weaver
10.14* Separation Agreement dated April 25, 1997 between the Company and
Walter E. Damian (incorporated herein by reference to Exhibit 10.21
to the Company's Annual Report on Form 10-K for its fiscal year ended
July 31, 1997, Commission File No. 0-20490)
10.15* Separation Agreement dated April 25, 1997 between the Company and Jim
J. Trigg (incorporated herein by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for its fiscal year ended July
31, 1997, Commission File No. 0-20490)
10.16* Separation Agreement dated August 11, 1999 between the Company and
Ararat Hacetoglu (incorporated herein by reference to Exhibit 10.14
to the Company's Annual Report on Form 10-K for its fiscal year ended
July 31, 1999, Commission File No. 0-20490)
10.17* Separation Agreement dated October 6, 1999 between the Company and
Michael F. Supon(incorporated herein by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for its fiscal year ended
July 31, 1999, Commission File No. 0-20490)
10.18* 1995 Stock-Based Incentive Compensation Plan of the Company
(incorporated herein by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1, Registration No. 33-31408)
10.19* Amendment to 1995 Stock-Based Incentive Compensation Plan of the
Company dated August 26, 1996 (incorporated herein by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K for its
fiscal year ended July 31, 1996, Commission File No. 0-20490)
62
<PAGE> 64
EXHIBIT NO. DESCRIPTION
------------------------------------------------------------------------------
10.20* Agreement under the 1995 Stock-Based Incentive Plan (incorporated herein
by reference to Exhibit 10.22 to the Company's Registration Statement on
Form S-1, Registration No. 33-91102)
10.21* Non-Employee Director Stock-Based Incentive Compensation Plan of the
Company dated August 26, 1996 (incorporated herein by reference to
Exhibit 10.27 to the Company's Annual Report on Form 10-K for its fiscal
year ended July 31, 1996, Commission File No. 0-20490)
10.22* Incentive Bonus Plan of the Company (incorporated herein by reference to
Exhibit 10.33 to the Company's Annual Report on Form 10-K for its fiscal
year ended July 31, 1997, Commission File No. 0-20490)
10.23* Supplemental Executive Savings Plan of the Company (incorporated herein
by reference to Exhibit 10.31 to the Company's Annual Report on Form
10-K for its fiscal year ended July 31, 1996, Commission File No.
0-20490)
10.24* The 1998 Stock-Based Incentive Compensation Plan (incorporated herein by
reference from Exhibit 10.32 of the Company's Quarterly Report on Form
10-Q for the quarterly period ended January 31, 1999)
10.25* Replacement Power Agreement between the Power Authority of the State of
New York and the Company dated October 17, 1994 (incorporated herein by
reference to Exhibit 10.31 to the Company's Registration Statement on
Form S-1, Registration No. 33-91102)
10.26* Acetylene Purchase Agreement dated as of January 1, 1985 between BOC (as
predecessor to the Company) and GAF Corporation (incorporated herein by
reference to Exhibit 10.32 to the Company's Registration Statement on
Form S-1, Registration No. 33-91102)
10.27* Amendment to the Acetylene Supply Agreement between Air Products &
Chemicals and the Company dated as of October 21, 1994 (incorporated
herein by reference to Exhibit 10.33 to the Company's Registration
Statement on Form S-1, Registration No. 33-91102)
10.28* Acetylene Agreement dated January 1, 1975, as amended June 12, 1978 and
February 10, 1982, between Airco, Inc. and DuPont (incorporated herein
by reference to Exhibit 10.34 to the Company's Registration Statement on
Form S-1, Registration No. 33-91102)
10.29* Agreement between the Company (Carbide Unit), Calvert City, Kentucky,
and the Oil, Chemical and Atomic Workers, International Union, AFL-CIO
Local 3-556, dated February 1, 1996 (incorporated herein by reference to
Exhibit 10.38 to the Company's Annual Report on Form 10-K for its fiscal
year ended July 31, 1996, Commission File No. 0-20490)
10.30* Agreement between the Company (Electrode Unit) and International Union
of Electrical, Technical Salaried Machine and Furniture Workers, AFL-CIO
Local Union 502, dated June 7, 1999 (incorporated herein by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K for its fiscal
year ended July 31, 1999, Commission File No. 0-20490)
10.31* Agreement by and between the Company (Carbide Division), Louisville,
Kentucky Plant, and International Brotherhood of Firemen and Oilers
Local No. 320, Affiliated with the AFL-CIO, dated July 1, 1996
(incorporated herein by reference to Exhibit 10.40 to the Company's
Annual Report on Form 10-K for its fiscal year ended July 31, 1996,
Commission File No. 0-20490)
10.32* Agreement between the Company (Electrode Unit) and the Oil, Chemical and
Atomic Workers International Union and Local Union Number 8-23516, dated
January 25, 1999 (incorporated herein by reference to Exhibit 10.29 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended January 31, 1999)
10.33* Master Lease between the Company and PNC Leasing Corp. dated January 27,
1997 (incorporated herein by reference to Exhibit 10.43 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 30,
1997, Commission File No. 0-20490)
63
<PAGE> 65
EXHIBIT NO. DESCRIPTION
------------------------------------------------------------------------------
21.1* Subsidiaries and Affiliates of the Company (incorporated herein by
reference to Exhibit 21.1 to the Company's Annual Report on Form 10-K
for its fiscal year ended July 31, 1997, Commission File No. 0-20490)
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
* Exhibit has previously been filed with the Commission and is herein
incorporated by reference.
(b) Reports on Form 8-K
The Company did not file any reports on form 8-K for the quarterly period ended
July 31, 2000.
64
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on November 14,
2000.
THE CARBIDE/GRAPHITE GROUP, INC.
By: /s/ Walter B. Fowler
---------------------------------
(WALTER B. FOWLER)
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on
November 14, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
------------------------------------------------------------------------------------------------------------
<S> <C>
/s/ Walter B. Fowler Chairman of the Board, President, Chief Executive Officer and
---------------------------------------- Director (Principal Executive Officer)
(WALTER B. FOWLER)
/s/ William M. Thalman Vice President-Treasurer
---------------------------------------- (Principal Financial Officer)
(WILLIAM M. THALMAN)
/s/ Jeffrey T. Jones Vice President-Controller
---------------------------------------- (Principal Accounting Officer)
(JEFFREY T. JONES)
/s/ Ararat Hacetoglu Vice President and General Manager, Carbide Products
----------------------------------------
(ARARAT HACETOGLU)
/s/ Stephen D. Weaver Senior Vice President and General Manager,
---------------------------------------- Electrodes and Graphite Specialty Products
(STEPHEN D. WEAVER)
/s/ Jim J. Trigg Vice President and General Manager, Seadrift Coke, L.P.
----------------------------------------
(JIM J. TRIGG)
/s/ James R. Ball Director
----------------------------------------
(JAMES R. BALL)
/s/ Paul F. Balser Director
----------------------------------------
(PAUL F. BALSER)
/s/ Robert M. Howe Director
----------------------------------------
(ROBERT M. HOWE)
/s/ Ronald B. Kalich Director
----------------------------------------
(RONALD B. KALICH)
/s/ Nicholas T. Kaiser Director
----------------------------------------
(NICHOLAS T. KAISER)
/s/ Charles E. Slater Director
----------------------------------------
(CHARLES E. SLATER)
</TABLE>
65
<PAGE> 67
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
The Carbide/Graphite Group, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated September 8, 2000, except for paragraphs 2 through 5 of Note 6 as to which
the date is November 13, 2000 appearing on page 24 of the 2000 Annual Report on
Form 10-K of The Carbide/Graphite Group, Inc. also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania 15219
September 8, 2000, except for
paragraphs 2 through 5 of Note 6
as to which the date is
November 13, 2000
66
<PAGE> 68
SCHEDULE II
THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended July 31, 2000, 1999 and 1998 (in thousands)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E Col. F
----------------------------------------------------------------------------------------------------------------------
Additions
--------------------------
Balance at
Beginning Charged Charged to Balance at
of Period to Expense Other Accounts Deductions* End of Period
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended July 31, 2000 $ 819 $301 -- $ 143 $ 977
Year Ended July 31, 1999 2,025 120 -- 1,326 819
Year Ended July 31, 1998 2,029 -- -- (4) 2,025
======================================================================================================================
</TABLE>
* Represents uncollectible accounts written off and recoveries of customer
accounts previously reserved for.
67
