10-K405 1 j8492301e10-k405.txt PERIOD YEAR ENDED 7/31/2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED 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 ----------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: ----------------------- 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 2 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. 1 3 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. 2 4 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. 3 5 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:
FISCAL 2000 ---------------------------------------------- Product Category Net Sales % of Total ------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 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 ------------------------------------------------------------------------------------------------------------------ Total graphite electrode product net sales $158,818 100.0% ==================================================================================================================
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. 4 6 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:
FISCAL 2000 ------------------------------------------- Product Category Net Sales % of Total ----------------------------------------------------------------------------------------------------------------- (dollars in thousands) 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 ----------------------------------------------------------------------------------------------------------------- Total calcium carbide product net sales $48,537 100.0% =================================================================================================================
5 7 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. 6 8 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 7 9 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 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 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:
Area (approximate Owned Location Use square feet) or Leased ----------------------------------------------------------------------------------------------------------------------- Graphite electrode products facilities: 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 =======================================================================================================================
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 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 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 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 15 ITEM 6 SELECTED FINANCIAL DATA
Year Ended July 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts, percentages and pricing information) STATEMENTS OF OPERATIONS DATA(1): 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 -------------------------------------------------------------------------------------------------------------
(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 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:
Year Ended July 31, 2000 1999 1998 ------------------------------------------------------------------------------------------------------- (dollar amounts in thousands) 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) =======================================================================================================
15 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. 16 18 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 17 19 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 18 20 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. 19 21 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 20 22 $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. 21 23 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. 22 24 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 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 26
CONSOLIDATED STATEMENTS OF OPERATIONS THE CARBIDE/GRAPHITE GROUP, INC. Year Ended July 31, 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share information) 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 -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 25 27
CONSOLIDATED BALANCE SHEETS THE CARBIDE/GRAPHITE GROUP, INC. July 31, 2000 1999 --------------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share information) ASSETS 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 ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 26 28
CONSOLIDATED STATEMENTS OF CASH FLOWS THE CARBIDE/GRAPHITE GROUP, INC. Year Ended July 31, 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------- (in thousands) 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 -- -- -- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 27 29
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) 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) --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 28 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 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):
Per Share Income (Loss) Shares Amount ------------------------------------------------------------------------------------------------------------ 2000 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) ------------------------------------------------------------------------------------------------------------
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 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):
July 31, 2000 1999 --------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------
As of July 31, 2000 and 1999, the Company held forward foreign currency contracts in the following foreign denominations (in thousands):
2000 1999 -------------------------- ---------------------------- Market Market Contract Value Contract Value July 31, Value Gain (Loss) Value Gain (Loss) ------------------------------------------------------------------------------------------------------------------------ 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) ------------------------------------------------------------------------------------------------------------------------
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 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):
2000 1999 --------------------------- ----------------------------- MARKET Market CONTRACT VALUE Contract Value July 31, VALUE GAIN (LOSS) Value Gain (Loss) ----------------------------------------------------------------------------------------------------------------- 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 -----------------------------------------------------------------------------------------------------------------
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 34 4. INCOME TAXES The components of the provision (benefit) for income taxes related to operations included the following (in thousands):
Year Ended July 31, 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- Current: 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) -----------------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory income taxes to effective taxes follows (in thousands):
Year Ended July 31, 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- 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) -----------------------------------------------------------------------------------------------------------------------
The components of deferred tax assets and liabilities follow (in thousands):
2000 1999 ------------------------------ ----------------------------- DEFERRED TAX DEFERRED TAX Deferred Tax Deferred Tax July 31, ASSETS LIABILITIES Assets Liabilities ----------------------------------------------------------------------------------------------------------------- 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 -----------------------------------------------------------------------------------------------------------------
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 35 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following (in thousands):
July 31, 2000 1999 ------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------
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 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 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 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):
Pension Plans OPEB Plans ------------------------- ------------------------ 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------------------------------------------
37 39 The following is a reconciliation of the beginning and ending fair values of plan assets for the Company's pension plans (in thousands):
Pension Plans --------------------------------- 2000 1999 ----------------------------------------------------------------------------------------------------------- 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 -----------------------------------------------------------------------------------------------------------
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):
Pension Plans OPEB Plans --------------------------- ---------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------ 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) ------------------------------------------------------------------------------------------------------------------
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):
Pension Plans OPEB Plans ----------------------------------- ---------------------------------- 2000 1999 1998 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------------
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 40 The following assumptions were used in the accounting for the Company's pension plans and OPEB Plans:
2000 1999 1998 --------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------
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.
Year Ended July 31, 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------- Options outstanding, beginning of year: 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 -----------------------------------------------------------------------------------------------------------------
* 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 41 The following is a summary of the characteristics of the options outstanding as of July 31, 2000:
Options Outstanding Range 1 Range 2 Total -------------------------------------------------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------------------------------------------------
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):
2000 1999 1998 --------------------------- ---------------------- --------------------------- Actual Pro Forma Actual Pro Forma Actual Pro Forma ------------------------------------------------------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------------------------------------------------------
Significant assumptions used in determining fair value and compensation cost for stock options in accordance with SFAS #123 included the following:
2000 1999 1998 ----------------------------------------------------------------------------------------------------------------- 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 -----------------------------------------------------------------------------------------------------------------
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 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 43 Segment information is as follows (in thousands):
Year Ended July 31, 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------- NET SALES TO CUSTOMERS BY PRODUCT LINE: 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 ----------------------------------------------------------------------------------------------------------------------
* 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 44 11. CASH FLOW INFORMATION Net cash payments for interest and income taxes were as follows (in thousands):
Year Ended July 31, 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------- Interest $8,191 $7,572 $10,196 Income taxes (received) paid (8,463) 106 6,627 --------------------------------------------------------------------------------------------------------------------
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 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):
Year Ended July 31, 2000: 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FISCAL YEAR ----------------------------------------------------------------------------------------------------------------------- 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 -----------------------------------------------------------------------------------------------------------------------
* 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 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.
Name Age Position --------------------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------------------
(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 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 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 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
Long-Term Annual Compensation Compensation ---------------------------------- ------------- Common Stock Other Annual Underlying All Other Name and Principal Position Year Salary Bonus(1) Compensation Options(2) Compensation -------------------------------------------------------------------------------------------------------------------- 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 ====================================================================================================================
(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 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
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% ------------------------------------------------------------------------------------------------------------- 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) -- -- -- -- -- -- =============================================================================================================
(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
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 ------------------------------------------------------------------------------------------------------------------------------- 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 -- -- -- ===============================================================================================================================
(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 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 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 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 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 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. 54 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 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. 56 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 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.
Number of Shares Percent Name Beneficially Owned of Class ----------------------------------------------------------------------------------------------------- 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 ======================================================================================================
(1) Shares are owned by Longleaf Partners Small-Cap Fund for which Southeastern Asset Management, Inc. is the investment adviser. 58 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.
Number of Shares Percentage Name of Officer or Director Beneficially Owned(1) of Class(2) ----------------------------------------------------------------------------------------------------- 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 =====================================================================================================
(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 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 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 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 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 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 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.
SIGNATURE TITLE ------------------------------------------------------------------------------------------------------------ /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)
65 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 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)
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 ---------------------------------------------------------------------------------------------------------------------- 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 ======================================================================================================================
* Represents uncollectible accounts written off and recoveries of customer accounts previously reserved for. 67