-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SlAlDuauS6nysSXGcjmCZ8FHwgfNZyOOF9CKXMLjOh+2MWE+zhPjhBn+1OavHAI5 Wc1Uktw2Guu1yfwcKEecPg== 0000950128-00-000526.txt : 20000315 0000950128-00-000526.hdr.sgml : 20000315 ACCESSION NUMBER: 0000950128-00-000526 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARBIDE GRAPHITE GROUP INC /DE/ CENTRAL INDEX KEY: 0000888918 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 251575609 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-15055 FILM NUMBER: 568990 BUSINESS ADDRESS: STREET 1: ONE GATEWAY CTR STREET 2: 19TH FL CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4125623700 MAIL ADDRESS: STREET 1: ONE GATEWAY CTR STREET 2: 19TH FL CITY: PITTSBURGH STATE: PA ZIP: 15222 10-Q 1 THE CARBIDE/GRAPHITE GROUP, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------ FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 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 Charter) Delaware 25-1575609 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Code) One Gateway Center, 19th Floor Pittsburgh, PA 15222 (412) 562-3700 (Address, including zip code, and telephone number, including area code, of principle executive offices) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of the close of business on March 10, 2000, there were 8,331,342 shares of the Registrant's $0.01 par value Common Stock outstanding. 2 THE CARBIDE/GRAPHITE GROUP, INC. INDEX TO FORM 10-Q ITEM DESCRIPTION PAGE ------ ------------------------------------------------------------ ------ PART I 1 Index to Financial Statements .............................. 2 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 14 3 Quantitative and Qualitative Disclosure About Market Risk ..................................... 20 PART II 1 Legal Proceedings .......................................... 21 2 Changes in Securities ...................................... * 3 Defaults Upon Senior Securities ............................ * 4 Submission of Matters to a Vote of Security Holders ........ 24 5 Other Information .......................................... * 6 Index to Exhibits and Reports on Form 8-K .................. 25 Signatures ................................................. 26 - ------------- * Item not applicable to the Registrant for this filing on Form 10-Q. 1 3 PART I Item 1 INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Condensed Consolidated Balance Sheets as of January 31, 2000 and July 31, 1999 .................................................. 3 Unaudited Consolidated Statements of Operations for the Quarters and Six Months Ended January 31, 2000 and 1999 ..................... 4 Unaudited Consolidated Statement of Stockholders' Equity for the Six Months Ended January 31, 2000 ...................................... 5 Unaudited Consolidated Statements of Cash Flows for the Quarters and Six Months Ended January 31, 2000 and 1999 ..................... 6 Footnotes to Unaudited Condensed Consolidated Financial Statements ...... 7 2 4 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS as of January 31, 2000 and July 31, 1999 (in thousands, except share information)
January 31, July 31, 2000 1999 * ----------- -------- (Unaudited) ASSETS Current assets: Accounts receivable -- trade, net of allowance for doubtful accounts: $796 at January 31 and $819 at July 31 ....... $ 39,057 $ 37,997 Inventories (Note 2) ........................................ 63,099 73,621 Income taxes receivable ..................................... 4,175 6,592 Deferred income taxes ....................................... 8,055 12,093 Other current assets ........................................ 4,283 5,989 -------- -------- Total current assets .................................... 118,669 136,292 Property, plant and equipment, net .............................. 125,517 130,342 Other assets .................................................... 8,955 7,782 -------- -------- Total assets ........................................ $253,141 $274,416 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accrued expenses: Overdrafts ................................................ $ 5,944 $ 4,079 Accounts payable, trade ................................... 11,740 16,937 Antitrust claims reserve (Note 4) ......................... 9,363 21,404 Other current liabilities ................................. 14,928 18,268 -------- -------- Total current liabilities ............................. 41,975 60,688 Long-term debt (Note 5) ......................................... 111,000 110,500 Deferred income taxes and other liabilities ..................... 22,688 21,911 -------- -------- Total liabilities ..................................... 175,663 193,099 -------- -------- Stockholders' equity: Preferred stock, $0.01 par value; 2,000,000 shares authorized; none outstanding .............................. -- -- Common stock, $0.01 par value; 18,000,000 shares authorized; shares issued: 9,942,042 at January 31 and 9,937,042 at July 31; shares outstanding: 8,317,842 at January 31 and 8,337,842 at July 31 ...................................... 99 99 Additional paid-in capital .................................. 36,616 36,616 Retained earnings ........................................... 51,931 55,595 Other stockholders' equity items ............................ (11,168) (10,993) -------- -------- Total stockholders' equity .......................... 77,478 81,317 -------- -------- Total liabilities and stockholders' equity .......... $253,141 $274,416 ======== ========
* Condensed from audited fiscal 1999 balance sheet. The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements. 3 5 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS for the quarters and six months ended January 31, 2000 and 1999 (in thousands, except share and per share data)
Quarter Ended January 31, Six Months Ended January 31, ------------------------- ---------------------------- 2000 1999 2000 1999 -------- -------- -------- --------- (Unaudited) (Unaudited) Net sales ........................................ $53,634 $58,165 $104,757 $127,517 Operating costs and expenses: Cost of goods sold (Note 2) .................. 54,942 49,469 99,645 108,801 Selling, general and administrative .......... 3,243 3,398 6,223 6,982 Other expense (Note 6) ....................... - - - 8,043 ------- ------- -------- -------- Operating income (loss) .................. (4,551) 5,298 (1,111) 3,691 Other costs and expenses: Interest expense, net ........................ 2,459 1,475 4,551 2,933 ------- ------- -------- -------- Income (loss) before income taxes ........ (7,010) 3,823 (5,662) 758 Provision for (benefit from) taxes (Note 3) ..... (2,454) 1,337 (1,998) 265 ------- ------- -------- -------- Net income (loss) ....................... $(4,556) $ 2,486 $ (3,664) $ 493 ======= ======= ======== ======== Earnings per share information (Note 1): Weighted average common shares outstanding .................................... 8,314,509 8,353,342 8,326,175 8,440,459 --------- --------- --------- --------- Weighted average common and common equivalent shares outstanding .................. - 8,380,867 - 8,468,833 --------- --------- --------- --------- Net income (loss): Basic ....................................... $(0.55) $0.30 $(0.44) $0.06 ====== ===== ====== ===== Diluted ..................................... $(0.55) $0.30 $(0.44) $0.06 ====== ===== ====== =====
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements. 4 6 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY for the six months ended January 31, 2000 (in thousands, except share amounts)
Common Stock Additional Other Comprehensive -------------------------- Paid-In Retained Stockholders' Loss Shares Amount Capital Earnings Equity Items ------------- ------ ------- ---------- --------- ------------- Balance at July 31, 1999 * .... 9,937,042 $99 $36,616 $55,595 $(10,993) Net loss ...................... $ (3,664) (3,664) ======== Exercise of stock options ..... 5,000 Purchase of treasury stock .... (175) --------- --- ------- ------- ------- Balance at January 31, 2000 (Unaudited) ............ 9,942,042 $99 $36,616 $51,931 $(11,168) ========= === ======= ======= ========
- ---------- * Condensed from audited fiscal year 1999 statement of stockholders' equity. The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements. 5 7 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS for the quarters and six months ended January 31, 2000 and 1999 (in thousands)
Quarter Ended January 31, Six Months Ended January 31, ------------------------- ---------------------------- 2000 1999 2000 1999 ---------- --------- -------- --------- (Unaudited) (Unaudited) Net income (loss) ........................................ $ (4,556) $ 2,486 $ (3,664) $ 493 Adjustments for non-cash transactions: Depreciation and amortization .......................... 4,888 4,161 9,835 8,580 Amortization of debt issuance costs .................... 66 36 119 72 Amortization of intangible assets ...................... 16 22 29 43 Changes in deferred taxes .............................. 4,038 10 4,038 (1,843) Loss on the impairment of assets ....................... - - - 5,742 Increase (decrease) in cash from changes in: Accounts receivable .................................... 1,558 4,190 (1,180) 3,411 Inventories ............................................ 12,234 (3,394) 10,522 (3,223) Income taxes ........................................... (4,850) 1,275 2,417 443 Other current assets ................................... 992 189 1,706 739 Accounts payable and accrued expenses .................. (10,664) (12,849) (20,578) (10,845) Other non-current assets and liabilities, net ........... (87) 95 (424) 599 -------- -------- -------- ------- Net cash provided by (used for) operations ......... 3,635 (3,779) 2,820 4,211 -------- -------- -------- ------- Investing activities: Capital expenditures ................................... (1,892) (3,172) (5,010) (5,971) -------- -------- -------- ------- Net cash used for investing activities ............. (1,892) (3,172) (5,010) (5,971) -------- -------- -------- ------- Financing activities: Proceeds from revolving credit facility ................ 26,750 15,300 48,250 33,770 Repayment on revolving credit facility ................. (28,950) (12,350) (47,750) (30,970) Overdrafts and other ................................... 457 4,001 1,690 (1,040) -------- -------- -------- ------- Net cash provided by (used for) financing activities .............. (1,743) 6,951 2,190 1,760 -------- -------- -------- ------- Net change in cash and cash equivalents .................. - - - - Cash and cash equivalents, beginning of period ........... - - - - -------- -------- -------- ------- Cash and cash equivalents, end of period ................. - - - - ======== ======== ======== =======
The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements. 6 8 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Carbide/Graphite Group, Inc. and Subsidiaries herein are referenced as the "Company." The Company's current fiscal year ends July 31, 2000. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: INTERIM ACCOUNTING The Company's Annual Report on Form 10-K for its fiscal year ended July 31, 1999 includes additional information about the Company, its operations and its consolidated financial statements, and contains a summary of significant accounting policies followed by the Company in preparation of its consolidated financial statements and should be read in conjunction with this quarterly report on Form 10-Q. These policies were also followed in preparing the Unaudited Condensed Consolidated Financial Statements included herein. The 1999 year-end consolidated balance sheet data contained herein were derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments that are of a normal and recurring nature necessary for a fair statement of the results of operations of these interim periods have been included. The net loss for the six months ended January 31, 2000 is not necessarily indicative of the results to be expected for the full fiscal year. The Management Discussion and Analysis that follows these notes contains additional information on the results of operations and financial position of the Company. These comments should be read in conjunction with these financial statements. EARNINGS PER SHARE The following tables provide a reconciliation of the income and share amounts for the basic and diluted earnings per share computations for the quarters and six months ended January 31, 2000 and 1999 (dollar amounts in thousands):
For the quarters ended January 31, --------------------------------------------------------------------------------- 2000 1999 ------------------------------------ ------------------------------------- Weighted Per Weighted Per Income Average Share Income Average Share (Loss) Shares Amount (Loss) Shares Amount ------ -------- ------ ------ -------- ------ Basic earnings per share....... $(4,556) 8,314,509 $(0.55) $2,486 8,353,342 $0.30 ====== ===== Effect of dilutive securities: Options for common stock..... - - - 27,525 ------- --------- ------ --------- Diluted earnings per share .... $(4,556) 8,314,509 $(0.55) $2,486 8,380,867 $0.30 ======= ========= ====== ====== ========= =====
7 9 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
For the six months ended January 31, --------------------------------------------------------------------------------- 2000 1999 ----------------------------------- --------------------------------- Weighted Per Weighted Per Income Average Share Income Average Share (Loss) Shares Amount (Loss) Shares Amount ------ ------ ------ ------ ------ ------ Basic earnings per share....... $(3,664) 8,326,175 $(0.44) $493 8,440,459 $0.06 ====== ===== Effect of dilutive securities: Options for common stock..... - - - 28,374 ------- --------- ---- --------- Diluted earnings per share .... $(3,664) 8,326,175 $(0.44) $493 8,468,833 $0.06 ======= ========= ====== ==== ========= =====
The weighted-average number of options for common stock outstanding for both the quarter and six months ended January 31, 2000 was 688,900, versus 441,000 and 442,500 for the quarter and six months ended January 31, 1999, 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 quarter and six months ended January 31, 2000, common equivalent shares were excluded from the diluted earnings per share computation for those periods as their effect would have been anti-dilutive. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Company is required to adopt Statement of Financial Accounting Standards #133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS #133) for all of the quarters in its fiscal year ending July 31, 2001. SFAS #133 establishes accounting and reporting standards for derivatives and hedging activities. The Company has not yet completed its evaluation of the financial accounting and reporting impact of SFAS #133. 2. INVENTORIES: Inventories consisted of the following (in thousands):
January 31, July 31, 2000 1999 ----------- -------- Finished goods..................... $ 18,630 $ 22,386 Work in process.................... 34,186 43,723 Raw materials ..................... 13,219 13,429 -------- -------- 66,035 79,538 LIFO reserve ...................... (13,809) (16,487) -------- -------- 52,226 63,051 Supplies .......................... 10,873 10,570 -------- -------- $ 63,099 $ 73,621 ======== ========
8 10 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED The decline in inventory values from July 31, 1999 to January 31, 2000 was primarily due to the Company's working capital improvement program. The Company has temporarily reduced graphite electrode and needle coke production to lower inventory levels. The Company estimates that its cost of goods sold for the quarter and six months ended January 31, 2000 includes approximately $7 million in fixed costs that would have been capitalized into inventory had the Company been operating at normal production levels during the quarter. 3. INCOME TAXES: The provision for income taxes for the quarters and six months ended January 31, 2000 and 1999 are summarized by the following effective tax rate reconciliations:
Quarter Ended Six Months Ended January 31, January 31, -------------------- ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Federal statutory tax rate ................ (35.0)% 35.0% (35.0)% 35.0% Effect of: State taxes, net of federal benefit .. 1.4 1.4 1.4 1.4 Foreign sales corporation benefit .... (1.6) (1.6) (1.6) (1.6) Other ................................ 0.2 0.2 (0.1) 0.2 ----- ---- ----- ---- Effective tax rate ................. (35.0)% 35.0% (35.3)% 35.0% ===== ==== ===== ====
The income tax benefits for the quarter and six months ended January 31, 2000 were recorded based on the Company's projected effective income tax rate for the fiscal year ending July 31, 2000. 4. CONTINGENCIES: In May 1997, the Company was served with a subpoena issued by a Grand Jury empanelled by the United States District Court for the Eastern District of Pennsylvania. The Company was advised by attorneys for the 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 past five years. The Company is cooperating with the DOJ in the investigation. The DOJ has granted the Company and certain former and present senior executives the opportunity to participate in its Corporate Leniency Program and the Company has entered into an agreement with the DOJ under which the Company and such executives who cooperate will not be subject to criminal prosecution with respect to the investigation if charges are issued by the Grand Jury. Under the agreement, the Company has agreed to use its best efforts to provide for restitution to its domestic customers for actual damages if any conduct of the Company which violated the Federal Antitrust Laws in the manufacture and sale of such graphite products caused damage to such customers. 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 9 11 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 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. 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 a third amended complaint. 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 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 agreed to plead or have pleaded guilty to antitrust conspiracy charges filed by the DOJ and have agreed to or been ordered to pay fines and, in the case of Messrs. Krass and Hart, have agreed to serve prison sentences, in connection with those guilty pleas or agreements to plead guilty. 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 10 12 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED Commission. On January 24, 2000, the European Commission adopted a Statement of Objections against the Company, SGL Carbon AG, UCAR International, Inc., VAW Aluminum AG, Showa Denko KK, Tokai Carbon Co. Ltd., Nippon Carbon Co. Ltd. and SEC Corporation. The Company is in the process of preparing a response to the Statement of Objections. 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 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 and the effect of the possible additional payments ("most favored nations") noted above, (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 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 January 31, 2000, $35.6 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 or otherwise not material in the judgement of management. Management does not believe that its loss exposure related to these cases is materially greater than amounts provided in the consolidated balance sheet as of January 31, 2000. As of January 31, 2000, a $0.2 million reserve has been recorded to provide for estimated exposure on claims for which a loss is deemed probable. 5. LONG-TERM DEBT: In connection with the tender of substantially all of the Company's 11.5% Senior Notes in fiscal 1998, the Company entered into an agreement with a consortium of banks led by PNC Bank 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). During the quarter ended January 31, 2000, the 1997 Revolving Credit Facility was amended which resulted in a $10 million reduction in the facility commitment to $140 million as of January 31, 2000. The amendment was obtained primarily to allow the Company to complete its working capital improvement program. The most restrictive covenants under the 1997 Revolving Credit Facility include a maximum Consolidated Total Indebtedness to EBITDA Ratio of 3.75 to 1.0, a minimum Interest Coverage 11 13 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED Ratio of 3.5 to 1.0 and a minimum Consolidated Tangible Net Worth, all as defined in the 1997 Revolving Credit Facility agreement. The amendment temporarily reduces the minimum Interest Coverage Ratio, reduces the minimum Consolidated Tangible Net Worth requirement and temporarily increases the maximum Consolidated Total Indebtedness to EBITDA Ratio to accommodate the expected impact of a working capital improvement program. The 1997 Revolving Credit Facility agreement excludes the Antitrust Charge from EBITDA for both pricing and covenant calculation purposes. Interest under the 1997 Revolving Credit Facility is based on, at the option of the Company, either PNC Bank's prime rate or a floating LIBOR rate plus a spread based on a leverage calculation (specifically, the Consolidated Total Indebtedness to EBITDA Ratio). As a result of the amendment, interest costs will be calculated based on a floating LIBOR rate plus 2.25% until the Interest Coverage Ratio increases above 3.5 to 1.0 and the Consolidated Total Indebtedness to EBITDA Ratio decreases below 3.75 to 1.0. As of January 31, 2000, the interest rate on borrowings outstanding under the 1997 Revolving Credit Facility was 8.1%. The 1997 Revolving Credit Facility is collateralized with receivables, inventory and substantially all of the Company's property, plant and equipment. Repayment of funds borrowed under the credit agreement is not required until the expiration of the facility. As of January 31, 2000, the Company had $22.2 million available under the 1997 Revolving Credit Facility. As of January 31, 2000, borrowings totaled $111.0 million and outstanding letters of credit were $6.8 million. 6. OTHER ITEMS: OTHER EXPENSE During fiscal 1999, the Company closed certain baking and graphitizing operations at its St. Marys, Pennsylvania plant. Other expense in the six months ended January 31, 1999 represents 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 during the Company's fiscal year ended July 31, 1999. SHARE REPURCHASE PROGRAM During the quarter ended January 31, 2000, the Company repurchased 25,000 shares of Common Stock under its share repurchase program at a total cost of $0.2 million. The Company has repurchased 492,200 shares of Common Stock at a total cost of $5.9 million under its share repurchase program. 14 THE CARBIDE/GRAPHITE GROUP, INC. AND SUBSIDIARIES FOOTNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 7. SEGMENT INFORMATION: Information about the Company's reportable segments as of January 31, 2000 and July 31, 1999 and for the quarters and six months ended January 31, 2000 and 1999 follows (amounts in thousands):
Quarter Ended Six Months Ended January 31, January 31, ------------------------- -------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (Unaudited) (Unaudited) Net sales to customers: Graphite electrode products ................ $ 41,935 $ 44,595 $ 81,589 $ 98,098 Calcium carbide products ................... 11,699 13,570 23,168 29,419 -------- -------- -------- -------- Total net sales to customers ........... 53,634 58,165 104,757 127,517 -------- -------- -------- -------- Intercompany sales, at market prices: Graphite electrode products ................ 26 48 50 95 Eliminations ............................... (26) (48) (50) (95) -------- -------- -------- -------- Total net sales ........................ $ 53,634 $ 58,165 $104,757 $127,517 ======== ======== ======== ======== Operating income (loss): Graphite electrode products (a) ............ $ (3,378) $ 5,832 $298 $ 12,608 Calcium carbide products ................... 202 940 1,064 2,376 Unallocated corporate ...................... (1,375) (1,474) (2,473) (11,293) -------- -------- -------- -------- Operating income (loss) ................ $ (4,551) $ 5,298 $ (1,111) $ 3,691 ======== ======== ======== ======== Depreciation and amortization: Graphite electrode products ................ $ 4,456 $ 3,740 $ 8,963 $ 7,734 Calcium carbide products ................... 404 393 815 792 Unallocated corporate ...................... 43 50 85 95 -------- -------- -------- -------- Depreciation and amortization .......... $ 4,903 $ 4,183 $ 9,863 $ 8,621 ======== ======== ======== ======== EBITDA: (b) Graphite electrode products ................ $ 1,078 $ 9,572 $ 9,261 $ 20,342 Calcium carbide products ................... 606 1,333 1,879 3,168 Unallocated corporate ...................... (1,332) (1,424) (2,388) (3,155) -------- -------- -------- -------- EBITDA ................................. $ 352 $ 9,481 $ 8,752 $ 20,355 ======== ======== ======== ======== January 31, July 31, Total assets: 2000 1999 ----------- -------- Graphite electrode products ................ $210,146 $224,773 Calcium carbide products ................... 26,737 27,888 Unallocated corporate ...................... 16,258 21,755 -------- -------- Total assets ........................... $253,141 $274,416 ======== ========
- ------------ (a) Excludes other expense in the six months ended January 31, 1999 which is included in "unallocated corporate expenses" (See Note 6). (b) EBITDA is defined as operating income (loss) before depreciation and amortization and other expense. EBITDA is not presented as a measure of operating results under generally accepted accounting principles. EBITDA is an important measure in assessing the performance of the Company's business segments. 13 15 PART I Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth certain financial information for the quarters and six months ended January 31, 2000 and 1999 and should be read in conjunction with the unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q:
Quarter Ended Six Months Ended January 31, January 31, ----------------------- -------------------------- 2000 1999 2000 1999 ------- ------- -------- -------- (Unaudited) (Unaudited) Net sales: Graphite electrode products .............. $41,935 $44,595 $ 81,589 $ 98,098 Calcium carbide products ................. 11,699 13,570 23,168 29,419 ------- ------- -------- -------- Total net sales .................... $53,634 $58,165 $104,757 $127,517 ======= ======= ======== ======== Percentage of net sales: Graphite electrode products .............. 78.2% 76.7% 77.9% 76.9% Calcium carbide products ................. 21.8 23.3 22.1 23.1 ------- ------- -------- -------- Total net sales .................... 100.0% 100.0% 100.0% 100.0% ======= ======= ======== ======== Gross profit as a percentage of segment net sales: Graphite electrode products .............. (4.9)% 16.2% 3.7% 15.6% Calcium carbide products ................. 6.3 10.7 9.1 11.4 Percentage of total net sales: Total gross profit margin ................ (2.4)% 15.0% 4.9% 14.7% Selling, general and administrative ...... 6.0 5.8 5.9 5.5 Operating income (loss) .................. (8.5) 9.1 (1.1) 2.9 Net income (loss) ......................... (8.5) 4.3 (3.5) 0.4
------------ Net sales for the quarter ended January 31, 2000 were $53.6 million versus $58.2 million in the prior year comparable quarter. Graphite electrode product sales for the quarter ended January 31, 2000 were $41.9 million versus $44.6 million in the prior year comparable quarter. Calcium carbide product sales were $11.7 million versus $13.6 million in the prior year comparable quarter. Net sales for the six months ended January 31, 2000 were $104.8 million versus $127.5 million in the prior year comparable period. For the six months ended January 31, 2000, graphite electrode product sales were $81.6 million compared to $98.1 million in last year's comparable period, while calcium carbide product sales were $23.2 million compared to $29.4 million last year. Within the graphite electrode products segment, graphite electrode net sales were $32.0 million, a 9.5% increase over last year's second quarter resulting from a 24.1% increase in electrode shipments. Graphite electrode shipments totaled 28.6 million pounds versus 23.0 million pounds in last year's second quarter. Domestic and 14 16 foreign electrode shipments as a percentage of total electrode shipments for the quarter ended January 31, 2000 were 55.5% and 44.5%, respectively, versus 52.8% and 47.2%, respectively, in last year's second quarter. The improvement in shipments was partially offset by an 11.8% decrease in the average price of graphite electrodes. Weakness in certain regions of the global economy continued to have a negative impact on graphite electrode transactional prices during the quarter. Also, the continuing strength of the U.S. dollar versus the Euro has eroded foreign graphite electrode net prices by an estimated 18% as compared to last year's second quarter. Domestic graphite electrode prices decreased 6.7% in the current quarter as compared to last year's second quarter as weakness in the U.S. steel industry during the second half of 1998 and first half of 1999 negatively impacted domestic pricing. Average foreign electrode net prices deceased 19.3% in the current quarter versus last year's second quarter due to the stronger U.S. dollar against the Euro. The Company expects demand for graphite electrodes to improve throughout the remainder of fiscal 2000 as the global economy improves and world-wide production of electric arc furnace steel increases. However, the continuing strength of the U.S. dollar against the Euro is expected to continue to negatively impact foreign graphite electrode net prices for the foreseeable future. Needle coke sales were $4.9 million versus $10.0 million a year ago, with the decrease resulting from a 45.7% decrease in needle coke shipments and a 10.4% decrease in average needle coke prices. Shipments and average prices for needle coke were lower during the current quarter due to weaker demand for needle coke and increased price competition in this market. The Company expects average needle coke prices to decline approximately 10% during the second half of the fiscal year ending July 31, 2000 due to aggressive price competition in the needle coke market. Graphite specialty product sales during the quarter ended January 31, 2000 were $5.1 million versus $5.3 million in the prior year comparable quarter. For the six months ended January 31, 2000, graphite electrode sales were $62.5 million, an 8.4% decrease from the prior year comparable period resulting from a 12.4% decline in average graphite electrode net prices. Partially offsetting the effects of the lower net prices was a 4.3% increase in graphite electrode shipments during the current six-month period. Shipments of graphite electrodes for the six months ended January 31, 2000 were 55.3 million pounds versus 53.1 million pounds in last year's comparable period. Domestic and foreign electrode shipments as a percentage of total electrode shipments for the six months ended January 31, 2000 were 55.1% and 44.9%, respectively, versus 54.0% and 46.0%, respectively, in the prior year comparable period. The domestic electrode price was down 8.8% while the average foreign electrode price was down 17.6%. Needle coke sales for the six months ended January 31, 2000 were $9.7 million versus $18.6 million in the prior year comparable period. The decline in needle coke sales was due to a 39.6% decline in needle coke shipments, coupled with a 13.4% decrease in average needle coke prices. Graphite specialty product sales for the six months ended January 31, 2000 were $9.4 million versus $11.3 million in the prior year comparable period, with the decline resulting from lower shipments of bulk and granular graphite. Within the calcium carbide products segment, acetylene sales (which includes pipeline acetylene and calcium carbide for fuel gas applications) decreased 26.6% to $5.6 million for the quarter ended January 31, 2000. The decrease in sales was due primarily to lower shipments. ISP, the Company's largest pipeline acetylene customer, reduced their demand for the Company's acetylene during fiscal 1999 by approximately 75% of its historical levels. This reduction in demand has continued into fiscal 2000 and may be permanent. Sales of calcium carbide for metallurgical applications were $4.6 million which was 3.7% lower than last year's comparable quarter. Weakness in the domestic steel market as well as substitute products has had a negative impact on demand for calcium carbide for metallurgical applications. Net sales of acetylene and calcium carbide for metallurgical applications are expected to remain at lower levels throughout fiscal 2000 and, potentially, beyond as a result of increased competition and weak demand. For the six months ended January 31, 2000, acetylene sales were $11.1 million, a 35.3% decrease from the prior year comparable period resulting from lower shipments. Sales of calcium carbide for metallurgical applications were $9.1 million, a 9.6% decrease from a year ago resulting primarily from lower shipments. The gross profit margin on graphite electrode product sales for the quarter ended January 31, 2000 was a negative 4.9% versus 16.2% in the prior year comparable quarter. The gross profit margin on graphite electrode 15 17 product sales for the six months ended January 31, 2000 was 3.7% versus 15.6% in the prior year comparable period. The effects of the Company's working capital improvement program negatively impacted the gross profit margin in both periods. The Company has temporarily reduced graphite electrode and needle coke production to lower inventory levels. The Company estimates that its cost of goods sold for the quarter and six months ended January 31, 2000 includes approximately $7 million in fixed costs that would have been capitalized into inventory had the Company been operating at normal production levels. 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 addition, depreciation and amortization charges were approximately $0.7 million and $1.2 million higher during the quarter and six months ended January 31, 2000, respectively. Also, the cost of decant oil, the primary raw material in the production of needle coke, has increased 70.3% and 37.1%, respectively, during the quarter and six months ended January 31, 2000 versus last year's comparable periods. The continuing rise in world petroleum prices is expected 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 sales for the quarter ended January 31, 2000 was 6.3% versus 10.7% in the prior year comparable quarter. Gross profit as a percentage of calcium carbide product sales for the six months ended January 31, 2000 was 9.1% versus 11.4% in the prior year comparable period. The decrease in the gross margin in both periods was due primarily to lower sales in the carbide business. Selling, general and administrative expenditures for the quarter ended January 31, 2000 were $3.2 million versus $3.4 million in the comparable quarter a year ago. Selling, general and administrative expenditures for the six months ended January 31, 2000 were $6.2 million versus $7.0 million in the comparable period a year ago. The decrease in expenditures for both periods was due primarily to lower departmental operating costs achieved as a result of the Company's cost saving program in fiscal 1999. During fiscal 1999, the Company announced plans to close certain baking and graphitizing operations at its St. Marys, Pennsylvania plant resulting in a 12% reduction in the Company's graphite electrode production capacity. Other expense in the six months ended January 31, 1999 represents 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. Net interest expense for the quarter ended January 31, 2000 was $2.5 million, including $2.4 million of interest expense associated with the Company's revolving credit facility and $0.1 million in bank fees. Net interest expense for the quarter ended January 31, 1999 was $1.5 million, including $1.9 million of interest expense associated with the Company's revolving credit facility and $0.1 million in bank fees, less $0.5 million in capitalized interest. Net interest expense for the six months ended January 31, 2000 was $4.6 million, including $4.4 million of interest expense associated with the Company's revolving credit facility and $0.2 million in bank fees. Net interest expense for the six months ended January 31, 1999 was $2.9 million, including $3.7 million of interest expense associated with the Company's revolving credit facility and $0.2 million in bank fees, less $1.0 million in capitalized interest. The income tax benefit for the quarter and six months ended January 31, 2000 was recorded based on the Company's projected effective income tax rate for the fiscal year ending July 31, 2000. The current year effective rate differs from the federal statutory rate due primarily to state taxes, offset by benefits derived from the Company's foreign sales corporation. The Company has implemented a working capital improvement program that is expected to be in effect for the remainder of fiscal 2000. While this program is expected to have a positive effect on operating cash flows, the program may result in the Company reporting a net loss from operations for the quarter ending April 30, 2000 and for the fiscal year ending July 31, 2000. See a more detailed description of the Company's working capital improvement program under "Liquidity and Capital Resources" below. 16 18 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Company is required to adopt Statement of Financial Accounting Standards #133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS #133) for all of the quarters in its fiscal year ending July 31, 2001. SFAS #133 establishes accounting and reporting standards for derivatives and hedging activities. The Company has not yet completed its evaluation of the financial accounting and reporting impact of SFAS #133. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY 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 $10 million in capital improvements during its fiscal year ending July 31, 2000. In addition, the Company currently estimates that it will fund approximately $20 million in antitrust payments during fiscal 2000. The recent increase in prices of oil (a major raw material for the Company's needle coke affiliate, Seadrift Coke, L.P.) has resulted in an increased working capital requirement for this raw material. The Company has implemented a working capital improvement program that is expected to be in effect for the remainder of fiscal 2000. In connection with this program, the Company has temporarily reduced graphite electrode and needle coke production in order to reduce inventory levels and further improve the Company's cost structure. This program is expected to have a positive effect on operating cash flows as cash outflows for raw materials, labor and utilities will be reduced during the period of lower production. However, the program has had and is expected to continue to have a negative impact on the Company's operating results during the period of reduced production, as the Company will not realize operating efficiencies and fixed cost absorption typical of higher levels of production. This situation may result in the Company reporting a net loss from operations for the quarter ending April 30, 2000 and for the fiscal year ending July 31, 2000. The Company believes that its cash flows from operations (including the expected benefits of its working capital improvement initiative described above) and availability under its revolving credit facility (as amended and more fully described below) will be sufficient to fund all of its currently planned liquidity needs through at least the expiration of its revolving credit facility in December 2003. However, the terms and conditions of any settlements of pending antitrust claims may adversely impact the Company's expected liquidity needs. Also, the Company's operating results and expected cash flows from operations could be negatively impacted if weak demand for the Company's products continues, if the U.S. dollar continues its strong position versus the Euro or if increased oil costs continue for an extended period of time. In the event that such resources are not available to fund the Company's planned capital expenditures, service its indebtedness 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 its revolving credit facility, obtain additional funding or further delay discretionary capital projects. The negative impact of the operating factors noted above may impact the Company's compliance with the financial covenants in the 1997 Revolving Credit Facility. If the Company is not in compliance with such covenants in the future, the Company may have to obtain covenant violation waivers from its lenders or refinance its current borrowing arrangement. If the Company were required to refinance or renegotiate its 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. 17 19 In connection with the tender of substantially all of the Company's 11.5% Senior Notes in fiscal 1998, the Company entered into the 1997 Revolving Credit Facility, as amended, an agreement with a consortium of banks led by PNC Bank for a $150 million revolving credit facility with a $15 million sub-limit for letters of credit which will expire in December, 2003. During the quarter ended January 31, 2000, the 1997 Revolving Credit Facility was amended which resulted in a $10 million reduction in the facility commitment to $140 million as of January 31, 2000. The amendment was obtained primarily to allow the Company to complete its working capital improvement program. The most restrictive covenants under the 1997 Revolving Credit Facility include a maximum Consolidated Total Indebtedness to EBITDA Ratio of 3.75 to 1.0, a minimum Interest Coverage Ratio of 3.5 to 1.0 and a minimum Consolidated Tangible Net Worth, all as defined in the 1997 Revolving Credit Facility agreement. The amendment temporarily reduces the minimum Interest Coverage Ratio, reduces the minimum Consolidated Tangible Net Worth requirement and temporarily increases the maximum Consolidated Total Indebtedness to EBITDA Ratio to accommodate the expected impact of a working capital improvement program. The 1997 Revolving Credit Facility agreement excludes the Antitrust Charge from EBITDA for both pricing and covenant calculation purposes. Interest under the 1997 Revolving Credit Facility is based on, at the option of the Company, either PNC Bank's prime rate or a floating LIBOR rate plus a spread based on a leverage calculation (specifically, the Consolidated Total Indebtedness to EBITDA Ratio). As a result of the amendment, interest costs will be calculated based on a floating LIBOR rate plus 2.25% until the Interest Coverage Ratio increases above 3.50 to 1.0 and the Consolidated Total Indebtedness to EBITDA Ratio decreases below 3.75 to 1.0. As of January 31, 2000, the interest rate on borrowings outstanding under the 1997 Revolving Credit Facility was 8.1%. The 1997 Revolving Credit Facility is collateralized with receivables, inventory and substantially all of the Company's property, plant and equipment. Repayment of funds borrowed under the credit agreement is not required until the expiration of the facility. As of January 31, 2000, the Company had $22.2 million available under the 1997 Revolving Credit Facility. As of January 31, 2000, borrowings totaled $111.0 million and outstanding letters of credit were $6.8 million. On March 4, 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, including the Company's liquidity needs. During the quarter ended January 31, 2000, the Company repurchased 25,000 shares of Common Stock under its share repurchase program at a total cost of $0.2 million. In total, the Company has repurchased 492,200 shares of Common Stock at a total cost of $5.9 million under its share repurchase program. The 1997 Revolving Credit Facility allow for the repurchase of Common Stock under the share repurchase program upon the achievement of certain debt levels. CASH FLOW INFORMATION Cash flow provided by operations for the quarter ended January 31, 2000 was $3.6 million. Cash inflows from net loss plus non-cash items of $0.4 million were increased by a $3.2 million increase in cash flow from changes in working capital items. The Company's working capital improvement program resulted in $12.2 million in cash flow from inventory reduction and $1.6 million from accounts receivable. The Company also received a $1.6 million income tax refund during the quarter. Partially offsetting these cash inflows were $10.6 million in antitrust settlement and expense payments and $1.6 million in interest payments. Cash flow provided by operations for the six months ended January 31, 2000 was $2.8 million. Cash inflows from net loss plus non-cash items of $6.3 million were offset by a $3.5 million net cash outflow from changes in working capital items. Major cash inflows included $10.5 million from inventory reductions and an $8.5 million income tax refund. Offsetting these working capital cash inflows were $12.0 million in antitrust settlement and expense payments and $3.5 million in interest payments. 18 20 Investing activities for the quarter and six months ended January 31, 2000 included $1.9 million and $5.0 million, respectively, in capital expenditures. The Company believes that most of its future investing activity cash flow requirements will be for capital expenditures. Cash flow used for financing activities for the quarter ended January 31, 2000 was $1.7 million, including a $1.3 million net outflow to reduce borrowings under the 1997 Revolving Credit Facility. Cash flow provided by financing activities for the six months ended January 31, 2000 was $2.2 million, including a $1.9 million net inflow from an increase in overdrafts. OTHER ITEMS 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" has executed letters of intent to purchase certain assets of Rossborough Manufacturing Co., L.P. (Rossborough) and Reactive Metals & Alloys Corporation (Remacor). In connection with the formation of the joint venture, the Company will contribute its calcium carbide business net assets and debt to the joint venture while "non ferrum" will invest cash. Rossborough and Remacor service the steel industry by providing hot metal treatment equipment, refractories and desulfurization products and services. The newly combined company is expected to have revenues in excess of $125 million and will be financed as a stand-alone independent company. The transaction, which is expected to be completed during the Company's fiscal fourth quarter ending July 31, 2000, is subject to the negotiation and execution of definitive agreements, the receipt of appropriate governmental approvals, final corporate approvals and the arranging of necessary financing. ENVIRONMENTAL 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 preparing a proposed plan of action to achieve resolution of this issue. Such plan of action will include the installation and ongoing operation of an air emissions scrubbing unit. A preliminary cost estimate for this unit is approximately $4.0 million installed, plus $0.5 million per year in ongoing cash operating costs. The Company believes that certain costs are subject to reimbursement under an environmental indemnity agreement the Company has with The BOC Group, plc, the predecessor to the Company. The Company expects that the fine to be levied in connection with this issue will be immaterial. YEAR 2000 COMPLIANCE The Company has modified, upgraded and replaced certain components of its computer software, operating systems and manufacturing process control systems to accommodate the Year 2000 changes required for correct recording of dates in the year 2000 and beyond. The Company has adopted a comprehensive Year 2000 compliance action plan that includes (i) inventorying all of its information technology (IT) systems, manufacturing process control systems and non-IT systems, (ii) assessing these systems and resources for Year 2000 compliance, (iii) remedying and replacing non-compliant systems, (iv) testing upgraded systems for compliance, and (v) developing contingency plans. The Company has substantially completed its Year 2000 compliance program, and, while the Company continues to test and refine its contingency plans, the Company's 19 21 significant IT and non-IT systems are Year 2000 compliant. The Company does not expect to experience significant operational problems associated with Year 2000 compliance. The Company continues to evaluate the Year 2000 compliance programs of its critical customers, suppliers and service providers in an attempt to determine the adequacy of their programs in addressing the Year 2000 issue. This evaluation includes the distribution of questionnaires to such parties and the development of contingency plans that assume the failure of a third party critical to the Company's business. The Company believes that the most reasonably likely worst-case scenario for the Company with respect to the Year 2000 issue is the failure of a critical vendor, including but not limited to a utility supplier, or the failure of a critical customer, including electric arc furnace steel producers who use a substantial amount of power in their production process. A failure by a critical supplier or group of critical customers could negatively impact sales, profits and cash flows. The Company believes that the formulation of contingency plans will help mitigate exposure and losses should such a failure occur. However, because the Company's overall Year 2000 compliance is contingent upon the readiness of its critical vendors and customers, there can be no assurance that the Company's Year 2000 compliance programs will adequately address Year 2000 issues not under its direct control. 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 related to the antitrust investigations by the DOJ, 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 the antitrust reserve is adequate, there can be no assurance that future developments or other factors might not adversely affect current estimates. Such factors also include the possibility that increased demand or prices for the Company's products may not occur or continue, the success of the Company's working capital improvement initiative, 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 this and the Company's other filings with the Securities and Exchange Commission. Neither the statements contained in this report nor any reserve or charge recorded by the Company relating to civil lawsuits or claims shall be deemed to constitute an admission as to any liability in connection with the subject matter thereof. The Company does not undertake to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There have not been any material changes in the Company's exposures to market risk during the quarter ended January 31, 2000 which would require an update to the disclosures provided in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1999. 20 22 PART II Item 1 LEGAL PROCEEDINGS In May 1997, the Company was served with a subpoena issued by a Grand Jury empanelled by the United States District Court for the Eastern District of Pennsylvania. The Company was advised by attorneys for the 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 past five years. The Company is cooperating with the DOJ in the investigation. The DOJ has granted the Company and certain former and present senior executives the opportunity to participate in its Corporate Leniency Program and the Company has entered into an agreement with the DOJ under which the Company and such executives who cooperate will not be subject to criminal prosecution with respect to the investigation if charges are issued by the Grand Jury. Under the agreement, the Company has agreed to use its best efforts to provide for restitution to its domestic customers for actual damages if any conduct of the Company which violated the Federal Antitrust Laws in the manufacture and sale of such graphite products caused damage to such customers. 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. 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 a third amended complaint. 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. 21 23 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 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 agreed to plead or have pleaded guilty to antitrust conspiracy charges filed by the DOJ and have agreed to or been ordered to pay fines and, in the case of Messrs. Krass and Hart, have agreed to serve prison sentences, in connection with those guilty pleas or agreements to plead guilty. 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 Carbon AG, UCAR International, Inc., VAW Aluminum AG, Showa Denko KK, Tokai Carbon Co. Ltd., Nippon Carbon Co. Ltd. and SEC Corporation. The Company is in the process of preparing a response to the Statement of Objections. 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 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 and the effect of the possible additional payments ("most favored nations") noted above, (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 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 January 31, 2000, $35.6 million in antitrust settlements and costs had been paid. 22 24 The Company is also involved in various legal proceedings considered incidental to the conduct of its business or otherwise not material in the judgement of management. Management does not believe that its loss exposure related to these cases is materially greater than amounts provided in the consolidated balance sheet as of January 31, 2000. As of January 31, 2000, a $0.2 million reserve has been recorded to provide for estimated exposure on claims for which a loss is deemed probable. 23 25 Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 7, 1999, the Company held its Annual Meeting of Stockholders in Pittsburgh, PA (the Meeting). At the Meeting, Mr. Walter B. Fowler and Mr. Charles E. Slater were each re-elected to the Company's Board of Directors for terms expiring at the Annual Meeting of Stockholders in 2002. The remainder of the Board is comprised of Mr. Paul F. Balser, Mr. James. R. Ball, Mr. Robert M. Howe, Mr. Nicholas T. Kaiser and Mr. Ronald B. Kalich. Also at the Meeting, PricewaterhouseCoopers LLP was ratified as the Company's independent accountants for its fiscal year ending July 31, 2000. Total shares of Common Stock issued and outstanding as of October 18, 1999, the date of record for the Meeting, were 8,337,842. 5,711,366 shares of Common Stock were represented at the Meeting. Tabulations of votes cast were as follows: - -------------------------------------------------------------------------------- FOR BOARD OF DIRECTORS FOR WITHHELD AUTHORITY - -------------------------------------------------------------------------------- Walter B. Fowler 5,383,215 328,151 - -------------------------------------------------------------------------------- Charles E. Slater 5,696,815 14,551 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FOR PRICEWATERHOUSECOOPERS LLP - -------------------------------------------------------------------------------- For 5,694,843 - -------------------------------------------------------------------------------- Against 10,923 - -------------------------------------------------------------------------------- Abstain 5,600 - -------------------------------------------------------------------------------- 24 26 PART II Item 6 EXHIBITS AND REPORTS ON FORM 8-K A. INDEX TO EXHIBITS 10.32 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 period ended October 31, 1999) B. REPORTS ON FORM 8-K None. 25 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the following authorized officers on March 14, 2000. SIGNATURE TITLE - -------------------------------------------------------------------------------- /S/ WALTER B. FOWLER CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) - ------------------------- (WALTER B. FOWLER) /S/ STEPHEN D. WEAVER VICE PRESIDENT - FINANCE AND CHIEF FINANCIAL OFFICER - ------------------------- (PRINCIPAL FINANCIAL OFFICER) (STEPHEN D. WEAVER) /S/ JEFFREY T. JONES CONTROLLER - CORPORATE FINANCE - ------------------------- (PRINCIPAL ACCOUNTING OFFICER) (JEFFREY T. JONES) /S/ MICHAEL F. SUPON VICE PRESIDENT AND GENERAL MANAGER, - ------------------------- ELECTRODES AND GRAPHITE SPECIALTY PRODUCTS (MICHAEL F. SUPON) /S/ ARARAT HACETOGLU VICE PRESIDENT AND GENERAL MANAGER, - ------------------------- CALCIUM CARBIDE PRODUCTS (ARARAT HACETOGLU) /S/ JIM J. TRIGG VICE PRESIDENT AND GENERAL MANAGER, - ------------------------- SEADRIFT COKE, L.P. (JIM J. TRIGG) 26 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JUL-31-2000 AUG-01-1999 JAN-31-2000 0 0 39,853 (796) 63,099 118,669 342,847 (217,330) 253,141 41,975 111,000 0 0 99 77,379 253,141 104,757 104,757 99,645 105,868 0 0 4,551 (5,662) (1,998) (3,664) 0 0 0 (3,664) (0.44) (0.44)
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