________________________________________________________________________________
________________________________________________________________________________
FORM 10-Q
---------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ....................
to ....................
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Commission file number: (1-13888)
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UCAR INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1385548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
---------------
39 Old Ridgebury Road 06817-0001
Danbury, Connecticut (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 207-7700
---------------
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 September 30, 1998, 44,979,425 shares of common stock, par value $.01 per
share, were outstanding.
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
-------------------------------
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997........................................ Page 3
Consolidated Statements of Operations for the Three Months
ended September 30, 1998 and 1997 and for the Nine Months ended
September 30, 1998 and 1997.................................. Page 4
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1998 and 1997............................ Page 5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Nine Months ended September 30, 1998......................... Page 6
Notes to Consolidated Financial Statements..................... Page 7
Item 2. Management's Discussion and Analysis of Financial Condition
---------------------------------------------------------------------
and Results of Operations............................... Page 17
-------------------------
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings....................................... Page 29
---------------------------
Item 6. Exhibits and Reports on Form 8-K........................ Page 34
------------------------------------------
SIGNATURE............................................................. Page 35
INDEX TO EXHIBITS..................................................... Page E-1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
September 30, December 31,
ASSETS 1998 1997
---- ----
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents....................... $ 86 $ 58
Short-term investments.......................... 27 20
Notes and accounts receivable................... 205 242
Inventories:
Raw materials and supplies.................. 61 50
Work in process............................. 138 125
Finished goods.............................. 55 31
------ ------
254 206
Prepaid expenses................................ 43 40
------ ------
Total current assets.................. 615 566
------ ------
Property, plant and equipment..................... 1,295 1,289
Less: accumulated depreciation.................... 821 724
------ ------
Net fixed assets...................... 474 565
Other assets...................................... 80 102
------ ------
Total assets.......................... $ 1,169 $ 1,233
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................ $ 59 $ 76
Short-term debt................................. 31 76
Payments due within one year on long-term debt.. 61 52
Accrued income and other taxes.................. 26 36
Other accrued liabilities....................... 276 262
------ ------
Total current liabilities............. 453 502
------ ------
Long-term debt.................................... 668 604
Other long-term obligations....................... 309 313
Deferred income taxes............................. 44 47
Minority stockholders' equity in consolidated entities 13 13
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $.01, 10,000,000 shares
authorized, none issued....................... - -
Common stock, par value $.01, 100,000,000 shares
authorized, 47,381,852 shares issued at
September 30, 1998, 47,330,570 shares issued at
December 31, 1997............................. - -
Additional paid-in capital...................... 521 520
Accumulated other comprehensive income (loss)... (156) (130)
Retained earnings (deficit)..................... (591) (544)
------ ------
(226) (154)
Less: cost of common stock held in treasury,
2,402,427 shares.............................. (92) (92)
------ ------
Total stockholders' equity (deficit).. (318) (246)
------ ------
Total liabilities and stockholders'
equity (deficit)..................... $ 1,169 $ 1,233
====== ======
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ............................................................... $ 233 $ 278 $ 725 $ 806
Cost of sales ........................................................... 151 174 454 504
------ ------ ------ ------
Gross profit ............................................................ 82 104 271 302
Research and development ................................................ 2 3 6 7
Selling, administrative and other expenses .............................. 27 25 79 75
Other expense (net) ..................................................... 1 5 5 6
Restructuring charge ................................................... 86 - 86 -
Impairment loss on Russian assets ....................................... 60 - 60 -
------ ------ ------ -----
Operating profit (loss) ............................................ (94) 71 35 214
Interest expense ........................................................ 19 17 54 48
------ ------ ------ -----
Income (loss) before provision for income taxes .................. (113) 54 (19) 166
Provision for income taxes .............................................. (1) 17 26 51
------ ------ ------ -----
Income (loss) of consolidated entities ........................... (112) 37 (45) 115
Minority stockholders' share of income .................................. 1 - 2 1
UCAR share of net income from company carried at equity ................. - - - 2
------ ------ ------ -----
Net income (loss) ................................................ $ (113) $ 37 $ (47) $ 116
====== ====== ====== =====
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Basic net income (loss) per share ................................... $ (2.51) $ 0.80 $ (1.05) $ 2.52
Weighted average common shares outstanding (in thousands) ........... 44,977 45,838 44,959 46,108
====== ====== ====== ======
DILUTED EARNINGS PER COMMON SHARE:
Diluted net income per share ...................................... $ N/A $ 0.77 $ N/A $ 2.42
Weighted average common shares outstanding (in thousands) ......... - 47,711 - 48,068
====== ====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Dollars in millions)
(Unaudited)
Nine Months
Ended September 30,
-------------------
1998 1997
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (47) $ 116
Non-cash charges to net income (loss):
Depreciation.......................................... 38 38
Deferred income taxes................................. (7) (8)
Restructuring charge.................................. 86 -
Impairment loss on Russian assets..................... 60 -
Other non-cash charges.................................. 2 5
Working capital*.......................................... (79) (48)
Long-term assets and liabilities.......................... (5) 6
---- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 48 109
---- ----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (40) (46)
Purchase of subsidiaries, net of cash acquired............ - (124)
Proceeds from the sale of short-term investments.......... 22 15
Purchase of short-term investments........................ (29) (30)
Sale of assets ........................................... 2 1
---- ----
NET CASH USED IN INVESTING ACTIVITIES................ (45) (184)
---- ----
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt........................................... (47) 18
Long-term debt borrowings................................. 210 168
Long-term debt reductions................................. (138) (90)
Sale of common stock...................................... 1 5
Financing costs........................................... - (2)
Purchase of treasury stock................................ - (52)
Tax benefit arising from exercise of employee stock options - 5
---- ----
NET CASH PROVIDED BY FINANCING ACTIVITIES............ 26 52
---- ----
Net increase (decrease) in cash and cash equivalents....... 29 (23)
Effect of exchange rate changes on cash and cash equivalents (1) -
Cash and cash equivalents at beginning of period........... 58 95
---- ----
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 86 $ 72
==== ====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid for:
Interest expense........................................ $ 56 $ 50
Income taxes............................................ 44 53
*Net change in working capital by component (excluding
cash and cash equivalents, short-term investments,
deferred income taxes and short-term debt):
(Increase) decrease in current assets:
Notes and accounts receivable......................... $ 42 $ (23)
Inventories........................................... (47) 7
Prepaid expenses and other current assets............. - (1)
Antitrust investigations and related lawsuits and claims. (38) -
Decrease in payables and accruals........................ (36) (31)
---- ----
WORKING CAPITAL...................................... $ (79) $ (48)
==== ====
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
<TABLE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in millions)
(Unaudited)
<CAPTION>
Additional Comprehensive Retained Total
Common Paid-in Income Earnings Treasury Stockholders'
Stock Capital (Loss) (Deficit) Stock Equity (Deficit)
----- ------- ------ --------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997........... $ - $ 520 $ (130) $ (544) $ (92) $ (246)
Net income (loss)...................... - - - (47) - (47)
Other comprehensive income (loss):
Foreign currency translation adjustment - - (26) - - (26)
---- ---- ----- ----- ---- ----
Comprehensive income (loss)............ - - (26) (47) - (73)
Exercise of employee stock options..... - 1 - - - 1
---- ---- ----- ----- ---- -----
BALANCE AT SEPTEMBER 30, 1998.......... $ - $ 521 $ (156) $ (591) $ (92) $ (318)
==== ==== ===== ===== ==== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) INTERIM FINANCIAL PRESENTATION
The interim Consolidated Financial Statements are unaudited; however, in
the opinion of management, they have been prepared in accordance with
Rule 10-01 of Regulation S-X adopted by the Securities and Exchange
Commission (the "Commission") and reflect all adjustments (all of which
are of a normal, recurring nature) which are necessary for a fair
presentation of consolidated financial position, results of operations
and cash flows for the periods presented. Results of operations for the
nine months ended September 30, 1998 are not necessarily indicative of
the results of operations that may be expected for the entire year ending
December 31, 1998.
As used in these Notes, references to "UCAR" mean UCAR International
Inc., to "Global" mean UCAR Global Enterprises Inc., a direct, wholly
owned subsidiary of UCAR, and to the "Company" mean UCAR and its
subsidiaries (including Global), collectively. Separate financial
statements of Global are not presented because they would not be material
to holders of Subordinated Notes (as defined below).
FOREIGN CURRENCY TRANSLATION
Effective January 1, 1997, as a result of significant increases in the
rate of inflation in Mexico, the Company changed its functional currency
in Mexico to the U.S. dollar. Accordingly, translation gains and losses
are included in the Consolidated Statements of Operations for the nine
months ended September 30, 1998 and 1997, respectively.
Effective January 1, 1998, Brazil is no longer considered to be a highly
inflationary economy. Accordingly, unrealized gains and losses resulting
from translating assets and liabilities of the Brazilian operations into
U.S. dollars are accumulated in an equity account in the balance sheet
until such time as the Brazilian operations are sold or substantially or
completely liquidated.
COMPREHENSIVE INCOME (LOSS)
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company adopted SFAS 130 during the first
quarter of 1998, and earlier periods have been restated to conform with
SFAS 130. Comprehensive income (loss) of the Company consists of net
income (loss) and foreign currency translation adjustments. Comprehensive
income (loss) for the three months ended September 30, 1998 was a loss of
$122 million and for the three months ended September 30, 1997 was income
of $31 million. Comprehensive income (loss) for the nine months ended
September 30, 1998 was a loss of $73 million and for the nine months
ended September 30, 1997 was income of $106 million. The Company does not
provide for U.S. income taxes on
7
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
foreign currency translation adjustments since the existing tax and
reporting bases differences in the foreign investments are considered
essentially permanent in duration.
(2) UCAR GLOBAL ENTERPRISES INC.
UCAR has no material assets, liabilities or operations other than those
that result from its ownership of 100% of the outstanding common stock of
Global. The following is a summary of the consolidated assets and
liabilities of Global and its subsidiaries and their consolidated results
of operations:
September 30, December 31,
1998 1997
---- ----
(Dollars in millions)
Assets:
Current assets...................... $ 615 $ 566
Non-current assets.................. 554 667
------ ------
Total assets.................... $ 1,169 $ 1,233
====== ======
Liabilities:
Current liabilities................. $ 453 502
Non-current liabilities............. 1,021 964
------ ------
Total liabilities............... $ 1,474 $ 1,466
====== ======
Minority stockholders' equity in
consolidated entities................ $ 13 $ 13
====== ======
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions)
Net sales............. $ 233 $ 278 $ 725 $ 806
Gross profit.......... 82 104 271 302
Net income............ (113) 37 (47) 116
(3) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of SFAS 128 using the following data:
<TABLE>
<CAPTION>
Three Months Nine months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for basic calculation.......... 44,976,599 45,837,779 44,958,726 46,108,495
Add: effect of stock options................ - 1,873,554 - 1,959,511
----------- --------- ----------- ---------
Weighted average common shares
outstanding, adjusted for diluted
calculation................................ 44,976,599 47,711,333 44,958,726 48,068,006
========== ========== ========== ==========
</TABLE>
8
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
The calculation of weighted average common shares outstanding for the
1998 periods excludes all outstanding options because they are all
antidilutive due to the net loss for the 1998 periods. The calculation of
weighted average common shares outstanding excludes performance stock
options for 743,504 shares in the three months ended September 30, 1997
and performance stock options for 753,587 shares in the nine month period
ended September 30, 1997 because the exercise of these options would not
have been dilutive for these periods.
(4) CONTINGENCIES
ANTITRUST INVESTIGATIONS
In 1997, the Company was served with subpoenas to produce documents and a
related search warrant in connection with a criminal investigation by the
U.S. Department of Justice (the "DOJ") as to whether there has been any
violation of U.S. federal antitrust laws by producers of graphite
electrodes. Concurrently, representatives of the antitrust enforcement
authorities of the European Union (the "EU authorities") visited offices
of the Company's French subsidiary for purposes of gathering information
in connection with an investigation as to whether there has been any
violation of the antitrust law of the European Union by such producers.
Subsequently, the Company was served with subpoenas by the DOJ to produce
documents relating to, among other things, its carbon electrode and bulk
graphite businesses. On April 24, 1998, pursuant to an agreement between
the DOJ and UCAR, the DOJ charged UCAR and unnamed co-conspirators with
participating from 1993 until January 1997 in an international conspiracy
involving meetings and conversations in the Far East, Europe and the
United States resulting in agreements to fix prices and allocate market
shares worldwide, to restrict co-conspirators' capacity and to restrict
non-conspiring producers' access to manufacturing technology for graphite
electrodes. In addition, pursuant to the agreement, UCAR pled guilty to a
one-count charge of violating U.S. federal antitrust laws in connection
with the sale of graphite electrodes and was sentenced to pay a
non-interest-bearing fine in the aggregate amount of $110 million. The
fine is payable in six annual installments of $20 million, $15 million,
$15 million, $18 million, $21 million and $21 million, respectively,
commencing July 23, 1998. The agreement was approved by the District
Court and, as a result, the Company will not be subject to prosecution by
the DOJ with respect to any other violations of the U.S. federal
antitrust laws occurring prior to April 24, 1998. The payment due July
23, 1998 was made timely.
In April 1998, the Company became aware that the Canadian Competition
Bureau (the "Competition Bureau") had commenced a criminal investigation
as to whether there has been any violation of the Canadian Competition
Act (the "Canadian Act") by producers of graphite electrodes. Counsel has
advised the Company that any claim arising out of the investigation
against UCAR would most likely be brought under Section 45 of the
Canadian Act, which prohibits conspiring to fix prices. Under Section 45,
the maximum fine for each violation is Cdn$10 million. Section 46 of the
Canadian Act prohibits implementation of a conspiracy to fix prices.
Counsel has advised the Company that the Company's Canadian subsidiary
(but not UCAR) could be charged under Section 46 to the extent that it is
found to have followed the
9
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
directives of a party to such a conspiracy. Under Section 46, the amount
of the fine is discretionary and there is no maximum. The Company has
been required by the Competition Bureau to produce documents and
witnesses in Canada.
In June 1998, the Company became aware that Japanese antitrust
authorities had commenced an investigation of producers and distributors
of graphite electrodes. The Company has no facilities or employees in
Japan and has not sold a material quantity of graphite electrodes in
Japan. The independent distributor of the Company's products in Japan
has, however, been required to produce documents and witnesses in Japan.
The Company has been and intends to continue to vigorously protect its
interests in connection with the ongoing investigations. The Company may,
however, at any time settle any possible charges. The Company is
cooperating with the EU authorities and the Competition Bureau in their
investigations.
CIVIL ANTITRUST LAWSUITS
In 1997, UCAR and other producers of graphite electrodes were served with
complaints commencing various antitrust class action lawsuits.
Subsequently, the complaints were either withdrawn without prejudice to
refile or consolidated into a single complaint (called the "antitrust
class action lawsuit"). In the consolidated complaint, the plaintiffs
allege that the defendants violated U.S. federal antitrust laws and seek,
among other things, an award of treble damages resulting from such
alleged violations. In the consolidated complaint, the proposed class
consists of all persons who purchased graphite electrodes in the United
States (called the "class") directly from the defendants during the
period from January 1, 1992 through August 15, 1997 (called the "class
period"). In 1998, UCAR and other producers of graphite electrodes were
served with a complaint by 27 steelmakers in the United States commencing
a separate civil antitrust lawsuit (called the "opt-out lawsuit"). In
1998, UCAR, other producers of graphite electrodes, and other companies
were served with a complaint by Nucor Corporation and an affiliate
commencing a civil antitrust and fraudulent transfer lawsuit (called the
"Nucor lawsuit"). Certain other steelmakers in the United States and
Canada have also served the Company or its Canadian subsidiary,
respectively, with complaints commencing civil antitrust lawsuits in
various courts (called the "other lawsuits"). The Company and other
producers of graphite electrodes have been named as defendants in some or
all of the complaints filed in the other lawsuits. The complaints allege
that the defendants violated applicable antitrust laws and seek, among
other things, an award of treble damages (in the case of lawsuits in the
United States) or actual damages (in the case of lawsuits in Canada)
resulting from such alleged violations.
Through November 12, 1998, the Company had entered into agreements to
settle the antitrust class action, the opt-out lawsuit and the Nucor
lawsuit as well as certain of the other lawsuits and antitrust claims by
certain other steelmakers who negotiated directly with the Company. The
settlements cover, among other claims, substantially all of the actual
and potential claims by steelmakers in the United States arising out of
alleged antitrust violations occurring prior to the date of the
respective agreements in connection with the sale of graphite electrodes.
The aggregate
10
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
amount of these settlements has been within the amounts used by the
Company for the purposes of evaluating the $340 million reserve described
below. Although each settlement is unique, in the aggregate they consist
primarily of current and deferred cash payments with some product credits
and discounts. The aggregate amount of the settlements and percentage of
covered claims could vary depending on the steelmakers who are ultimately
included in the class and the amount of their purchases of graphite
electrodes. If aggregate purchases of graphite electrodes during the
class period by steelmakers who are ultimately included in the class
total less than a specified threshold, the Company has the option to
withdraw from the settlement of the antitrust class action. The Company
is obligated to encourage all steelmakers who could be included in the
class (called "potential class members") to join the class. The Company
currently expects that most of the potential class members will be
included in the class and, accordingly, will be covered by the
settlement.
The other lawsuits that have not been settled are still in their early
stages. The Company intends to vigorously defend against these lawsuits.
The Company may at any time, however, settle these lawsuits and is
actively negotiating with the plaintiffs, as well as other steelmakers
who are not parties to any lawsuit and wish to enter into separate
settlements with the Company, to settle their lawsuits and claims.
SHAREHOLDER DERIVATIVE LAWSUIT
In March 1998, UCAR was served with a complaint commencing a shareholder
derivative lawsuit. Certain former and current directors and officers are
named as defendants. UCAR is named as a nominal defendant. In the
complaint, the plaintiff alleges that the defendants breached their
fiduciary duties in connection with alleged non-compliance by the Company
and its employees with antitrust laws. The plaintiff also alleges that
certain of the defendants sold common stock while in possession of
materially adverse non-public information relating to such non-compliance
with antitrust laws. The complaint seeks recovery for UCAR of damages to
the Company resulting from such alleged breaches and sales. In May 1998,
UCAR and the individual defendants filed a motion to dismiss the
complaint on the grounds that plaintiff failed to make a demand upon
UCAR's Board of Directors prior to commencing the lawsuit and to
sufficiently allege that such a demand would have been futile. In
response to the motion, plaintiff requested and obtained from the Court
permission to file an amended complaint. The amended complaint was served
in July 1998. A second motion to dismiss has been filed. This lawsuit is
in its early stages. Counsel has, however, advised the Company that the
lawsuit is being pursued for recovery from the individual defendants on
behalf of (and payable to) UCAR and that any indemnification obligations
which UCAR may have to the individual defendants would result from
judgments or settlements in favor of UCAR. As a result, UCAR does not
believe that the outcome of this lawsuit will have a material adverse
effect on the Company. No provision for any liability related to this
lawsuit has been made in the Consolidated Financial Statements.
11
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
SECURITIES CLASS ACTION LAWSUIT
In April and May 1998, UCAR was served with complaints commencing
securities class actions. The complaints have been consolidated into a
single complaint and a consolidated amended complaint was served in
September 1998. The defendants named in such complaint are UCAR and
certain former directors and certain current and former officers. The
proposed class consists of all persons who purchased common stock during
the period from August 1995 through March 1998. Such complaint alleges
that, during such period, the defendants violated U.S. federal securities
laws in connection with purchases and sales of common stock by failing to
disclose alleged violations of antitrust laws. Such complaint seeks,
among other things, to recover damages resulting from such alleged
violations. UCAR expects to respond to such complaint with a motion to
dismiss. This lawsuit is in its early stages and no evaluation of
liability related to this lawsuit can yet be made. No provision for any
liability related to this lawsuit has been made in the Consolidated
Financial Statements.
OTHER
It is possible that additional investigations and civil lawsuits relating
to the subject matter of those described above seeking, among other
things, to impose fines and penalties or recover damages could be
commenced against the Company in the United States and in other
jurisdictions.
EARNINGS CHARGE
The Company recorded a charge of $340 million ($310 million after tax)
against results of operations for 1997 as a reserve for potential
liabilities and expenses in connection with antitrust investigations and
related lawsuits and claims. Actual liabilities and expenses could be
materially higher or lower than such amount.
(5) STOCKHOLDER RIGHTS PLAN
Effective August 7, 1998, UCAR adopted a Stockholder Rights Plan (the
"Rights Plan") under which one preferred stock purchase right (a "Right")
was distributed on September 21, 1998 as a dividend on each outstanding
share of common stock. Each Right entitles a stockholder to buy one
one-thousandth of a share of a new series of preferred stock for $110
upon the occurrence of certain events. Rights will be exercisable once a
person or group acquires 15% or more of the outstanding shares of common
stock (except that, for certain existing stockholders who currently own
more than 15%, the thresholds described herein are 22.5%) or 10 days
after a person or group announces a tender offer for 15% or more of the
outstanding shares of common stock. No certificates will be issued unless
the Rights become exercisable.
Under certain circumstances, all Rights holders, except the person or
group holding or seeking to acquire 15% or more of the outstanding shares
of common stock, will be entitled to purchase
12
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
shares of common stock at 50% of the price at which such shares traded
prior to the acquisition or announcement. Alternatively, if UCAR is
acquired after the Rights become exercisable, the Rights will entitle
such holders to buy the acquiring company's shares at a similar discount.
UCAR can redeem the Rights for one cent per Right under certain
circumstances. If not redeemed, the Rights will expire on August 7, 2008.
(6) MANAGEMENT STOCK OPTION PLAN
Effective September 29, 1998, UCAR's Board of Directors amended the
Management Stock Option Plan to permit the grant of options covering up
to an additional 2,000,000 (bringing the total to 8,000,000) shares of
common stock and granted new options covering an aggregate of 1,986,500
shares of common stock. The exercise price per share of the new options
is the closing price on the date of grant ($17.06). The term of the new
options is 10 years. So long as an employee remains employed by the
Company: one-third of the new options granted to the employee will vest
on September 29, 1999; one-third will vest when the closing price of the
common stock is at least $20.50 for 20 consecutive trading days; and
one-third will vest when the closing price of the common stock is at
least $24.00 for 20 consecutive trading days (although no options will be
exercisable before September 29, 1999 regardless of earlier vesting) and
all unvested options will vest on the seventh anniversary of the date of
grant, provided that the first third of the employee's new options will
vest immediately upon termination of employment of the employee by the
Company without cause prior to September 29, 1999.
(7) RESTRUCTURING PLAN
In September 1998, the Company recorded a restructuring charge of $86
million in connection with strategic plans to reduce costs and improve
operating efficiencies. The principal actions of these plans involve the
closure of two operating facilities (Welland, Canada and Berlin, Germany)
and the centralization and consolidation of administrative and financial
functions. These actions, which will result in the elimination of
approximately 430 administrative and manufacturing positions, are
expected to be completed in 1999.
The major components of the restructuring charge are as follows:
September 30,
1998
----
(Dollars in millions)
Severance and related costs.............................. $ 30
Write-down of property, plant and equipment.............. 28
Plant and office shutdown and related costs.............. 19
Post monitoring and environmental costs ................. 9
---
$ 86
===
13
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(8) IMPAIRMENT LOSS
During August 1998, the Russian economic and business climate experienced
significant adverse change. This change, when considered in conjunction
with the current and historical operating and cash-flow losses of the
Company's graphite electrode facility in Vyazma, Russia, indicated the
need for assessing the recoverability of the long-lived and intangible
assets of this facility. The Company estimated future undiscounted flows
expected to result from the use of these assets and concluded they were
less than the carrying amount of these assets. Accordingly, the Company
recorded an impairment loss of $60 million ($58 million after tax) for
the unrecoverable portion of these assets, effectively writing down the
carrying value of these assets to their fair value of $2 million. Fair
value was calculated on the basis of discounted estimated future cash
flow. Estimates of the discounted future cash flows are subject to
significant uncertainties and assumptions. Accordingly, actual results
could vary significantly from such estimates.
(9) OTHER ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," and
Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." These Statements address presentation and
disclosure matters and will have no impact on the Company's financial
position or results of operations. As required by Statement 131 and 132,
compliance with the respective reporting disclosures will be reflected in
the Company's 1998 Annual Report on Form 10-K.
In 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." It
requires that an entity recognize all derivative instruments as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The
Company is currently evaluating the effect this statement will have on
its financial position and results of operations in the period of
adoption.
In 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting of the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 is
effective for financial statements for fiscal years beginning after
December 15, 1998. The Company does not believe the implementation of
this SOP will have a material impact on its financial position and
results of operations in the period of adoption.
(10) SUBSEQUENT EVENTS
AMENDMENTS TO SENIOR SUBORDINATED NOTES AND SENIOR SECURED CREDIT
FACILITIES
On November 3, 1998, the indenture (the "Subordinated Note Indenture")
relating to Global's 12% senior subordinated notes due 2005 (the
"Subordinated Notes") was amended to exclude the $340 million charge
against results of operations for 1997 for potential liabilities and
expenses in
14
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PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
connection with antitrust investigations and related lawsuits and claims
from the definition of consolidated cash flow, to limit the amount of
bank indebtedness (as defined) which may be incurred pursuant to certain
provisions thereof and to broaden the ability of domestic and foreign
subsidiaries to be borrowers under and guarantors of Global's senior
credit facility.
On November 11, 1998, Global's senior secured credit facilities were
refinanced. The refinancing consisted of the addition of a new $210
million senior secured tranche C term debt facility (the "Tranche C
Facility") to the existing senior secured credit facilities (the
"Existing Facilities") and the amendment of the Existing Facilities. The
representations, warranties, covenants and events of default applicable
to the Tranche C Facility and the Existing Facilities, as amended (the
"Amended Facilities" and, together with the Tranche C Facility, the
"Facilities") are the same.
As a result of the early extinguishment of the Existing Facilities in
connection with the refinancing, on November 11, 1998, the Company
recorded an extraordinary charge of approximately $11 million ($7 million
after income tax) associated with the write-off of related deferred debt
issuance costs.
The Tranche C Facility provides for U.S. dollar denominated term loans of
$125 million to Global and U.S. dollar denominated term loans of $85
million to Global's wholly owned Swiss subsidiary. The Tranche C Facility
amortizes over five years with nominal quarterly installments during the
first four years and quarterly installments aggregating $206 million in
the fifth year, with the final installment payable on December 31, 2003.
After the refinancing, the interest rate applicable to the tranche A term
debt facility (the "Tranche A Term Facility") and the revolving credit
facility (the "Revolving Facility") under the Facilities is, at Global's
option, either adjusted LIBOR (as defined) plus a margin ranging from
2.25% to 2.75% (depending on the ratio of the sum of total debt plus
reserves in respect of litigation liabilities to EBITDA (each, as
defined)) or an alternate base rate (as defined) plus a margin ranging
from 1.25% to 1.75% (depending on such ratio). In addition, after the
refinancing, the interest rate applicable to the tranche B term debt
facility (the "Tranche B Term Facility") under the Facilities and the
Tranche C Facility is either adjusted LIBOR plus 3.25% or the alternate
base rate plus 2.25%. Further, after the refinancing, Global pays a per
annum fee ranging from 2.25% to 2.75% (depending on such ratio) of the
aggregate face amount of letters of credit outstanding under the tranche
A letter of credit facility (the "Tranche A Letter of Credit Facility")
under the Facilities and the Revolving Facility and a per annum fee of
0.50% on the unused portion of the commitments under the Revolving
Facility.
After the refinancing, mandatory prepayments of loans and mandatory
reductions in letters of credit in respect of consolidated excess cash
flow (as defined) are required in an amount of between 50% and 75%
(depending on such ratio) of consolidated excess cash flow after giving
effect to certain debt service and voluntary prepayments. In addition,
after the refinancing, there is a call premium of 101% applicable to
prepayments of loans under the Tranche B Facility or the Tranche C
Facility prior to December 31, 1999.
15
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PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
The refinancing effected other changes to the Facilities to make
covenants generally more restrictive and to broaden the scope of security
interests and intercompany guarantees previously granted by the Company.
In addition, among other things, as a condition to each borrowing under
the Facilities, the Company is required to represent that the sum
(calculated as provided in the Facilities) of litigation payments and
reserves in respect of litigation liabilities (each, as defined) has not
and is not reasonably expected to exceed $400 million. Further, certain
provisions of the Amended Facilities have had the effect of permanently
waiving, in certain respects, compliance with certain covenants and
modifying certain representations relating to compliance with laws,
absence of material legal proceedings and absence of material adverse
changes in the business, financial condition or results of operations of
the Company insofar as they relate to significant legal proceedings
described in Note 5. As a result, the Company will have the ability
(subject to compliance with applicable covenants, conditions and other
terms in the future) to borrow under the Revolving Facility. After giving
effect to the initial use of proceeds from the Tranche C Facility, $179
million is available for borrowing under the Revolving Facility.
16
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PART I (Cont.)
UCAR INTERNATIONAL INC.
Introduction to Part I, Item 2, and Part II, Item 1
Unless otherwise indicated, references to "UCAR" mean UCAR International Inc.
and to the "Company" mean UCAR, its subsidiaries (including UCAR Global
Enterprises Inc. ("Global") and EMSA (Pty.) Ltd. ("EMSA")), collectively, except
that such references do not include UCAR Grafit OAO ("UCAR Grafit"), Carbone
Savoie S.A.S. ("Carbone Savoie") or UCAR Elektroden GmbH ("UCAR Elektroden" and,
together with UCAR Grafit, Carbone Savoie and EMSA, the "Acquired Companies")
with respect to time periods prior to their respective acquisitions. Unless
otherwise indicated, financial information of the Company includes UCAR Grafit,
UCAR Elektroden and Carbone Savoie since their respective acquisitions in late
1996 and early 1997 and EMSA since the acquisition in April 1997 of the 50% of
its equity not previously owned by the Company on a consolidated basis. For
dates and periods prior to April 1997, financial information of the Company
includes EMSA using the equity method.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These statements include statements about such
matters as electric arc furnace ("EAF") steel production, prices and sales of
and demand for graphite electrodes and other products, future operational and
financial performance of pre-existing and acquired businesses, divestiture,
joint venture, operating and capital projects, legal matters and related fees
and costs, consulting fees and related projects, and costs, cost savings and
reductions, margins and earnings. Except as otherwise required to be disclosed
in periodic reports required to be filed by companies registered under the
Exchange Act by the rules of the Securities and Exchange Commission (the
"Commission"), the Company has no duty to update such statements. Actual future
events and circumstances (including future performance, results and trends)
could differ materially from those set forth in such statements due to various
factors. Such factors include the possibility that announced additions to EAF
steel production capacity may not occur or that increased EAF steel production
may not result in increased demand for or prices of graphite electrodes, the
occurrence of unanticipated events or circumstances relating to antitrust
investigations or antitrust, shareholder derivative or securities lawsuits, the
assertion of other claims relating to such investigations or lawsuits or the
subject matter thereof, the occurrence of unanticipated events or circumstances
relating to acquired businesses, the occurrence of unanticipated events or
circumstances relating to divestiture, joint venture, operating, capital, global
integration or other projects, changes in currency exchange rates, changes in
economic and competitive conditions, technological developments, and other risks
and uncertainties, including those set forth herein and in UCAR's Quarterly
Report on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998 and
UCAR's Annual Report on Form 10-K for the year ended December 31, 1997
(collectively, the "Prior Reports"). All cost savings and reductions described
herein are based on comparisons to estimated amounts using 1998 data.
This Quarterly Report on Form 10-Q contains descriptions of developments in
various matters described in the Prior Reports. These matters include antitrust
investigations and related lawsuits and claims, a charge of $340 million against
results of operations for 1997 as a reserve for potential liabilities and
expenses in connection therewith (the "$340 million charge"), shareholder
derivative and securities class action lawsuits, a plea agreement with the
Antitrust Division of the U.S. Department of Justice (the "DOJ"), a waiver of
breaches, if any, of certain covenants under and amendments to Global's senior
secured credit facilities and future financing requirements and cash management
plans as well as actual and potential impacts of such matters. Reference is made
to the Prior Reports for a description of these matters and impacts and certain
risks and uncertainties associated therewith. Neither the statements contained
in this Quarterly Report on Form 10-Q nor any charge taken by the Company
relating to any legal proceedings shall be deemed to constitute an admission as
to any wrongdoing or liability in connection with the subject matter of such
investigations, lawsuits or claims.
17
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PART I (Cont.)
UCAR INTERNATIONAL INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
In November 1996, the Company acquired 90% of the equity of UCAR Grafit in
Vyazma, Russia. Thereafter, the Company increased its ownership to 99% of such
equity. In 1997, the Company acquired 70% of the equity of Carbone Savoie in
Notre Dame and Venniseux, France and, through a newly formed 70%- owned
subsidiary, UCAR Elektroden, acquired the graphite electrode business of
Elektrokohle Lichtenberg AG ("EKL") in Berlin, Germany. The Company also
acquired the outstanding shares of EMSA, in South Africa, held by the Company's
former 50%-joint venture partner in EMSA. The acquisitions of UCAR Grafit,
Carbone Savoie, EMSA and the graphite electrode business of EKL were accounted
for as purchases.
In September 1998, UCAR's Board of Directors approved the adoption of a new
strategic plan. The plan is intended to enhance stockholder value by focusing on
maximizing cash flow, generating growth in earnings and strengthening
competitiveness through operating and overhead cost reduction programs and
optimization of margins as a result of plant rationalization. The plan is also
intended, over the long term, to strengthen the Company's position as a low cost
producer to the steel and metals industries and, over the near term, to respond
to slowdowns in global economies that are impacting the Company's customers. The
Company believes that, under current conditions, the plan will have a major
positive impact on earnings beginning in the second half of 1999.
The key elements of the plan consist of rationalization of the Company's
manufacturing operations, centralization and consolidation of administrative
functions and implementation of cost reduction programs. The Company believes
that the plan will generate, under current conditions, permanent annual cost
reductions of approximately $80 million in 1999, approximately $115 million in
the year 2000 and approximately $135 in the year 2001, reduce working capital
needs and improve efficiencies. Adoption of the plan resulted in one-time,
non-recurring charges in the 1998 third quarter aggregating $146 million ($135
million after income tax) consisting of $45 million of cash expenditures and
$101 million of non-cash charges. The non-recurring charges are a restructuring
charge of $86 million (of which $47 million relates to asset write-downs and
related shutdown costs, $30 million relates to employee severance and related
benefit costs and $9 million relates to postmonitoring and environmental costs)
and an impairment loss on Russian assets of $60 million. The plan will also
require capital expenditures of $24 million.
Under the plan, the Company is reducing its graphite electrode manufacturing
capacity by 30,000 metric tons. The Company believes that the reduction
represents approximately 4% of estimated western world graphite electrode
manufacturing capacity and approximately 11% of the Company's capacity. The
reduction will be accomplished by permanently closing higher cost operations in
Berlin, Germany and Welland, Canada and downsizing operations in Vyazma, Russia.
The Company believes that, when global economies improve, EAF steelmaking should
return to its historic long-term compound annual growth rate of 4%, which should
result in increased demand for graphite electrodes (albeit at a lower rate after
taking into account continuing declines in specific consumption). The Company
also believes that
18
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PART I (Cont.)
UCAR INTERNATIONAL INC.
it is able to incrementally expand the manufacturing capacity of its other
operations, when and as required to meet increased demand, at a capital
investment per annual metric ton of capacity of less than $1,000.
The Berlin, Germany extrusion facility manufactures green electrodes and has
approximately 70 employees. UCAR Elektroden acquired 70% ownership in February
1997 from EKL. The Welland, Canada facility is a fully integrated manufacturer
of graphite electrodes (with a capacity of 23,000 metric tons) and carbon and
graphite cathodes. It has approximately 280 employees and was acquired by the
Company in 1917. Cathodes will continue to be manufactured in North America at
the Company's plant in Columbia, Tennessee. The Vyazma, Russia facility
manufactures graphite electrodes. It is held by UCAR Grafit, which was acquired
in late 1996 and early 1997. The facility, which had 1,200 employees in early
1997, will have approximately 600 employees when downsizing is completed. Its
graphite electrode manufacturing capacity will be reduced to 10,000 metric tons
from 17,000 metric tons. The plant closures and downsizing are expected to
generate annual cost savings of approximately $24 million in 1999, $33 million
in 2000 and $35 million in the year 2001 and thereafter, for an aggregate
one-time cash closure cost of $38 million and aggregate one-time non-cash asset
write-downs and impairment loss of $92 million.
The Company is also restructuring its worldwide operations on a cost center
basis. This restructuring includes the consolidation of finance and
administrative functions, including accounting, treasury, information systems,
accounts receivable/payable, purchasing and human resources, along with targeted
outsourcing, to gain efficiencies. This restructuring also includes centralizing
the Company's European administrative activities in UCAR S.A., its Swiss
subsidiary, and relocating its U.S. headquarters from Danbury, Connecticut to
Nashville, Tennessee. The new corporate headquarters in Nashville will be
centrally located near the Clarksville, Columbia and Lawrenceburg, Tennessee
facilities and will have approximately 40 employees. The Company believes that
this restructuring will generate annual savings in total overhead (selling,
administrative and other, research and development, and other expense (net)) of
approximately $19 million in 1999, approximately $29 million in 2000 and $32
million in the year 2001, and thereafter for a one-time cash charge of $11
million and a one-time non-cash asset write-down of $5 million. The Company
believes that this restructuring will contribute to permanently reducing the
Company's effective annual income tax rate, which the Company believes will
generate tax savings of approximately $6 million in 1999, $10 million in 2000
and $12 million in the year 2001.
Additionally, the plan includes more than 100 identified projects to improve
plant operating efficiencies. The Company believes that these projects will
yield annual savings of approximately $30 million in 1999, $38 million in 2000
and $39 million in the year 2001 and thereafter, after initial capital
expenditures of approximately $24 million. These projects relate to such areas
as energy conservation, raw material substitution, yield improvement, reduction
in labor by automation, maintenance savings and reduction in plant
administration.
The Company intends to divest or joint venture its graphite specialties business
since it is not considered to be in alignment with the Company's new strategic
plan. The graphite specialties business generated $113 million in 1997 net
sales. If this business is sold, proceeds from this divestment are expected to
far
19
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PART I (Cont.)
UCAR INTERNATIONAL INC.
exceed the cash cost of the 1998 third quarter write-off and the capital
expenditures required to achieve the cost savings expected under the plan. No
assurance can be given that such cost savings will be achieved, that such joint
venture or divestiture will be completed or as to the amount of such savings,
the net proceeds of any such joint venture or divestiture or the timing thereof.
The Company has no commitments with respect to any such joint venture or
divestiture.
The Company is a global company and serves every geographic market worldwide.
Accordingly, it is always impacted in varying degrees, both positively and
negatively, as country or regional market conditions fluctuate. In 1997, Western
Europe began recovering from the economic downturn that commenced in 1996. The
Company has benefited from this recovery. Conversely, an economic downturn in
the Asia Pacific region began in 1997 and is still continuing. Customers in the
Asia Pacific region account for approximately 10% of the Company's net sales.
This downturn has adversely affected production of steel and other metals in the
region, which has reduced demand for graphite electrodes and other products used
in such production. The Company believes that these adverse impacts include a
reduction in customers' inventories of graphite electrodes and such other
products as well as their operating rates. The Company believes that net sales
of all products to customers in the Asia Pacific region, as well as net sales of
graphite electrodes to customers in other regions (such as Eastern Europe,
Africa, South America and the Middle East) that typically export steel products
into the Asia Pacific region, will be adversely impacted at least through the
first half of 1999 by this downturn. The Company also believes that steel
production in North America and certain Western European countries has been
adversely impacted by significant increases in steel imports. This has caused a
reduction in the amount of steel produced in these countries resulting in lower
demand for graphite electrodes. The Company believes that these impacts will
continue at least through the first half of 1999.
Since 1997, the Company has been subject to antitrust investigations by U.S. and
foreign governmental agencies and named as a defendant in related antitrust
class actions and antitrust lawsuits. The Company recorded a charge of $340
million ($310 million after tax) against results of operations for 1997 as a
reserve for potential liabilities and expenses in connection with antitrust
investigations and related lawsuits and claims. In April 1998, pursuant to an
agreement with the DOJ, UCAR pled guilty to a one-count charge of violating
antitrust laws in the sale of graphite electrodes and was sentenced to pay a
non-interest-bearing fine in the aggregate amount of $110 million, payable in
six annual installments. Through November 12, 1998, the Company had reached
settlements covering, among other claims, substantially all of the actual and
potential claims by steelmakers in the United States for antitrust violations in
connection with the sale of graphite electrodes. In the aggregate, the fine and
settlements are within the amounts used by the Company for purposes of
evaluating the $340 million reserve. It is possible that additional
investigations and lawsuits may be commenced. Actual liabilities and expenses
could be materially higher or lower than such charge.
The Company has also been subject to a shareholder's derivative lawsuit and
securities class action. UCAR does not believe that the outcome of the
shareholder derivative lawsuit will have a material adverse effect on the
Company. The securities class action is still in its early stages and no
evaluation of potential liability with respect thereto has yet been made.
20
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PART I (Cont.)
UCAR INTERNATIONAL INC.
In November 1998, Global's senior secured credit facilities were refinanced and
the indenture (the "Subordinated Note Indenture") relating to Global's 12%
senior subordinated notes due 2005 (the "Subordinated Notes") was amended. In
connection with the refinancing, the Company obtained additional term debt of
$210 million and the ability (subject to compliance with applicable covenants,
conditions and other terms in the future) to borrow under its revolving credit
facility.
As a result of the adoption of the new strategic plan and the refinancing as
well as other developments described herein, the Company believes that, under
current conditions, it will be able to meet its debt service, trade and other
obligations, including currently known obligations for liabilities and expenses
in connection with antitrust investigations and related lawsuits and claims,
when due.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales were $233 million in the 1998 third quarter as compared to sales of
$278 million in the 1997 third quarter. This decrease was primarily due to lower
net sales of graphite electrodes.
Net sales of graphite electrodes were $162 million in the 1998 third quarter as
compared to $204 million in the 1997 third quarter. The decrease in net sales of
graphite electrodes was attributable primarily to a decrease of 10,500 metric
tons in the volume of graphite electrodes sold to 52,900 metric tons in the 1998
third quarter from 63,400 metric tons in the 1997 third quarter. The reduced
volume of graphite electrodes sold represented $32 million of lower net sales.
The decrease in the volume of graphite electrodes sold was primarily due to
adverse impacts of economic conditions described above.
The average selling price per metric ton (in U.S. dollars and net of changes in
currency exchange rates) of the Company's graphite electrodes was $2,971 in the
1998 third quarter as compared to $3,081 in the 1997 third quarter. The decrease
in the average selling price was primarily a result of the strengthening of the
U.S. dollar during the 1998 third quarter as compared to other currencies in
which the Company sells its products. This U.S. dollar strengthening reduced net
sales of graphite electrodes in the 1998 third quarter by approximately $9
million.
Net sales of the carbon and graphite specialty group products combined were $71
million in the 1998 third quarter as compared to $74 million in the 1997 third
quarter. Net sales of cathodes to the aluminum industry, which are included in
the group, were $23 million in the 1998 third quarter as compared to $18 million
in the 1997 third quarter. The increase was due primarily to both an increase in
the volume of cathodes sold and an increase in average selling price due to
changes in the mix of product sold. Net sales of the other products in the group
were $48 million in the 1998 third quarter as compared to $56 million in the
1997 third quarter. This decline was primarily a result of reduced demand for
these products in the semiconductor, petroleum exploration, transportation,
silicon metal and steel industries due to adverse impacts of economic conditions
described above.
21
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PART I (Cont.)
UCAR INTERNATIONAL INC.
Cost of sales were $151 million in the 1998 third quarter as compared to $174
million in the 1997 third quarter. This decrease was due primarily to lower
volumes of graphite electrodes sold.
As a result of the changes described above, gross profit was $82 million, or
35.2% of net sales, in the 1998 third quarter as compared to $104 million, or
37.4% of net sales, in the 1997 third quarter. The percentage decline in the
gross profit margin in the 1998 third quarter was primarily due to increased raw
material and other inventory costs and higher fixed costs per metric ton of
graphite electrodes sold. The higher fixed costs per metric ton was due to the
fact that substantially the same fixed costs were spread over fewer metric tons
sold.
Selling, administrative and other expenses were $27 million in the 1998 third
quarter as compared to $25 million in the 1997 third quarter. Such expenses in
the 1998 third quarter included a non-recurring charge of $2 million associated
with the relocation and related costs of moving to the new corporate
headquarters in Nashville, Tennessee.
Other expense (net) was $1 million of expense in the 1998 third quarter as
compared to $5 million of expense in the 1997 third quarter period. This change
was due primarily to favorable exchange gains on foreign currency transactions.
As a result of the changes described above, as well as the restructuring charge
and impairment loss on Russian assets, there was an operating loss of $94
million in the 1998 third quarter as compared to an operating profit of $71
million in the 1997 third quarter.
Interest expense was $19 million in the 1998 third quarter as compared to $17
million in the 1997 third quarter. This increase was primarily due to imputed
interest expense on the non-interest-bearing $110 million fine, payable to the
DOJ in six annual installments, and an increase in average total debt
outstanding. The average total debt outstanding was $772 million with an average
interest rate of 8.81% in the 1998 third quarter as compared to $753 million
with an average interest rate of 9.00% in the 1997 third quarter.
Provision for income taxes was a tax benefit of $1 million in the 1998 third
quarter as compared to tax expense of $17 million in the 1997 third quarter. The
income tax benefit in the 1998 third quarter reflects benefits realized from the
restructuring charge and impairment loss on Russian assets as well as global
integration and other projects. The tax benefits from the restructuring charge
and impairment loss are limited because of the nature of those deductions under
U.S. federal income tax law and the inability to recapture previously paid
income taxes. The effective tax rate excluding the restructuring charge and
impairment loss was 30% for the 1998 third quarter as compared to 31% for the
1997 third quarter.
As a result of the changes and other factors described above, there was a net
loss of $113 million in the 1998 third quarter as compared to net income of $37
million in the 1997 third quarter.
22
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PART I (Cont.)
UCAR INTERNATIONAL INC.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997.
Net sales were $725 million in the nine months of 1998 as compared to $806
million in the nine months of 1997. This decrease was primarily attributable to
lower net sales of graphite electrodes. Net sales of graphite electrodes
accounted for 69% of total net sales in the nine months of 1998 as compared to
71% of total net sales in the nine months of 1997.
Net sales of graphite electrodes were $503 million in the nine months of 1998 as
compared to $574 million in the nine months of 1997. The decrease in net sales
of graphite electrodes was attributable primarily to a decrease of 15,000 metric
tons in the volume of graphite electrodes sold to 160,400 metric tons in the
nine months of 1998 from 175,400 metric tons sold in the nine months of 1997.
The decrease in the volume of graphite electrodes sold represented $47 million
of lower net sales. The decrease in volume of graphite electrodes sold was
primarily due to adverse impacts of economic conditions described above.
The average selling price per metric ton (in U.S. dollars and net of changes in
currency exchange rates) of the Company's graphite electrodes was $3,034 in the
nine months of 1998 as compared to $3,136 in the nine months of 1997. The
decrease in such average selling price was primarily a result of the
strengthening of the U.S. dollar during the nine months of 1998 as compared to
other currencies in which the Company sells its products. This U.S. dollar
strengthening reduced net sales of graphite electrodes by approximately $24
million in the nine months of 1998 as compared to the nine months of 1997.
Net sales of the Company's carbon and graphite specialty group products combined
were $222 million in the nine months of 1998 as compared to $232 million in the
nine months of 1997. Net sales of carbon and graphite cathodes to the aluminum
industry remained strong at $67 million in the nine months of 1998 as compared
to $62 million in the nine months of 1997. The increase was due primarily to
both an increase in the volume of cathodes sold and an increase in average
selling price due to changes in the mix of product sold. Net sales of the other
products in the group were $155 million in the nine months of 1998 as compared
to $170 million in the nine months of 1997 and were adversely impacted by
reduced demand for furnace relines and lower productivity in the silicon metal
industry due to lower demand from the Asia Pacific region as well as other
economic conditions described above.
Cost of sales were $454 million in the nine months of 1998 as compared to $504
million in the nine months of 1997. This decrease was due primarily to lower
volumes of graphite electrodes sold.
As a result of the changes described above, gross profit was $271 million, or
37.4% of net sales, in the nine months of 1998 as compared to $302 million, or
37.5% of net sales, in the nine months of 1997.
Selling, administrative and other expenses were $79 million in the nine months
of 1998 as compared to $75 million in the nine months of 1997. Such expenses in
the nine months of 1998 include a non-
23
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PART I (Cont.)
UCAR INTERNATIONAL INC.
recurring charge of $2 million associated with the relocation and related costs
of moving to the new corporate headquarters in Nashville, Tennessee.
Other expense (net) was $5 million of expense in the nine months of 1998 as
compared to $6 million of expense in the nine months of 1997.
As a result of the changes described above, as well as the restructuring charge
and impairment loss on Russian assets, operating profit in the nine months of
1998 was $35 million as compared to $214 million in the nine months of 1997.
Interest expense was $54 million in the nine months of 1998 as compared to $48
million in the nine months of 1997. This increase was primarily due to an
increase in average total debt outstanding and imputed interest expense on the
non-interest-bearing $110 million antitrust fine, payable to the DOJ in six
annual installments. The average total debt outstanding was $769 million with an
average annual interest rate of 8.69% in the nine months of 1998 as compared to
$725 million with an average annual interest rate of 8.90% in the nine months of
1997.
Provision for income taxes was $26 million in the nine months of 1998 as
compared to $51 million in the nine months of 1997. The income tax benefit for
the nine months of 1998 reflects benefits realized from the restructuring charge
and impairment loss on Russian assets as well as global integration and other
projects. The tax benefits from the restructuring charge and impairment loss are
limited because of the nature of those deductions under U.S. federal income tax
law and the inability to recapture previously paid income taxes. The effective
tax rate excluding the restructuring charge and impairment charge was 29% for
the nine months of 1998 as compared to 31% for the nine months of 1997.
As a result of the changes and other factors described above, there was a net
loss of $47 million for the nine months of 1998 as compared to net income of
$116 million for the nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW PROVIDED BY OPERATIONS
Cash flow provided by operations was $48 million during the nine months of 1998
as compared to $109 million during the nine months of 1997. This change was
primarily due to the fact that net income (before restructuring charge and
impairment loss on Russian assets) was $28 million lower in the nine months of
1998 as compared to the nine months of 1997 as well as a decrease in cash flow
from working capital that was $31 million greater in the nine months of 1998
than it was in the nine months of 1997. The decrease in cash flow from working
capital was primarily due to payments made in the nine months of 1998 in
connection with antitrust investigations and related lawsuits and claims that
were not made in the nine months of 1997. These payments included the first
installment of $20 million paid to the DOJ in connection with the $110 million
fine. Decreases in notes and accounts receivable were substantially offset by
increases in inventories in the nine months of 1998 as compared to the nine
months of 1997, both of which resulted primarily from the decline in net sales
due to adverse impacts of economic
24
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC.
conditions described above. Accounts payable and other accruals declined by $5
million more in the nine months of 1998 than the nine months of 1997, due to
decreases in accounts payable which occurred primarily because of a delay in
adjusting trade payment practices to reflect lower net sales and decreases in
accrued income and other taxes resulting from tax benefits arising under the
Company's new strategic plan.
CASH FLOW USED IN INVESTING ACTIVITIES
The Company used $45 million in investing activities in the nine months of 1998
as compared to $184 million in the nine months of 1997. Substantially all of the
change is due to the fact that the Company used $124 million in the nine months
of 1997 in connection with the purchase of 70% of the equity in Carbone Savoie,
an investment in UCAR Electroden to finance the acquisition of the graphite
electrode business of EKL, an increase in the investment in UCAR Grafit, and the
acquisition of the outstanding shares of EMSA held by the Company's former
50%-joint-venture partner in EMSA. In the nine months of 1998, investing
activities consisted primarily of $40 million (as compared to $46 million in the
nine months of 1997) of capital expenditures, a portion of which was used to
complete cost reduction and operating efficiency projects begun in prior years,
and $7 million (as compared to $15 million in the nine months of 1997) of net
purchases of short-term investments by the Company's Brazilian subsidiary.
CASH FLOW PROVIDED BY FINANCING ACTIVITIES
Cash flow provided by financing activities was $26 million in the nine months of
1998 as compared to $52 million in the nine months of 1997. In the nine months
of 1998, financing activities consisted primarily of net total borrowings of $25
million under Global's senior secured credit facilities prior to and in
connection with obtaining a limited waiver in April 1998, including the
repayment of a short-term loan of approximately $38 million to the Company's
Russian subsidiary that was refinanced on a long-term basis under Global's
senior secured credit facilities. The borrowings were used primarily to finance
the increase in working capital.
In the nine months of 1997, financing activities consisted primarily of net
long-term borrowings of $67 million under the Global's senior secured credit
facilities and borrowings of $11 million of other long-term debt to finance a
portion of the acquisition of the Acquired Companies, net short-term borrowings
of $18 million by certain foreign subsidiaries to meet local cash needs, and $52
million of purchases of treasury stock.
LEVERAGE AND REFINANCING
The Company is highly leveraged. The Company's indebtedness may increase and its
liquidity may decrease in connection with, among other matters, liabilities and
expenses arising out of investigations, lawsuits and claims described herein and
in the Prior Reports. At September 30, 1998, the Company had total debt of $760
million and a stockholders' deficit of $318 million as compared to total debt of
$732 million and a stockholders' deficit of $246 million at December 31, 1997.
At September 30, 1998, cash,
25
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC.
cash equivalents and short-term investments were $113 million as compared to $78
million at December 31, 1997.
In November 1998, Global's senior secured credit facilities were refinanced and
the Subordinated Note Indenture was amended. The refinancing consisted of the
addition of a new $210 million senior secured tranche C term debt facility (the
"Tranche C Facility") to the existing senior secured credit facilities (the
"Existing Facilities") and the amendment of the Existing Facilities. The
representations, warranties, covenants and events of default applicable to the
Tranche C Facility and the Existing Facilities, as amended (the "Amended
Facilities" and, together with the Tranche C Facility, the "Facilities") are the
same.
The Tranche C Facility provides for U.S. dollar denominated term loans of $125
million to Global and U.S. dollar denominated term loans of $85 million to UCAR
S.A., Global's wholly owned Swiss subsidiary. The Tranche C Facility amortizes
over five years with nominal quarterly installments during the first four years
and quarterly installments aggregating $206 million in the fifth year, with the
final installment payable on December 31, 2003.
After the refinancing, the interest rate applicable to the tranche A term debt
facility (the "Tranche A Term Facility") and the revolving credit facility (the
"Revolving Facility") under the Facilities is, at Global's option, either
adjusted LIBOR (as defined) plus a margin ranging from 2.25% to 2.75% (depending
on the ratio of the sum of total debt plus reserves in respect of litigation
liabilities to EBITDA (each, as defined)) or an alternate base rate (as defined)
plus a margin ranging from 1.25% to 1.75% (depending on such ratio). In
addition, after the refinancing, the interest rate applicable to the tranche B
term debt facility (the "Tranche B Term Facility") under the Facilities and the
Tranche C Facility is either adjusted LIBOR plus 3.25% or the alternate base
rate plus 2.25%. Further, after the refinancing, Global pays a per annum fee
ranging from 2.25% to 2.75% (depending on such ratio) of the aggregate face
amount of letters of credit outstanding under the tranche A letter of credit
facility (the "Tranche A Letter of Credit Facility") under the Facilities or the
Revolving Facility and a per annum fee of 0.50% on the unused portion of the
commitments under the Revolving Facility. The effect of the refinancing is to
increase the interest rates and commitment fees which would otherwise have been
payable by the Company.
After the refinancing, mandatory prepayments of loans and mandatory reductions
of letters of credit in respect of consolidated excess cash flow (as defined)
are required in an amount of between 50% and 75% (depending on such ratio) of
consolidated excess cash flow after giving effect to certain debt service and
voluntary prepayments. The effect of the refinancing is to increase the
percentage of consolidated excess cash flow required to be applied to such
prepayments and reductions. In addition, after the refinancing, there is a call
premium of 101% applicable to prepayments of loans under the Tranche B Facility
or the Tranche C Facility prior to December 31, 1999.
The refinancing effected other changes to the Facilities to make covenants
generally more restrictive and to broaden the scope of security interests and
intercompany guarantees previously granted by the Company. In addition, among
other things, as a condition to each borrowing under the Facilities, the
26
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC.
Company is required to represent that the sum (calculated as provided in the
Facilities) of litigation payments and reserves in respect of litigation
liabilities (each, as defined) has not and is not reasonably expected to exceed
$400 million. If the Company were unable to make that representation (or the
other required representations), the Company would not be able to make such a
borrowing. Certain provisions of the Amended Facilities have the effect of
permanently waiving, in certain respects, compliance with certain covenants and
modifying certain representations relating to compliance with laws, absence of
material legal proceedings and absence of material adverse changes in the
business, financial condition or results of operations of the Company insofar as
they relate to significant legal proceedings described herein and in the Prior
Reports. As a result, the Company will have the ability (subject to compliance
with applicable covenants, conditions and other terms in the future) to borrow
under the Revolving Facility. After giving effect to the initial use of proceeds
from the Tranche C Facility, $179 million is available for borrowing under the
Revolving Facility.
In November 1998, the Subordinated Note Indenture was amended to exclude the
$340 million charge from the definition of consolidated cash flow therein, to
limit the amount of bank indebtedness (as defined) which may be incurred
pursuant to certain provisions thereof and to broaden the ability of domestic
and foreign subsidiaries to be borrowers under and guarantors of Global's senior
credit facility. The effect of these amendments was to facilitate the
refinancing of the Existing Facilities.
PLANS TO MANAGE LIQUIDITY
Debt (net of cash, cash equivalents and short-term investments and excluding the
reserve created by the $340 million charge) was $647 at September 30, 1998 as
compared to $644 million at September 30, 1997 and $672 million at June 30,
1998. Free cash flow, as measured by the change in net debt, from June 30, 1998
to September 30, 1998 was $25 million ($45 million, excluding the $20 million
payment to the DOJ), notwithstanding adverse impacts of economic conditions
described above. The Company believes that its ability to generate such free
cash flow is due in part to its strong focus on cash management and its low cost
supplier strategy. In addition, the Company has adopted a new strategic plan
which is expected to generate, under current conditions, annual cost reductions
of approximately $80 million in 1999, approximately $115 million in the year
2000 and approximately $135 million in the year 2001. The Company believes that
these cost reductions will finance substantially all of cash expenditures and
capital expenditures in the remainder of 1998 and 1999 contemplated under the
plan. Accordingly, as a result of the developments described herein, the Company
believes that, under current conditions, it will be able to meet its debt
service, trade and other obligations, including currently known obligations for
liabilities and expenses in connection with antitrust investigations and related
lawsuits and claims, when due in the ordinary course.
YEAR 2000
The year 2000 issue results from the fact that many computer programs were
written using two rather than four digits to define the applicable year. Any
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. this could result in processing
errors, miscalculations or failures causing disruptions of operations,
including, among other
27
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC.
things, temporary inability to process transactions or otherwise engage in
similar normal business act.
The Company is currently addressing the Year 2000 issue by reviewing and then
replacing or modifying, as appropriate, its existing systems, both domestic and
international. The Company currently believes that, with such replacements and
modifications, the Year 2000 issue will not pose significant operational
problems for the Company. It is anticipated that all Year 2000 compliance
efforts will be completed by June 30, 1999, allowing adequate time for testing.
Management also plans to review its external relationships to address potential
Year 2000 issues arising from relationships with significant customers,
suppliers and service providers.
Contingency plans are being considered and will be in place, as required, by the
third quarter of 1999 in the event that the corporation is at risk in regard to
suppliers, customers or its own internal hardware and software. Contingency
plans will include, but will not be limited to, consideration of alternative
sources of supply, customer communication plans, and plant and business response
plans.
The Company expects to complete the replacements and modifications by mid-1999,
which is prior to any anticipated impact on its systems. The cost of such
modifications and replacements, which are being expensed as incurred, is not
expected to be material to the Company. The Company currently estimates that
these costs will be less than $2 million.
ASSESSMENT OF THE EURO
On January 1, 1999, eleven of fifteen member countries of the European Union are
scheduled to establish fixed conversion rates between their existing currencies
("legacy currencies") and one common currency - the euro. The euro will then
trade on currency exchanges and may be used in business transactions. Beginning
in January 2002, new euro-denominated bills and coins will be issued, and legacy
currencies will be withdrawn from circulation. UCAR's operating subsidiaries
affected by the euro conversion are establishing plans to address the issues
raised by the euro currency conversion. These issues include, among others, the
need to adapt computer and financial systems to accommodate euro-denominated
transactions and the impact of one common currency on pricing. The Company
believes that, under current conditions, the conversion of various European
currencies into the Euro will not have a material adverse affect on the Company.
28
<PAGE>
PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC.
ITEM 1. LEGAL PROCEEDINGS
ANTITRUST INVESTIGATIONS
In 1997, the Company was served with subpoenas issued by the United States
District Court for the Eastern District of Pennsylvania (the "District Court")
to produce documents to a grand jury convened by attorneys for the DOJ and a
related search warrant in connection with a criminal investigation as to whether
there has been any violation of U.S. federal antitrust laws by producers of
graphite electrodes. Concurrently, representatives of Directorate General IV of
the European Union, the antitrust enforcement authorities of the European Union
(the "EU authorities"), visited offices of the Company's French subsidiary for
purposes of gathering information in connection with an investigation as to
whether there has been any violation of Article 85-1 of the Treaty of Rome, the
antitrust law of the European Union, by such producers. Subsequently, the
Company was served with subpoenas by the DOJ to produce documents relating to,
among other things, its carbon electrode and bulk graphite businesses. In
December 1997, UCAR's Board of Directors appointed a special committee of
outside directors, consisting of John R. Hall and R. Eugene Cartledge, to
exercise the power and authority of UCAR's Board of Directors in connection with
antitrust investigations and related lawsuits and claims. On April 24, 1998,
pursuant to an agreement between the DOJ and UCAR, the DOJ charged UCAR and
unnamed co-conspirators with participating from 1993 until January 1997 in an
international conspiracy involving meetings and conversations in the Far East,
Europe and the United States resulting in agreements to fix prices and allocate
market shares worldwide, to restrict co-conspirators' capacity and to restrict
non-conspiring producers' access to manufacturing technology for graphite
electrodes. In addition, pursuant to the agreement, UCAR pled guilty to a
one-count charge of violating U.S. federal antitrust laws in connection with the
sale of graphite electrodes and was sentenced to pay a non-interest-bearing fine
in the aggregate amount of $110 million. The fine is payable in six annual
installments of $20 million, $15 million, $15 million, $18 million, $21 million
and $21 million, respectively, commencing July 23, 1998. The agreement was
approved by the District Court and, as a result, the Company will not be subject
to prosecution by the DOJ with respect to any other violations of the U.S.
federal antitrust laws occurring prior to April 24, 1998. The payment due July
23, 1998 was timely made. The plea has made it more difficult for the Company to
defend against other investigations as well as civil lawsuits and claims.
In April 1998, the Company became aware that the Canadian Competition Bureau
(the "Competition Bureau") had commenced a criminal investigation as to whether
there has been any violation of the Canadian Competition Act (the "Canadian
Act") by producers of graphite electrodes. Counsel has advised the Company that
any claim against UCAR arising out of the investigation would most likely be
brought under Section 45 of the Canadian Act, which prohibits conspiring to fix
prices. Under Section 45, the maximum fine for each violation is Cdn$10 million.
Section 46 of the Canadian Act prohibits implementation of a conspiracy to fix
prices. Counsel has advised the Company that the Company's Canadian subsidiary
(but not UCAR) could be charged under Section 46 to the extent that it is found
to have followed the directives of a party to such a conspiracy. Under Section
46, the amount of the fine is discretionary and there is no maximum. The Company
has been required by the Competition Bureau to produce documents and witnesses
in Canada.
29
<PAGE>
PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC.
In June 1998, the Company became aware that Japanese antitrust authorities had
commenced an investigation of producers and distributors of graphite electrodes.
The Company has no facilities or employees in Japan and has not sold a material
quantity of graphite electrodes in Japan. The independent distributor of the
Company's products in Japan has, however, been required to produce documents and
witnesses in Japan.
The Company has been and intends to continue to vigorously protect its interests
in connection with the ongoing investigations. The Company may, however, at any
time settle any possible charges. The Company is cooperating with the EU
authorities and the Competition Bureau in their investigations.
CIVIL ANTITRUST LAWSUITS
In 1997, UCAR and other producers of graphite electrodes were served with
complaints commencing various antitrust class action lawsuits. Subsequently, the
complaints were either withdrawn without prejudice to refile or consolidated
into a single complaint in the District Court entitled IN RE GRAPHITE ELECTRODES
ANTITRUST LITIGATION (called the "antitrust class action lawsuit"). In the
consolidated complaint, the plaintiffs allege that the defendants violated U.S.
federal antitrust laws and seek, among other things, an award of treble damages
resulting from such alleged violations. In the consolidated complaint, the
proposed class consists of all persons who purchased graphite electrodes in the
United States (called the "class") directly from the defendants during the
period from January 1, 1992 through August 15, 1997 (called the "class period").
In 1998, UCAR and other producers of graphite electrodes were served with a
complaint by 27 steelmakers in the United States commencing a separate civil
antitrust lawsuit in the District Court (called the "opt-out lawsuit").
In 1998, UCAR, other producers of graphite electrodes, Union Carbide Corporation
and Mitsubishi Corporation were served with a complaint by Nucor Corporation and
an affiliate commencing a civil antitrust and fraudulent transfer lawsuit
(called the "Nucor lawsuit"). In the complaint, the plaintiffs allege that the
defendants violated U.S. federal antitrust laws and that Union Carbide
Corporation and Mitsubishi Corporation violated applicable state fraudulent
transfer laws. The complaint seeks, among other things, an award of treble
damages resulting from such alleged antitrust violations and an order to have
payments made by UCAR to Union Carbide Corporation and Mitsubishi Corporation in
connection with the Company's leveraged recapitalization in January 1995
declared to be fraudulent conveyances and returned to UCAR for purposes of
enabling UCAR to satisfy any judgments resulting from such alleged antitrust
violations.
Certain other steelmakers in the United States and Canada have also served the
Company or its Canadian subsidiary, respectively, with complaints commencing
civil antitrust lawsuits in various courts (called the "other lawsuits"). The
Company and other producers of graphite electrodes have been named as defendants
in some or all of such complaints. Such complaints allege that the defendants
violated applicable antitrust laws and seek, among other things, an award of
treble damages (in the case of lawsuits in the United States) or actual damages
(in the case of lawsuits in Canada) resulting from such alleged violations.
Under Canadian antitrust law (unlike U.S. federal antitrust law), there is no
provision
30
<PAGE>
PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC.
for an award of treble damages resulting from antitrust violations. The Company
is aware of other antitrust lawsuits in which other producers of graphite
electrodes (but not the Company) are defendants.
Through November 12, 1998, the Company had entered into agreements to settle the
antitrust class action, the opt-out lawsuit and the Nucor lawsuit as well as
certain of the other lawsuits and antitrust claims by certain other steelmakers
who negotiated directly with the Company. The settlements cover, among other
claims, substantially all of the actual and potential claims by steelmakers in
the United States arising out of alleged antitrust violations occurring prior to
the date of the respective agreements in connection with the sale of graphite
electrodes. The aggregate amount of these settlements has been within the
amounts used by the Company for the purposes of evaluating the $340 million
reserve described below. Although each settlement is unique, in the aggregate
they consist primarily of current and deferred cash payments with some product
credits and discounts. At November 12, 1998, the aggregate unpaid balance under
these settlements was approximately $108 million, which the Company expects to
fund using net cash flow from operations, cash and cash equivalents, short-term
investments and borrowings under the Revolving Facility. The aggregate amount of
the settlements and percentage of covered claims could vary depending on the
steelmakers who are ultimately included in the class and the amount of their
purchases of graphite electrodes. If aggregate purchases of graphite electrodes
during the class period by steelmakers who are ultimately included in the class
total less than a specified threshold, the Company has the option to withdraw
from the settlement of the antitrust class action. The Company is obligated to
encourage all steelmakers who could be included in the class (called "potential
class members") to join the class. The Company currently expects that most of
the potential class members will be included in the class and, accordingly, will
be covered by the settlement.
The other lawsuits that have not been settled are still in their early stages.
The Company intends to vigorously defend against these lawsuits. The Company may
at any time, however, settle these lawsuits and is actively negotiating with
plaintiffs' counsel, as well as other steelmakers who are not parties to any
lawsuit and wish to enter into separate settlements with the Company, to settle
their lawsuits and claims.
SHAREHOLDER DERIVATIVE LAWSUIT
In March 1998, UCAR was served with a complaint commencing a shareholder
derivative lawsuit in the Connecticut Superior Court (Judicial District of
Danbury). Robert P. Krass, former Chairman of the Board, President and Chief
Executive Officer, Robert J. Hart, former Senior Vice President and Chief
Operating Officer, William P. Wiemels, then Vice President and Chief Financial
Officer, Peter B. Mancino, General Counsel, Vice President and Secretary, and
Fred C. Wolf, then Vice President, Administration and Strategic Projects,
together with Robert D. Kennedy, current Chairman of the Board, and Messrs.
Cartledge and Hall, current directors and Glenn H. Hutchins, Howard A. Lipson,
Peter G. Peterson and Stephen A. Schwarzman, former directors, are named as
defendants. UCAR is named as a nominal defendant. The plaintiff named in the
complaint is David Jaroslawicz. In the complaint, the plaintiff alleges that the
defendants breached their fiduciary duties in connection with alleged
non-compliance by the Company and its employees with antitrust laws. The
plaintiff also alleges that certain of the defendants sold common stock while in
possession of materially adverse non-public information
31
<PAGE>
PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC.
relating to such non-compliance with antitrust laws. The complaint seeks
recovery for UCAR of damages to the Company resulting from such alleged breaches
and sales. In May 1998, UCAR and the individual defendants filed a motion to
dismiss the complaint on the grounds that plaintiff failed to make a demand upon
UCAR's Board of Directors prior to commencing the lawsuit and to sufficiently
allege that such a demand would have been futile. In response to the motion,
plaintiff requested and obtained from the Court permission to file an amended
complaint. The amended complaint was served in July 1998. A second motion to
dismiss has been filed. This lawsuit is in its early stages. Counsel has,
however, advised the Company that the lawsuit is being pursued for recovery from
the individual defendants on behalf of (and payable to) UCAR and that any
indemnification obligations which UCAR may have to the individual defendants
would result from judgments or settlements in favor of UCAR. As a result, UCAR
does not believe that the outcome of this lawsuit will have a material adverse
effect on the Company. No provision for any liability related to this lawsuit
has been made in the Consolidated Financial Statements.
SECURITIES CLASS ACTION LAWSUIT
In April and May 1998, complaints commencing securities class actions were filed
in the United States District Court for the District of Connecticut. The
complaints have been consolidated into a single complaint and the Florida State
Board of Administration has been designated as lead plaintiff (without prejudice
to defendants' right to contest such designation on the basis that such
plaintiff would not be an adequate class representative). A consolidated amended
complaint was served in September 1998. The defendants named in such complaint
are UCAR , David A. Stockman, a former director, and each of Messrs. Krass,
Hart, Mancino, Wiemels, Wolf, Hutchins, Kennedy, Lipson, Peterson and
Schwarzman. The proposed class consists of all persons who purchased common
stock during the period from August 1995 through March 1998. Such complaint
alleges that, during such period, the defendants violated U.S. federal
securities laws in connection with purchases and sales of common stock by
failing to disclose alleged violations of antitrust laws. Such complaint seek,
among other things, to recover damages resulting from such alleged violations.
UCAR expects to respond to such complaint with a motion to dismiss. This lawsuit
is in its early stages and no evaluation of liability related to this lawsuit
can yet be made. No provision for any liability related to this lawsuit has been
made in the Consolidated Financial Statements.
OTHER
It is possible that additional investigations and civil lawsuits relating to the
subject matter of those described above seeking, among other things, to impose
fines and penalties or recover damages could be commenced against the Company in
the United States and in other jurisdictions.
UCAR owns a directors and officers liability insurance policy that may be
applicable to the securities class action lawsuit and the shareholder derivative
lawsuit. The insurance policy provides coverage to the individual defendants of
$75 million for non-indemnifiable claims and $65 million for indemnifiable
claims. Although no assurance can be given that such will be the case, the
insurance policy may relieve a portion of any liabilities or expenses that UCAR
may incur with respect to these lawsuits.
32
<PAGE>
PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC.
The Company is involved in various other legal proceedings incidental to the
conduct of its business. While it is not possible to determine the ultimate
disposition of each of these other proceedings, the Company believes that the
ultimate disposition of such other proceedings will not have a material adverse
effect on the Company.
EARNINGS CHARGE
The Company recorded a charge of $340 million ($310 million after tax) against
results of operations for 1997 as a reserve for potential liabilities and
expenses in connection with antitrust investigations and related lawsuits and
claims. Actual liabilities and expenses could be materially higher or lower than
such amount.
33
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PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
The exhibits listed in the following table have been filed as part of
this Quarterly Report on Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
4.2 First Supplemental Indenture dated as of November 12, 1998 among
UCAR International Inc., UCAR Global Enterprises Inc. and United
States Trust Company of New York, as Trustee
10.23 Employment Agreement made as of June 22, 1998 between UCAR
International Inc. and Gilbert E. Playford
27.1 Financial Data Schedule for the third quarter of 1998 (for
Commission use only)
27.2 Restated Financial Data Schedule for the third quarter of 1997
(for Commission use only)
(b) REPORTS ON FORM 8-K
No Report on Form 8-K was filed during the quarter for which this
Quarterly Report on Form 10-Q is filed.
34
<PAGE>
UCAR INTERNATIONAL INC.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UCAR INTERNATIONAL INC.
Date: November 16, 1998 By: /s/ Corrado F. De Gasperis
--------------------------
Corrado F. De Gasperis
Controller
(Principal Accounting and
Information Officer)
35
<PAGE>
UCAR INTERNATIONAL INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
4.2 First Supplemental Indenture dated as of November 12, 1998 among
UCAR International Inc., UCAR Global Enterprises Inc. and United
States Trust Company of New York, as Trustee
10.23 Employment Agreement made as of June 22, 1998 between UCAR
International Inc. and Gilbert E. Playford
27.1 Financial Data Schedule for the third quarter of 1998 (for
Commission use only)
27.2 Restated Financial Data Schedule for the third quarter of 1997
(for Commission use only)
E-1
EXHIBIT 4.2
FIRST SUPPLEMENTAL INDENTURE
FIRST SUPPLEMENTAL INDENTURE, dated as of November 3, 1998 (this
"Supplemental Indenture"), among UCAR Global Enterprises Inc., a Delaware
corporation (the "Company"), UCAR International Inc., a Delaware corporation, as
Guarantor ("UCAR"), and United States Trust Company of New York, a New York
corporation, as Trustee (the "Trustee").
W I T N E S S E T H:
WHEREAS, the parties hereto are also the parties to that certain
indenture, dated as of January 15, 1995 (the "Indenture"), relating to the 12%
Senior Subordinated Notes due 2005 issued by the Company (the "Securities");
WHEREAS, in accordance with Section 9.02 of the Indenture, the parties
hereto have agreed to amend, and the registered holders of at least a majority
in principal amount at maturity of the Securities outstanding as of the date
hereof have consented (the "Requisite Consents") to amendments to, certain terms
of the Indenture as described below:; and
WHEREAS, all things necessary to make this Supplemental Indenture a
valid supplement to the Indenture according to the terms of the Indenture have
been done;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. CERTAIN TERMS DEFINED IN THE INDENTURE. All capitalized
terms used herein without definition herein shall have the meanings ascribed
thereto in the Indenture.
SECTION 2. AMENDMENTS TO THE INDENTURE. The Indenture is hereby amended
as follows:
(a) The first sentence of the definition of "Consolidated Cash
Flow" contained in Section 1.01 of the Indenture is hereby amended to delete the
word "and" appearing immediately before clause (vi) and to add a comma
immediately following clause (vi) and to add the following new clause (vii)
immediately after such added comma and before the word "and" appearing
immediately after clause (vi):
and (vii) the $340 million charge taken by the
Company against results of operations for 1997 for potential
liabilities and expenses in connection with antitrust and
related lawsuits and claims
(b) Section 4.03(f) of the Indenture is hereby amended and
restated in its entirety to read as follows:
(f) Notwithstanding Section 4.03(b), no Restricted
Subsidiary may Incur Indebtedness pursuant to Section 4.03(b)
unless (i) either (x) such Restricted Subsidiary is a Foreign
Restricted Subsidiary or (y) such Indebtedness is Bank
Indebtedness and (ii) at the time of
<PAGE>
Incurrence of such Indebtedness, and after giving effect
thereto, the aggregate outstanding amount of Indebtedness (x)
of Foreign Restricted Subsidiaries Incurred pursuant to
Section 4.03(c)(ii), together with the aggregate outstanding
amount of Indebtedness of Foreign Restricted Subsidiaries
Incurred pursuant to Section 4.03(b) (excluding Bank
Indebtedness described in clause (y) of clause (i) of this
Section 4.03(f)), shall not exceed the aggregate amount of
Indebtedness of Foreign Restricted Subsidiaries that is
outstanding immediately following the Issue Date pursuant to
Section 4.03(c)(ii) and (y) that is Bank Indebtedness
(including Indebtedness Incurred pursuant to Section
4.03(c)(i) or 4.03 (c)(ii)) shall not exceed $830 million;
provided, however, that Indebtedness of any Foreign Restricted
Subsidiary Incurred pursuant to Section 4.03(b) or 4.03(c)(ii)
shall not be subordinated in right of payment to any other
Indebtedness of such Foreign Restricted Subsidiary.
For purposes of this amendment and restatement of Section 4.03(f), the
$695 million mentioned in the definition of Credit Agreement shall not be
construed to limit the amount of Bank Indebtedness which may be Incurred under
Section 4.03(f) and the Company and its Restricted Subsidiaries shall replace
the Issuer mentioned in the definition of Bank Indebtedness.
(c) Section 4.03(c)(vi) is hereby amended by adding the following
language at the end of such clause after the word "million":
"and provided that no more than $25 million of Bank
Indebtedness Incurred pursuant to this Section 4.03(c)(vi) may
be outstanding at any one time."
SECTION 3. GOVERNING LAW. This Supplemental Indenture shall be governed
by, and construed in accordance with, the laws of the State of New York but
without giving effect to applicable principles of conflicts of law to the extent
that the application of the laws of another jurisdiction would be required
thereby.
SECTION 4. COUNTERPARTS. This Supplemental Indenture may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
SECTION 5. RATIFICATION. Except as expressly amended hereby, each
provision of the Indenture shall remain in full force and effect and, as amended
hereby, the Indenture is in all respects ratified and confirmed by each of the
Company, UCAR and the Trustee.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first above written.
UCAR INTERNATIONAL INC.
By:__________________________________
Title:
UCAR GLOBAL ENTERPRISES INC.
By:__________________________________
Title:
UNITED STATES TRUST COMPANY
OF NEW YORK, as Trustee
By:__________________________________
Title:
3
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made and
entered into as of June 22, 1998 by and between UCAR INTERNATIONAL INC., a
Delaware corporation (the "Company"), and GILBERT E. PLAYFORD, an individual
residing in Vero Beach, Florida (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive, and the
Executive desires to be employed, as the Company's President and Chief Executive
Officer on the terms and conditions set forth herein;
NOW, THEREFORE, the Company and the Executive, each intending
to be legally bound, hereby mutually covenant and agree as follows:
ARTICLE 1
DEFINITIONS
Defined terms used in this Agreement shall have the meanings
set forth below:
1.1 "ACCRUED OBLIGATIONS" shall mean, as of the date of
Termination of Employment, the sum of (A) the Executive's Starting Salary
through such date to the extent not theretofore paid, (B) the amount of any
bonus, incentive compensation, deferred compensation and other cash compensation
payable to the Executive as of such date but not yet paid, and (C) any vacation
pay, expense reimbursements and other cash entitlement accrued by the Executive
as of such date to the extent not theretofore paid.
1.2 "BANKRUPTCY" shall mean the commencement of a voluntary or
involuntary proceeding in a court of competent jurisdiction with respect to the
Company seeking relief under any federal or state bankruptcy, insolvency or
similar law, provided that such proceeding shall
<PAGE>
have continued undismissed for 120 days or an order approving such proceeding
shall have been entered.
1.3 "STARTING SALARY" shall mean the amount set forth in
Section 3.1.
1.4 "BONUS PLAN" shall mean the cash bonus plan described in
Section 3.2(a).
1.5 "BOARD" shall mean the Board of Directors of the Company.
1.6 "CAUSE" shall mean (i) gross neglect or willful and
continuing refusal by the Executive to substantially perform his duties (other
than due to Disability), (ii) breach of Section 4.2, (iii) willful engagement in
conduct which is demonstrably injurious to the Company or its Subsidiaries
(including, without limitation, a breach of Section 4.1) or (iv) conviction or
plea of nolo contendere to a felony or a misdemeanor involving moral turpitude.
1.7 "CHANGE IN CONTROL" shall mean:
(a) the date that any "person" (as such term is used in
Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) is or becomes the beneficial owner (as defined below, except
that such person shall be deemed to have "beneficial ownership" of all shares
that any such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 35% of the total voting power of the Company; or
(b) the date, following the expiration of any period of
two consecutive years, that individuals, who at the beginning of such period
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the shareholders of the Company was
approved by a vote of 66-2/3% of the directors of the Company then still in
office who were either directors at the beginning of such period or whose
2
<PAGE>
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board then in office.
For purposes of clause (a), "beneficial owner" has the same meaning as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, which shall in any event
include having the power to vote (or cause to be voted at such person's
direction) pursuant to contract, irrevocable proxy or otherwise, directly or
indirectly, voting power of the Company.
1.8 "COMPETITOR" shall have the meaning set forth in Section
4.2.
1.9 "CONFIDENTIAL INFORMATION" shall have the meaning set
forth in Section 4.1.
1.10 "DISABILITY" shall mean the inability of the Executive to
perform in all material respects his duties and responsibilities to the Company
or any Subsidiary by reason of a physical or mental disability or infirmity
which inability is reasonably expected to be permanent and has continued (i) for
a period of six consecutive months or (ii) such shorter period as the Company
may determine. The Executive (or his representative) shall furnish the Company
with satisfactory medical evidence documenting the Executive's disability or
infirmity.
1.11 "GOOD REASON" shall mean any (i) reduction in the
Executive's Starting Salary or opportunity to participate as set forth herein in
the Bonus Plan, (ii) a material adverse change in the UCAR Carbon Retirement
Plan, the UCAR Carbon Company Inc. Supplemental Retirement Income Plan, the
Equalization Benefit Plan for Participants of UCAR Carbon Retirement Plan or the
UCAR International Inc. Benefit Security Trust Agreement (as in effect on the
date hereof), (iii) relocation of the Participant's principal place of business
to a location which is more than 50 miles from its current location (without the
Executive's consent) or (iv) a material diminution in the Executive's duties,
responsibilities or reporting position as described in Article 2 (unless due to
a promotion or other increased responsibility).
3
<PAGE>
1.12 "RETIREMENT" shall mean the voluntary resignation of the
Executive when eligible to receive a pension benefit under the UCAR Carbon
Retirement Plan.
1.13 "SEVERANCE AMOUNT" shall mean an amount equal to the sum
of Starting Salary plus the Bonus Award, which sum shall be multiplied by 2.99.
The "BONUS AWARD" is the bonus amount paid or payable under the Bonus Plan for
the calendar year ending on or before the date of Termination of Employment.
1.14 "SUBSIDIARY" shall mean any corporation, over 50% of the
voting stock of which is owned by the Company.
1.15 "TERM" shall mean the term of this Agreement as set forth
in Section 2.2, and shall include any renewal period described therein.
1.16 "TERMINATION OF EMPLOYMENT" shall mean the Executive's
death or Disability, termination by the Company of the Executive's employment
for Cause or without Cause, resignation by the Executive from the employ of the
Company for Good Reason or without Good Reason, Retirement of the Executive, or
termination of the Executive's employment at the end of the Term.
ARTICLE 2
EMPLOYMENT AND TERM
2.1 EMPLOYMENT. The Company hereby offers to employ the
Executive as the President and Chief Executive Officer of the Company, and the
Executive hereby accepts such employment, for the Term.
2.2 TERM. The term of this Agreement shall commence on the
date hereof and shall end, unless extended as hereinafter provided, on the fifth
anniversary of the date hereof. The term of this Agreement shall be extended
automatically for successive additional one-year periods at the end of such
five-year period and of each such renewal period, unless, no later than
4
<PAGE>
ninety days prior to any such renewal date, the Board gives written notice to
the Executive that the term of this Agreement shall not be so extended or
unless, no later than two years prior to any such renewal date, the Executive
gives written notice to the Board that the term of this Agreement shall not be
so extended.
2.3 DUTIES. During the Term, unless otherwise agreed in
writing by the parties, the Executive shall have all powers and duties
consistent with his position as set forth in Section 2.1.
ARTICLE 3
COMPENSATION AND BENEFITS
3.1 STARTING SALARY. For services performed by the Executive
for the Company pursuant to this Agreement, the Company shall pay the Executive
the Starting Salary in the amount of $500,000 per year (which may be increased
by the Board, in its discretion, and references herein to Starting Salary and in
other documents to base salary shall mean such amount as so increased) payable
in accordance with the Company's regular payroll practices. Any compensation
which may be paid to the Executive under any additional compensation or
incentive plan of the Company or which may be otherwise authorized from time to
time by the Board in its discretion (or an appropriate committee thereof) shall
be in addition to the Starting Salary.
3.2 ANNUAL BONUSES. The Executive shall be entitled to
participate in the UCAR International Inc. Officers Incentive Plan in accordance
with its terms, with a target award of 60% of the greater of target salary
midpoint or actual salary.
3.3 OTHER BENEFITS. In addition to the Starting Salary and
participation in the Bonus Plan, the Executive shall also be entitled to the
following:
5
<PAGE>
(a) STOCK OWNERSHIP. The Executive and the Company have
on the date hereof entered into a Non-Qualified Stock Option Agreement.
(b)PARTICIPATION IN BENEFIT PLANS. The Executive shall be
entitled to participate in the benefit arrangements (including, without
limitation, future long-term incentive and stock option plans) maintained by the
Company for its executives at a level commensurate with his position. The
Executive shall also be entitled to participate in all other welfare and benefit
plans maintained by the Company for its employees generally.
(c) PRIOR SERVICE. Notwithstanding Section 3.3(b), (1)
for the purpose of calculating the Executive's benefits under the Company's
retirement plans, the Executive shall earn (ratably over the five year period
following the date hereof) service credit (a) for his employment with Union
Carbide Corporation ("Union Carbide") for the period from January 1, 1972
through January 31, 1996 plus (b) for the period from February 1, 1996 through
the date hereof (which together total 26.5 years and is called the "Prior
Service") in addition to the service credit which he earns for the period of his
employment with the Company and (2) the amount of benefits receivable by the
Executive under the Company's retirement plans shall be likewise ratably offset
by the amount of benefits receivable by the Executive under retirement plans of
Union Carbide. Prior Service and such offset shall be earned and applied as
follows: on each anniversary of the date hereof, one-fifth (1/5) of the Prior
Service will be earned (i.e., recognized) and one-fifth (1/5) of the offset will
apply. For example, after three years of credited service with the Company,
sixty percent (60%) of the Prior Service will be recognized and the Executive's
retirement benefits from the Company will be subject to an offset of sixty
percent (60%) of the Executive's retirement benefits from Union Carbide.
Accordingly, the Prior Service will be fully recognized, and the entire
retirement benefits from Union Carbide will be
6
<PAGE>
applied as an offset, as of the fifth anniversary of the date hereof. The
Company will make adjustments under its non-qualified retirement plans as
necessary to give effect to the foregoing. A further example of these
calculations has been separately provided to the Executive. The provisions of
this Section 3.3(c) are subject to the provisions of Sections 5.3(b) and 5.3(c).
(d) VACATION. The Executive shall be entitled to 5 weeks
vacation annually and paid holidays consistent with the Company's policies
applicable to executives.
ARTICLE 4
COVENANTS OF THE EXECUTIVE
4.1 CONFIDENTIALITY. The Executive acknowledges that, as a consequence of his
employment and position with the Company, the Executive will have access to and
become acquainted with confidential information of the Company and its
Subsidiaries. During the Term and at all times thereafter, the Executive shall
not, without the prior written consent of the Company, use, divulge, disclose or
make accessible to any other person, firm, partnership, corporation or other
entity any Confidential Information (as defined below) pertaining to the
business of the Company or any of its Subsidiaries, except while employed by the
Company, in the business of and for the benefit of the Company or any
Subsidiary. For purposes of this Section 4.1, "Confidential Information" shall
mean non-public (i) trade secrets, financial data, strategic business plans,
customer lists, sales and marketing information and plans and (ii) any other
technical, creative, proprietary and confidential information of the Company and
its Subsidiaries that is material to the business of the Company or its
Subsidiaries, which information described in either (i) or (ii) above was not
lawfully obtained by the Executive from a source independent of the Company or
its Subsidiaries or was not obtained in violation of such source's contractual
or other legal obligations or duties.
7
<PAGE>
4.2 NON-COMPETITION. The Executive shall not, during the Term
and for a period of two years following the Term, directly or indirectly (a)
own, manage, operate, join or control, or participate (or serve as a consultant
or similar position) in the ownership, management, operation or control of, any
business, entity, firm, partnership, corporation or other person, whether
private, governmental or quasi-governmental, which is engaged, directly or
indirectly, in the business of manufacturing or selling graphite or carbon
electrodes or any other business engaged in or being developed by the Company at
the time of the Executive's Termination of Employment (a "Competitor"), or (b)
solicit any person who is (or was during the six months prior to the Executive's
Termination of Employment) an employee of the Company to become an employee,
agent or independent contractor of a Competitor or any other business, or (c)
solicit any customer of the Company on behalf of any Competitor or any other
business; provided, however, that nothing in this Agreement shall preclude the
Executive from serving on the board of directors of any company with the prior
consent of the Company or managing his personal investments which do not exceed
5% of the equity of any Competitor (so long as, in the reasonable determination
of the Company, such activity does not materially interfere with his duties and
responsibilities hereunder).
4.3 ENFORCEMENT.
(a) The Executive agrees that the remedy at law for any
breach by him of any of the covenants and agreements set forth in this Section 4
will be inadequate and that, in the event of any such breach, the Company may,
in addition to the other remedies which may be available to it at law, obtain
injunctive relief prohibiting the Executive from the breach of such covenants
and agreements.
8
<PAGE>
(b) If any of the provisions of this Agreement shall
otherwise contravene or be invalid under the laws of any state or other
jurisdiction where it is applicable but for such contravention or invalidity,
such contravention or invalidity shall not invalidate all of the provisions of
this Agreement, but rather this Agreement shall be reformed and construed,
insofar as the laws of that state or jurisdiction are concerned, as not
containing the provision or provisions, but only to the extent that they are
contravening or are invalid under the laws of that state or jurisdiction, and
the rights and obligations created hereby shall be reformed and construed and
enforced accordingly.
(c) The Executive understands that the provisions of
Section 4 hereof may limit his ability to earn a livelihood in a business
similar to the business of the Company but nevertheless agrees and hereby
acknowledges that (i) such provisions do not impose a greater restraint than is
necessary to protect the goodwill or other business interests of the Company,
(ii) such provisions contain reasonable limitations as to time and the scope of
activity to be restrained and (iii) the consideration provided under this
Agreement, including, without limitation, any amounts or benefits provided under
Section 5, is sufficient to compensate the Executive for the restrictions
contained in this Section 4. In consideration of the foregoing and in light of
the Executive's education, skills and abilities, the Executive agrees that he
will not assert that, and it should not be considered that, any provisions of
this Section 4 prevented him from earning a living or otherwise are void,
voidable or unenforceable or should be voided or held unenforceable.
(d) Each of the covenants of this Section 4 is given by
the Executive as part of the consideration for this Agreement and as an
inducement to the Company to enter into this Agreement and accept its
obligations hereunder.
9
<PAGE>
ARTICLE 5
TERMINATION
5.1 TERMINATION OF AGREEMENT. This Agreement shall terminate
at the end of the Term.
5.2 PROCEDURES APPLICABLE TO TERMINATION FOR CAUSE AND
RESIGNATION FOR GOOD REASON.
(a) TERMINATION FOR CAUSE. If the Company determines that
Cause exists, it shall notify the Executive. The Executive may be terminated for
Cause upon 30 days' prior written notice. Such termination shall be effected by
a majority vote of the Board after the Executive shall have had the opportunity
(along with counsel) to be heard, unless within 15 days after receiving such
notice the Executive shall have cured the Cause to the reasonable satisfaction
of the Board.
(b) RESIGNATION FOR GOOD REASON. The Executive must give
at least 45 days prior written notice of his intent to resign for Good Reason.
During such 45-day period, the Company shall have the opportunity to cure the
Good Reason during the first 30 days of such notice period. If no notice is
given within 45 days after the event giving rise to Good Reason, the Good Reason
shall be deemed to have been waived.
5.3 OBLIGATIONS OF THE COMPANY UPON TERMINATION OF EMPLOYMENT.
(a) ACCRUED OBLIGATIONS AND OTHER BENEFITS. In the event
of Termination of Employment for any reason, the Company shall pay to the
Executive or, in the event of the Executive's death, his heirs or estate the
following:
(i) all Accrued Obligations in a lump sum within
ten days after the date of Termination of Employment; and
10
<PAGE>
(ii) all benefits accrued by the Executive as of
the date of Termination of Employment under all qualified and
nonqualified retirement, pension, profit sharing and similar plans of
the Company to such extent, in such manner and at such time as are
provided under the terms of such plans and arrangements.
(b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD
REASON. In the event that the Company terminates the Executive's employment
during the Term without Cause (but excluding Termination of Employment by reason
of the Executive's death or disability or under the circumstances described in
Section 5.3(c)), or the Executive resigns from his employment during the Term
for Good Reason, in addition to the amounts payable under Section 5.3(a):
(i) the Company shall pay the Severance Amount to
the Executive in a lump sum within ten days after the date of
Termination of Employment;
(ii) the Executive's pension benefit under all
applicable pension plans shall be increased by the amount he would
have accrued had he had an additional three (3) years of age and an
additional three (3) years of service, and, in addition, the
Executive shall then become entitled to retire immediately and
receive a pension benefit that is not actuarially reduced for early
commencement of payment;
(iii) the Company shall continue all benefit
coverage of the Executive and his dependents provided under the
Company's benefit policies applicable to retired executives; and
11
<PAGE>
(iv) if such termination or resignation occurs
prior to the fifth anniversary of the date hereof, all Prior Service
will be fully recognized (and the entire retirement benefits from
Union Carbide will apply as an offset) as described in Section 3.3(c)
as of the date of Termination of Employment (rather than as of such
fifth anniversary).
(c) TERMINATION FOLLOWING CHANGE IN CONTROL OR
BANKRUPTCY. If the Company terminates the Executive's employment during the Term
without Cause (but excluding Termination of Employment by reason of the
Executive's death or Disability) or the Executive resigns from his employment
during the Term for Good Reason, in each case within two years after a Change in
Control or Bankruptcy, in addition to the amounts payable under Section 5.3(a):
(i) the Company shall pay to the Executive, in a
lump sum within ten days after the date of Termination of Employment,
an amount equal to the result of the multiplication of (i) the sum of
the Starting Salary plus the Bonus Award by (ii) 2.99;
(ii) the Executive's pension benefit under all
applicable pension plans shall be increased by the amount he would
have accrued had he had an additional three (3) years of age and an
additional three (3) years of service, and, in addition, the
Executive shall then become entitled to retire immediately and
receive a pension benefit that is not actuarially reduced for early
commencement of payment;
12
<PAGE>
(iii) the Company shall continue all benefit
coverage of the Executive and his dependents provided under the
Company's benefit policies applicable to retired executives; and
(iv) if such termination or resignation occurs
prior to the fifth anniversary of the date hereof, all Prior Service
will be fully recognized (and the entire retirement benefits from
Union Carbide will apply as an offset) as described in Section 3.3(c)
as of the date of Termination of Employment (rather than as of such
fifth Anniversary).
(d)TERMINATION UNDER OTHER CIRCUMSTANCES. The Executive
acknowledges that the Company's obligations hereunder upon a Termination of
Employment by reason of the Executive's death or Disability, the termination of
the Executive's employment during the Term by the Company for Cause, resignation
by the Executive from the employ of the Company during the Term without Good
Reason, Retirement of the Executive, or termination of the Executive's
employment at the end of the Term (regardless of which party gives notice of
non-renewal or the reasons therefor) are limited to those provided in Section
5.3(a).
ARTICLE 6
MISCELLANEOUS
6.1 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the heirs and representatives of the Executive and the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization,
consolidation, acquisition of asset or stock, liquidation or otherwise), by
agreement in form and substance reasonably satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform this Agreement
if no such succession had taken place.
13
<PAGE>
Regardless whether such agreement is executed, this Agreement shall
be binding upon any successor of the Company in accordance with the operation of
law and such successor shall be deemed the "Company" for purposes of this
Agreement.
6.2 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Board or the Company, to:
UCAR International Inc.
39 Old Ridgebury Road, Section J4
Danbury, CT 06817
Attention: General Counsel
To the Executive, to:
Gilbert E. Playford
5200 St. Andrews Island Dr.
Grand Harbor
Vero Beach, FL 32967-7296
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
6.3 TAX WITHHOLDING. The Company shall provide for the
withholding of any taxes required to be withheld by federal, state and local law
with respect to any payment in cash, shares of capital stock and/or other
property made by or on behalf of the Company to or for the benefit of the
Executive under this Agreement or otherwise. The Company may, at its option: (i)
withhold such taxes from any cash payments owing from the Company to the
Executive, (ii) require the Executive to pay to the Company in cash such amount
as may be required to satisfy
14
<PAGE>
such withholding obligations and/or (iii)
make other satisfactory arrangements with the Executive to satisfy such
withholding obligations.
6.4 NO ASSIGNMENT. Except as otherwise expressly provided in
Section 6.1, this Agreement is not assignable by any party and no payment to be
made hereunder shall be subject to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or other charge.
6.5 EXECUTION IN COUNTERPARTS. This Agreement may be executed
by the parties hereto in one or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.6 JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes
with regard to this Agreement shall be exclusively in the courts of the State of
Connecticut, and this Agreement shall be construed and interpreted in accordance
with and governed by the laws of the State of Connecticut, other than the
conflict of laws provisions of such laws.
6.7 SEVERABILITY. If any provision of this Agreement shall be
adjudged by any court of competent jurisdiction to be invalid or unenforceable
for any reason, such judgment shall not affect, impair or invalidate the
remainder of this Agreement.
6.8 ENTIRE AGREEMENT. Except as otherwise provided in Section
3.3, this Agreement embodies the entire understanding of the parties hereto, and
supersedes all other oral or written agreements or understandings between them
regarding the subject matter hereof. No change, alteration or modification
hereof may be made except in a writing, signed by each of the parties hereto.
The headings in this Agreement are for convenience and reference only and shall
not be construed as part of this Agreement or to limit or otherwise affect the
meaning hereof.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day and year first above written.
UCAR INTERNATIONAL INC.
By: /s/ Robert D. Kennedy__________________
Name: Robert D. Kennedy
Title: Chairman
/s/ Gilbert E. Playford________________
Gilbert E. Playford
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
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REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED
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<TOTAL-LIABILITY-AND-EQUITY> 1,185
<SALES> 806
<TOTAL-REVENUES> 806
<CGS> 504
<TOTAL-COSTS> 504
<OTHER-EXPENSES> 7
<LOSS-PROVISION> (1)
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 166
<INCOME-TAX> 51
<INCOME-CONTINUING> 116
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116
<EPS-PRIMARY> 2.52<F1>
<EPS-DILUTED> 2.42<F1>
<FN>
<F1> Restated in accordance with Statement of Financial Accounting Standards No.
128 "Earnings Per Share" which was adopted retroactively as of December 31,
1997.
<F2> The September 30, 1997 figure has been corrected to properly reflect only
trade notes and accounts receivable.
</FN>
</TABLE>
