<PAGE>
================================================================================
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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
.................... TO ....................
---------------
COMMISSION FILE NUMBER: (1-13888)
---------------
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)
---------------
3102 WEST END AVENUE
SUITE 1100 37203
NASHVILLE, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 760-8227
---------------
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 March 31, 1999, 45,082,530 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 December 31, 1998
and March 31, 1999........................................... Page 3
Consolidated Statements of Operations for the Three Months
ended March 31, 1998 and 1999................................ Page 4
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1998 and 1999................................ Page 5
Consolidated Statement of Stockholders' Equity (Deficit) for
the Three Months ended March 31, 1999........................ Page 6
Notes to Consolidated Financial Statements..................... Page 7
INTRODUCTION TO PART I, ITEMS 2 AND 3, AND PART II, ITEM 1........ Page 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... Page 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS..................................................... Page 30
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS......................................... Page 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... Page 39
SIGNATURE............................................................ Page 40
INDEX TO EXHIBITS.................................................... Page E-1
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1998 1999
---- ----
<S> <C> <C>
CURRENT ASSETS: (UNAUDITED)
Cash and cash equivalents.............................. $ 58 $ 68
Short-term investments................................. 11 7
Notes and accounts receivable.......................... 198 211
Inventories:
Raw materials and supplies........................... 58 58
Work in process...................................... 150 135
Finished goods....................................... 56 61
----- -----
264 254
Prepaid expenses....................................... 47 46
----- -----
Total current assets........................... 578 586
----- -----
Property, plant and equipment............................. 1,220 1,160
Less: accumulated depreciation............................ 752 727
----- -----
Net fixed assets............................... 468 433
Other assets.............................................. 91 91
----- -----
Total assets................................... $1,137 $1,110
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................................... $ 67 $ 60
Short-term debt........................................ 19 15
Payments due within one year on long-term debt......... 63 64
Accrued income and other taxes......................... 28 25
Other accrued liabilities.............................. 198 172
----- -----
Total current liabilities...................... 375 336
----- -----
Long-term debt............................................ 722 761
Other long-term obligations............................... 266 263
Deferred income taxes..................................... 48 49
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, 47,411,296 shares issued at December 31,
1998, 47,425,836 shares issued at March 31, 1999..... - -
Additional paid-in capital............................. 521 523
Accumulated other comprehensive income (loss).......... (157) (198)
Retained earnings (deficit)............................ (566) (550)
Less: cost of common stock held in treasury, 2,226,498
shares at December 31, 1998, 2,343,306 shares at
March 31, 1999....................................... (85) (87)
----- -----
Total stockholders' equity (deficit)........... (287) (312)
----- -----
Total liabilities and stockholders' equity
(deficit).................................... $1,137 $1,110
===== =====
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
--------------
1998 1999
---- ----
Net sales................................................... $ 244 $ 202
Cost of sales............................................... 151 139
------ -----
Gross profit........................................... 93 63
Research and development.................................... 2 2
Selling, administrative and other expenses.................. 26 22
Other (income) expense (net)................................ 4 (3)
------ -----
Operating profit....................................... 61 42
Interest expense............................................ 16 19
------ -----
Income before provision for income taxes............... 45 23
Provision for income taxes.................................. 10 6
------ -----
Income of consolidated entities........................ 35 17
Less: minority stockholders' share of income................ - 1
------ -----
Net income............................................. $ 35 $ 16
===== =====
BASIC EARNINGS PER COMMON SHARE:
Basic net income per share............................... $ 0.77 $ 0.35
Weighted average common shares outstanding (IN THOUSANDS) 44,940 45,192
====== ======
DILUTED EARNINGS PER COMMON SHARE:
Diluted net income per share............................. $ 0.74 $ 0.34
Weighted average common shares outstanding (IN THOUSANDS) 46,670 46,501
====== ======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
---------------
CASH FLOW FROM OPERATING ACTIVITIES: 1998 1999
---- ----
Net income............................................. $ 35 $ 16
Non-cash charges to net income:
Depreciation and amortization........................ 14 12
Deferred income taxes................................ 1 4
Other non-cash charges............................... 7 5
Working capital*....................................... (65) (52)
Long-term assets and liabilities....................... 3 2
---- -----
NET CASH USED IN OPERATING ACTIVITIES............. (5) (13)
---- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures................................... (13) (12)
Purchases of short-term investments.................... (19) (13)
Maturity of short-term investments..................... 4 16
---- -----
NET CASH USED IN INVESTING ACTIVITIES............. (28) (9)
---- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt borrowings (reductions), net........... 5 (5)
Long-term debt borrowings.............................. 45 42
Long-term debt reductions.............................. (24) -
---- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES................. 26 37
---- -----
Net increase (decrease) in cash and cash equivalents...... (7) 15
Effect of exchange rate changes on cash and cash
equivalents............................................. - (5)
Cash and cash equivalents at beginning of period.......... 58 58
---- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 51 $ 68
==== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest expense..................................... $ 20 $ 23
Income taxes......................................... 13 8
* Net change in working capital due to the following
components:
(Increase) decrease in current assets:
Notes and accounts receivable........................ $ 6 $ (19)
Inventories.......................................... (25) (4)
Prepaid expenses..................................... 1 (2)
Decrease in accounts payable and accruals.............. (47) (4)
Antitrust investigations and related lawsuits and
claims............................................... - (18)
Restructuring payments................................. - (5)
---- -----
WORKING CAPITAL................................... $ (65) $ (52)
==== =====
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
UCAR INTERNATIONAL INC. AND SUSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
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, 1998..... $ - $ 521 $(157) $(566) $ (85) $(287)
Comprehensive income (loss):
Net income..................... - - - 16 - 16
Foreign currency translation
adjustments.................. - - (41) - - (41)
-- ---- ---- ---- ---- ----
Total comprehensive income (loss) - - (41) 16 - (25)
Acquisition of treasury shares... - 2 - - (2) -
-- ---- ---- ---- ---- ----
BALANCE AT MARCH 31, 1999..... $ - $523 $(198) $(550) $ (87) $(312)
== ==== ==== ==== ==== ====
</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
and reflect all adjustments (all of which are of a normal, recurring
nature) which are necessary for a fair presentation of financial position,
results of operations and cash flows for the periods presented. Results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results of operations that may be expected for the entire
year ending December 31, 1999.
IMPORTANT TERMS
The following terms are used to identify various companies or groups of
companies, markets or other matters in the Consolidated Financial
Statements.
"UCAR" refers to UCAR International Inc. only. UCAR is the issuer of the
publicly traded common stock mentioned in the Consolidated Financial
Statements.
"UCAR Global" refers to UCAR Global Enterprises Inc. only. UCAR Global is a
holding company and a direct wholly-owned subsidiary of UCAR. UCAR Global
is the only subsidiary directly owned by UCAR. UCAR Global is the issuer of
the outstanding 12% senior subordinated notes due 2005 (the "Subordinated
Notes") and is the primary borrower under the senior secured bank credit
facilities (the "Senior Bank Facilities").
"UCAR Group," "we," "us" or "our" refers collectively to UCAR, its
subsidiaries and its and their predecessors to the extent those
predecessors' activities related to the graphite and carbon business.
"Subsidiaries" refers to those companies which, at the relevant time, were
majority-owned or wholly-owned directly or indirectly by UCAR or its
predecessors. All of UCAR's subsidiaries have been wholly-owned (with
immaterial exceptions in the case of certain foreign subsidiaries) from at
least January 1, 1996 through March 31, 1999, except for its German
subsidiary and Carbone Savoie S.A.S., both of which were acquired in early
1997 and have been 70% owned, and except for its South African subsidiary,
which was 50% owned until April 1997, when it became 100% owned.
7
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(1) INTERIM FINANCIAL PRESENTATION (CONT.)
BUSINESS AND STRUCTURE
The UCAR Group operates in two business segments: graphite electrodes, and
graphite and carbon products. We develop, manufacture and market graphite
and carbon products, including electrodes, for the steel, ferroalloy,
aluminum, chemical, aerospace and transportation industries. Our principal
products are graphite electrodes, graphite and carbon cathodes, graphite
and carbon specialties (including carbon electrodes) and flexible graphite.
FOREIGN CURRENCY TRANSLATION
Generally, except for operations in Russia and Mexico in 1998 and Russia in
1999, unrealized gains and losses resulting from translating foreign
subsidiaries' assets and liabilities into U.S. dollars are accumulated in
other comprehensive income on the Consolidated Balance Sheet until such
time as the operations are sold or substantially or completely liquidated.
Translation gains and losses relating to operations where high inflation
exists are included in income in the Consolidated Financial Statements.
Since 1997, the Mexican economy has been considered highly inflationary,
defined as cumulative inflation of 100% or more over a three-year period.
Accordingly, the financial statements of our Mexican subsidiary have been
remeasured as if its functional currency were the U.S. dollar. In 1999, we
began to account for our Mexican subsidiary using the U.S. dollar as its
functional currency, irrespective of Mexico's inflationary status, because
its sales and purchases are predominantly U.S. dollar-denominated.
INVENTORIES
Inventories are stated at cost or market, whichever is lower. Cost is
determined generally on the "first-in first-out" method ("FIFO") in the
United States. The "average cost" method is used elsewhere.
8
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(1) INTERIM FINANCIAL PRESENTATION (CONT.)
ACCOUNTING CHANGES
In 1998, we changed our method of accounting for the cost of certain U.S.
inventories from the "last-in first-out" method ("LIFO") to the "first-in
first-out" method ("FIFO"). We believe the new method to be preferable
because it provides improved consistency in accounting for worldwide
inventories and avoids potential distortion of future profits from
anticipated decrements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. We are currently
evaluating the impact of SFAS 133 on our financial position, results of
operations and cash flows.
(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
UCAR Global and intercompany debt. Separate consolidated financial
statements of UCAR Global are not presented because they would not be
materially different than the Consolidated Financial Statements.
The following is a summary of the consolidated assets and liabilities of
UCAR Global and its subsidiaries and their consolidated results of
operations:
DECEMBER 31, MARCH 31,
1998 1999
---- ----
(DOLLARS IN MILLIONS)
Assets:
Current assets............................. $ 578 $ 586
Non-current assets......................... 559 524
----- ------
Total assets............................ $ 1,137 $ 1,110
===== ======
Liabilities:
Current liabilities........................ $ 375 $ 336
Non-current liabilities.................... 1,036 1,073
----- ------
Total liabilities....................... $ 1,411 $ 1,409
===== ======
Minority stockholders' equity in consolidated
entities................................... $ 13 $ 13
===== ======
9
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(2) UCAR GLOBAL ENTERPRISES INC. (CONT.)
THREE MONTHS
ENDED MARCH 31,
---------------
1998 1999
---- ----
(DOLLARS IN MILLIONS)
Net sales..................................... $ 244 $ 202
Gross profit.................................. $ 93 $ 63
Net income.................................... $ 35 $ 16
(3) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of SFAS 128, using the following data:
THREE MONTHS
ENDED MARCH 31,
---------------
1998 1999
---- ----
Weighted average common shares
outstanding for basic calculation..... 44,939,545 45,192,295
Add: Effect of stock options........... 1,730,726 1,308,443
----------- -----------
Weighted average common shares
outstanding, adjusted for diluted
calculation........................... 46,670,271 46,500,738
========== ==========
The calculation of weighted average common shares outstanding for the
diluted calculation excludes the consideration of stock options for 774,240
and 2,122,778 shares in the three months ended March 31, 1998 and 1999,
respectively, because the exercise of these options would not have been
dilutive for that period.
(4) SEGMENT REPORTING
The UCAR Group has two reportable operating segments: graphite electrodes,
and graphite and carbon products. The graphite electrode segment produces
and markets graphite electrodes to electric arc furnace and ladle furnace
steelmakers. The graphite and carbon products segment produces and markets
carbon electrodes, flexible graphite, graphite and carbon cathodes, and
graphite and carbon specialties. These reportable segments are managed
separately because of the different products and markets they serve.
10
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(4) SEGMENT REPORTING (CONT.)
We evaluate the performance of our operating segments based on gross profit.
Intersegment sales and transfers are not material. The following tables
summarize financial information concerning our reportable segments.
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1999
---- ----
(DOLLARS IN MILLIONS)
Net sales to external customers:
Graphite electrodes............. $ 167 $ 132
Graphite and carbon products.... 77 70
------ ------
Consolidated net sales......... $ 244 $ 202
====== ======
Gross profit:
Graphite electrodes............. $ 67 $ 44
Graphite and carbon products.... 26 19
------ ------
Consolidated gross profit...... $ 93 $ 63
====== ======
(5) RESTRUCTURING PLAN
In September 1998, we recorded a restructuring charge of $86 million in
connection with a global restructuring and rationalization plan to reduce
costs and improve operating efficiencies. The principal actions of the plan
involve the closure of manufacturing operations in 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 following is a summary of activity relating to the accrued liabilities
associated with the restructuring plan:
<TABLE>
<CAPTION>
BALANCE AT 1999 BALANCE AT
DECEMBER 31, 1998 PAYMENTS MARCH 31, 1999
----------------- -------- --------------
<S> <C> <C> <C>
Severance and related costs........ $ 30 $ 4 $ 26
Plant shut down and related costs.. 18 1 17
Postmonitoring and environmental... 9 - 9
---- -- ----
$ 57 $ 5 $ 52
==== == ====
</TABLE>
Our Berlin facility ceased production activities in 1998. Our Welland plant
ceased production efforts in April 1999. In addition, the relocation of our
corporate headquarters to Nashville, Tennessee was completed during the 1999
first quarter.
Cash payments of $5 million were made in the 1999 first quarter. Payments of
$1 million were associated with our Berlin facility, and payments of $4
million were associated with our Welland plant. Approximately
11
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(5) RESTRUCTURING PLAN (CONT.)
135 positions were eliminated in the 1999 first quarter. The restructuring
accrual is included in other accrued liabilities on the Consolidated Balance
Sheets.
(6) CONTINGENCIES
ANTITRUST INVESTIGATIONS
On June 5, 1997, we were served with subpoenas to produce documents to a
grand jury convened by the U.S. Department of Justice (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, the antitrust enforcement
authority of the European Union (the "EU authority") visited offices of one
of our French subsidiaries 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 those producers. In October
1997, we were served with subpoenas by the DOJ to produce documents relating
to, among other things, our carbon electrode and bulk graphite businesses.
In December 1997, UCAR's Board of Directors appointed a special committee of
outside directors to exercise its power and authority in connection with
antitrust investigations and related lawsuits and claims. On March 13, 1998,
the then Chairman of the Board, President and Chief Executive Officer and
the then Senior Vice President and Chief Operating Officer retired and
resigned from all positions with us.
On April 7, 1998, pursuant to a plea agreement between the DOJ and UCAR, the
DOJ charged UCAR and unnamed co-conspirators with participating from at
least July 1992 until at least June 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 in
the United States and elsewhere, to restrict co-conspirators' capacity and
to restrict non-conspiring producers' access to manufacturing technology for
graphite electrodes. On April 24, 1998, pursuant to the plea 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, commencing 1998. The plea
agreement was approved by the court and, as a result, we 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
payments due in 1998 and 1999 were timely made. The next installment
payment of $15 million is due in April 2000.
12
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(6) CONTINGENCIES (CONT.)
In April 1998, we became aware that the Canadian Competition Bureau (the
"Competition Bureau") had commenced a criminal investigation as to whether
there has been any violation of Canadian antitrust laws by producers of
graphite electrodes. In March 1999, pursuant to a plea agreement with the
Competition Bureau, our Canadian subsidiary pled guilty to a one count
charge of violating Canadian antitrust laws in connection with the sale of
graphite electrodes and was sentenced to pay a fine of Cdn. $11 million. The
plea agreement was approved by the court and, as a result, we will not be
subject to prosecution by the Competition Bureau with respect to any
antitrust violations occurring prior to the date of the plea agreement. The
fine was timely paid.
The guilty pleas have made it more difficult for us to defend against other
investigations as well as civil lawsuits and claims.
In June 1998, we became aware that the Japanese Fair Trade Commission (the
"JFTC") had commenced an investigation as to whether there has been any
violation of Japanese antitrust laws by producers and distributors of
graphite electrodes. In January 1999, UCAR received a request from the JFTC
to explain, among other things, the purpose of various alleged meetings
which took place between us and other producers of graphite electrodes. We
believe that, among other things, we have good defenses to any claim that we
are subject to the jurisdiction of the JFTC and we do not intend to comply
with this request. The independent distributor of our products in Japan has
been required to produce documents and witnesses to the JFTC. In March 1999,
the JFTC issued a "warning" letter to the four Japanese graphite electrode
producers. While the JFTC did not issue a "warning" letter to us, the
"warning" letter issued to the Japanese producers did reference us as a
member of an alleged cartel.
We have been vigorously protecting, and intend to continue to vigorously
protect, our interests in connection with the investigations described
above. We may, however, at any time settle any possible unresolved charges.
We are cooperating with the EU authority in its investigation and with the
DOJ and the Competition Bureau in their continuing investigations of others.
It is possible that antitrust investigations seeking, among other things, to
impose fines and penalties against us could be initiated by authorities in
other jurisdictions.
ANTITRUST LAWSUITS
In 1997, UCAR and other producers of graphite electrodes were served with
complaints commencing various antitrust class action lawsuits. Subsequently,
13
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(6) CONTINGENCIES (CONT.)
the complaints were either withdrawn without prejudice to refile or
consolidated into a single complaint (the "antitrust class action lawsuit").
The plaintiffs allege that the defendants violated U.S. federal antitrust
laws in connection with the sale of graphite electrodes and seek, among
other things, an award of treble damages resulting from such alleged
violations. In August 1998, the court certified a class of plaintiffs
consisting of all persons who purchased graphite electrodes in the United
States (the "class") directly from the defendants during the period from
July 1, 1992 through June 30, 1997 (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 (the "opt-out lawsuit"). The plaintiffs allege that the
defendants violated U.S. federal antitrust laws in connection with the sale
of graphite electrodes and seek, among other things, an award of treble
damages resulting from such alleged antitrust violations.
In 1998, the UCAR Group, other producers of graphite electrodes, Union
Carbide Corporation ("Union Carbide") and Mitsubishi Corporation
("Mitsubishi") were served with a complaint by Nucor Corporation and an
affiliate commencing a civil antitrust and fraudulent transfer lawsuit (the
"Nucor lawsuit"). The plaintiffs allege that the UCAR Group and certain
other defendants violated U.S. federal antitrust laws in connection with the
sale of graphite electrodes and that payments to Union Carbide and
Mitsubishi in connection with our leveraged recapitalization in January 1995
violated applicable state fraudulent transfer laws. The plaintiffs seek,
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 and Mitsubishi in connection with the recapitalization returned to
UCAR for purposes of enabling UCAR to satisfy any judgments resulting from
such alleged antitrust violations.
In 1998, the UCAR Group and other producers of graphite electrodes were
served with a petition by Chaparral Steel Company and two affiliates
commencing a separate civil antitrust lawsuit (the "Texas lawsuit"). The
plaintiffs allege that the defendants violated Texas antitrust laws in
connection with the sale of graphite electrodes and seek, among other
things, an award of treble damages resulting from such alleged violations.
In 1998, certain other steelmakers in the United States and Canada also
served us and other producers of graphite electrodes with complaints
commencing five separate civil antitrust lawsuits (four in the United States
and one in Canada) in various courts (the "other lawsuits"). The plaintiffs
allege that the defendants violated applicable antitrust laws (and
applicable conspiracy laws, in the case of the lawsuit in Canada) in
connection with the sale of graphite electrodes and seek, among other
things, an award of treble damages (in the case of lawsuits in the United
14
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(6) CONTINGENCIES (CONT.)
States) or actual and punitive damages (in the case of the lawsuit in
Canada) resulting from such alleged violations.
In 1999, the UCAR Group and other producers of graphite electrodes were
served with a complaint by 26 steelmakers and related parties, all but one
of whom is located outside the United States, commencing a separate civil
antitrust lawsuit in the United States (the "foreign customer lawsuit"). The
plaintiffs allege that the defendants violated U.S. federal antitrust laws
in connection with the sale of graphite electrodes sold or sourced from the
United States and those sold and sourced outside the United States. The
plaintiffs seek, among other things, an award of treble damages resulting
from such alleged antitrust violations. We believe that, among other things,
we have strong defenses against claims alleging that purchases of graphite
electrodes outside the United States are actionable under U.S. federal
antitrust laws.
In April 1999, the UCAR Group and other producers of graphite electrodes
were served with a complaint by Bayou Steel Corporation and an affiliate
commencing a separate civil antitrust lawsuit (the "Bayou lawsuit"). The
plaintiffs allege that the defendants violated U.S. federal antitrust laws
in connection with the sale of graphite electrodes and seek, among other
things, an award of treble damages resulting from such alleged violations.
Certain steelmakers in other countries who purchased graphite electrodes
from us, and certain customers who purchased other products from us, have
threatened to commence civil antitrust lawsuits against us in the United
States and other jurisdictions.
Through May 7, 1999, we have settled the antitrust class action lawsuit, the
opt-out lawsuit, the Nucor lawsuit, all of the other lawsuits (in Canada as
well as in the United States), certain of the threatened civil antitrust
lawsuits and certain possible civil antitrust claims by customers who
negotiated directly with us. The settlements cover, among other things,
virtually all of the actual and potential claims against us (but not other
defendants) by steelmakers in the United States and Canada arising out of
alleged antitrust violations occurring prior to the date of the respective
settlements in connection with the sale of graphite electrodes. The only
material exceptions are the Texas lawsuit, the foreign customer lawsuit, the
Bayou lawsuit and possible claims by steelmakers in the United States and
Canada whose aggregate purchases of graphite electrodes do not constitute a
material portion of our sales of graphite electrodes in the United States
and Canada. Although each settlement is unique, in the aggregate the
settlements consist primarily of current and deferred cash payments with
some product credits and discounts. Through March 31, 1999, all payments
due, an aggregate of $163 million, have been timely made. As of March 31,
1999 and based on information known to us at May 7, 1999, the aggregate
amount remaining due under the settlements was approximately $24 million,
most of which is payable in 1999. Amounts due under the settlement of the
15
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PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(6) CONTINGENCIES (CONT.)
antitrust class action may be increased if additional claims are filed by
members of the class or if it is determined that steelmakers outside the
United States who purchased graphite electrodes sourced within the United
States are members of the class and such steelmakers file claims
thereunder.
The Texas lawsuit, the foreign customer lawsuit and the Bayou lawsuit have
not been settled and are still in their early stages. We have been
vigorously defending, and intend to continue to vigorously defend, against
the Texas lawsuit, the foreign customer lawsuit and the Bayou lawsuit as
well as all threatened civil antitrust lawsuits and possible civil antitrust
claims, including those mentioned above. We may at any time, however, settle
the Texas lawsuit, the foreign customer lawsuit and the Bayou lawsuit as
well as any threatened lawsuits and possible claims and are actively
negotiating settlements with certain customers or their counsel.
We recorded a charge of $340 million 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 than $340 million. To the extent
that these liabilities and expenses are reasonably estimable, at May 7,
1999, $340 million continues to represent our estimate of these liabilities
and expenses. In the aggregate, the fines and settlements described above
are within the amounts we used to evaluate the $340 million charge.
It is possible that additional civil antitrust lawsuits seeking, among other
things, to recover damages could be commenced against us in the United
States and other jurisdictions.
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. The plaintiff
alleges that the defendants breached their fiduciary duties in connection
with alleged non-compliance by the UCAR Group and our employees with
antitrust laws and 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 and seeks recovery for UCAR of damages
to the UCAR Group resulting from these 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 obtained court permission to file an amended complaint.
16
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PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(6) CONTINGENCIES (CONT.)
The amended complaint was served in July 1998. In August 1998, UCAR and the
individual defendants moved to dismiss the complaint on the same grounds.
The motion has been fully briefed.
This lawsuit is still in its early stages. This lawsuit is being pursued for
recovery from the individual defendants on behalf of (and payable to) UCAR
and any indemnification obligations which UCAR may have to the individual
defendants would result from judgments or settlements in favor of UCAR. As a
result, we believe that UCAR's ultimate exposure in this lawsuit is limited
to defense costs and possibly reimbursement of certain of plaintiff's
attorneys' fees and expenses.
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 the consolidated amended complaint are UCAR and certain
former and current directors and officers. The proposed class consists of
all persons (other than the defendants) who purchased common stock during
the period from August 1995 through March 1998. The plaintiffs allege that,
during such period, the defendants violated U.S. federal securities laws in
connection with purchases and sales of common stock by making material
misrepresentations and omissions regarding alleged violations of antitrust
laws and seek, among other things, to recover damages resulting from such
alleged violations. UCAR and each of the individual defendants has filed a
motion to dismiss the complaint.
This lawsuit is still in its early stages and no evaluation of liability or
exposure related to this lawsuit can yet be made. As mentioned above, the
guilty pleas have made it more difficult for UCAR to defend against claims
asserted against it.
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PART I (CONT.)
UCAR INTERNATIONAL INC.
INTRODUCTION TO PART I, ITEMS 2 AND 3, AND PART II, ITEM 1
IMPORTANT TERMS
We use the following terms to identify various companies or groups of companies,
markets or other matters. These terms help to simplify the presentation of
information in this Report.
UCAR refers to UCAR International Inc. only. UCAR is the issuer of the publicly
traded common stock covered by this Report.
UCAR GLOBAL refers to UCAR Global Enterprises Inc. only. UCAR Global is a
holding company and a direct wholly owned subsidiary of UCAR. UCAR Global is the
only subsidiary directly owned by UCAR. UCAR Global is the issuer of our
outstanding 12% senior subordinated notes due 2005 (the "SUBORDINATED NOTES")
and is the primary borrower under the senior secured bank credit facilities (the
"SENIOR BANK FACILITIES").
UCAR GROUP, WE, US or OUR refers collectively to UCAR, its subsidiaries and its
and their predecessors to the extent those predecessors' activities related to
the graphite and carbon business.
SUBSIDIARIES refers to those companies which, at the relevant time, were
majority-owned or wholly-owned directly or indirectly by UCAR or its
predecessors. All of UCAR's subsidiaries have been wholly owned (with immaterial
exceptions in the case of certain foreign subsidiaries) from at least January 1,
1996 through March 31, 1999, except for our German subsidiary and Carbone Savoie
S.A.S. ("CARBONE SAVOIE"), both of which were acquired in early 1997 and have
been 70% owned, and except for our South African subsidiary, which was 50% owned
until April 1997, when it became 100% owned.
PRESENTATION OF FINANCIAL, MARKET AND LEGAL DATA
Separate consolidated financial statements of UCAR Global are not presented in
this Report because they would not be materially different than the Consolidated
Financial Statements.
We present financial information for the UCAR Group on a consolidated basis. We
use the equity method to account for 50% or less-owned interests and we do not
restate financial information for periods prior to the acquisition of
subsidiaries. This means that, prior to April 1997, financial information of our
South African subsidiary is only reflected on the single line in the
consolidated financial statements entitled "UCAR share of net income from
company carried at equity." For the same reason, financial information for our
German subsidiary and Carbone Savoie is consolidated on each line of the
Consolidated Financial Statements and the equity of the other 30% owners in
those subsidiaries is reflected on the single line entitled "minority
stockholders' share of income."
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PART I (CONT.)
UCAR INTERNATIONAL INC.
References to cost in the context of our low-cost supplier strategy do not
include the unusual or non-recurring charges identified in the Consolidated
Financial Statements on the lines entitled "antitrust investigations and related
lawsuits and claims," "restructuring charge" or "impairment loss on Russian
assets" or the impact of accounting changes.
Unless otherwise noted, all cost savings and reductions described in this Report
are estimates based on a comparison to costs in 1998 and on the assumption that
net sales and other operating conditions are substantially the same in 1999 as
they were in 1998.
Neither any statements in this Report nor any charge taken by the UCAR Group
relating to any legal proceedings constitute an admission as to any wrongdoing
or liability.
Reference is made to our Annual Report on Form 10-K for the year ended December
31, 1998 (the "ANNUAL REPORT") for background information on various
contingencies and other matters related to circumstances affecting us and our
industry.
FORWARD LOOKING STATEMENTS
This Report contains forward looking statements. These include statements about
such matters as future production of steel in electric arc furnaces, future
prices and sales of and demand for graphite electrodes and other products,
future operational and financial performance of various businesses, plans and
programs relating to strategies and divestiture, joint venture, operating,
global integration and capital projects, legal matters and related fees and
costs, consulting fees and related projects, and future costs, cost savings and
reductions, margins and earnings. Except as otherwise required to be disclosed
in periodic reports required to be filed by public companies with the SEC
pursuant to the SEC's rules, we have no duty to update these statements.
Actual future events and circumstances (including future performance, results
and trends) could differ materially from those set forth in these statements due
to various factors. These factors include:
. the possibility that announced additions to capacity for producing
steel in electric arc furnaces or announced reductions in graphite
electrode manufacturing capacity may not occur
. the possibility that increased production of steel in electric arc
furnaces may not result in increased demand for or prices or sales of
graphite electrodes
. the occurrence of unanticipated events or circumstances relating to
pending antitrust investigations or pending antitrust, shareholder
derivative or securities lawsuits
. the commencement of investigations or lawsuits relating to the
same subject matter as these pending investigations or lawsuits
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PART I (CONT.)
UCAR INTERNATIONAL INC.
. the occurrence of unanticipated events or circumstances relating
to our plans or projects
. changes in currency exchange rates, changes in economic or
competitive conditions, technological developments, and other risks
and uncertainties, including those described in this Report and the
Annual Report.
No assurance can be given that any future strategic alliances or divestitures
described in this Report or the Annual Report will be completed or as to the
timing or terms of any such transaction.
20
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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
We are the largest manufacturer of graphite and carbon electrodes and cathodes
in the world, with sales in more than 80 countries and manufacturing facilities
on four continents.
Graphite electrodes, our principal product, are consumed primarily in the
production of steel in electric arc furnaces, the steelmaking technology used by
all "mini-mills," which constitute the growth sector of the steel industry.
Graphite electrodes are also used for refining steel in ladle furnaces and in
other refining processes. Carbon electrodes are used primarily in the production
of silicon metal, which is used in the manufacture of aluminum. Cathodes are
used as lining for furnaces that smelt aluminum. We also manufacture other
graphite and carbon products as well as flexible graphite products. Our
non-electrode businesses contribute about one-third of our net sales. In
addition to the steel and metals industries, we sell our products to the
semiconductor, automotive, aerospace, chemical, and transportation industries.
Our strategic goal is to be the best global manufacturer and customer service
driven company in the graphite and carbon industry. We are focused on providing
our customers with exceptional commercial and technical service along with the
best product performance in the industry. We seek to be the lowest cost supplier
in the industry and to use that to our competitive advantage.
We believe our strengths include our multiple low cost locations and fully
integrated state-of-the-art manufacturing facilities, our record of innovative
product and process developments and our exceptional customer technical service.
We seek to build on these strengths to leverage earnings growth within existing
product lines and through new product innovation and penetration of related new
and niche markets.
GLOBAL RESTRUCTURING AND RATIONALIZATION PLAN AND OTHER INITIATIVES. In
September 1998, UCAR's Board of Directors adopted a global restructuring and
rationalization plan. The plan is intended to enhance stockholder value by
focusing on optimizing margins, maximizing cash flow, generating growth in
earnings and strengthening competitiveness through operating and overhead cost
reduction and plant rationalization. The plan is also intended, over the long
term, to strengthen our position as a low cost supplier to the steel and metals
industries and, over the near term, to respond to global economic conditions
that have been adversely impacting our customers.
The plan had a positive impact on earnings in the 1999 first quarter and we
believe that, under current conditions, the plan will continue to have a
positive impact on earnings, particularly in the second half of 1999. We
estimate that the plan will generate annual cost savings at a rate of about $80
million by the end of 1999, $111 million by the end of 2000 and $135 million by
the end of 2001 and thereafter. We also believe that the plan will reduce
working capital needs and improve efficiencies.
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PART I (CONT.)
UCAR INTERNATIONAL INC.
Planned plant rationalization activities are on or ahead of schedule. Savings
under the plan were on target for the 1999 first quarter, aggregating $10
million as compared to the 1998 measurement bases. We achieved $4 million of
savings in cost of sales, including a $50 per metric ton reduction in cost of
sales for graphite electrodes, as well as $6 million in total overhead savings.
We anticipate achieving about $64 million of savings in 1999.
Consistent with our strategic goals and cost reduction plans, we are seeking
strategic alliances to enhance our strengths and growth in existing product
lines and related new and niche markets as well as through new product
innovation. Our relationship with Aluminium Pechiney S.A. in the cathode
business is an example of a successful strategic alliance. Current areas of
focus include our graphite and carbon specialties business and our flexible
graphite business, where we see possible applications in the fuel cell,
semiconductor and flame retardant industries. Alliances may be structured as
joint ventures, licensing, supply or other arrangements. We may also divest
parts of certain businesses in our graphite and carbon products business
segment.
GLOBAL ECONOMIC CONDITIONS. We are a global company and serve every geographic
market worldwide. Accordingly, we are always impacted in varying degrees, both
positively and negatively, as country or regional conditions affecting the
markets for our products fluctuate.
In 1998, the economic downturn in the Asia Pacific region directly or indirectly
affected most of the worldwide markets for our products. This downturn directly
affected demand for steel and other metals in the Asia Pacific region. To the
extent that certain regions (such as Eastern Europe, Africa, South America and
the Middle East) were major exporters of steel and other metals to the Asia
Pacific region, this downturn also affected demand for their products. In some
instances, those exporters sought to sell their products in other regions (such
as North America and Western Europe), thereby adversely affecting demand for
steel and other metals produced in those other regions. All of these factors
resulted in a reduction in global demand for and production of steel and other
metals. As a result, our customers sought to reduce their inventories of
supplies (such as inventories of electrodes) as well as reduce their production
rates. All of these circumstances adversely affected demand for graphite
electrodes and some of our other products. We experienced downward pressure in
certain markets on pricing of graphite electrodes and some of our other products
beginning in early 1998. These circumstances negatively impacted our results of
operations in 1998 and in the 1999 first quarter.
We saw some signs of a possible improvement in the end of the 1999 first
quarter, which have continued into the first part of the 1999 second quarter.
These signs include increased demand and orders for graphite electrodes from the
steel industry and for graphite specialties from the semiconductor industry.
Demand for graphite specialties from the transportation industry and for
cathodes from aluminum industry has remained healthy. The silicon metals
industry and demand for products sold to that industry have, however, remained
weak. Pricing for most of our products has also remained weak. We do not yet
know whether this improvement will be significant or sustained. In any event, in
light of typical order patterns for graphite electrodes, we would not expect to
see a significant improvement before the second half of 1999.
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PART I (CONT.)
UCAR INTERNATIONAL INC.
REFINANCING AND PLANS TO MANAGE LIQUIDITY. In November 1998, the Senior Bank
Facilities were refinanced and the indenture governing the Subordinated Notes
(the "SUBORDINATED NOTE INDENTURE") was amended. In connection with the
refinancing, we obtained additional term debt of $210 million.
Following the refinancing, the covenants under the Senior Bank Facilities are
more restrictive than they had been. The covenants do, however, allow us to
implement our global restructuring and rationalization plan. Further, the
covenants do not restrict our ability to draw on our revolving credit facility
unless payments and reserves with respect to the litigation matters described
below exceed $400 million (adjusted for certain imputed interest expense).
We expect to continue to manage our liquidity as described in the Annual Report.
Global economic conditions negatively impacted our results of operations in the
1999 first quarter as described above and, correspondingly, negatively impacted
cash flow and other measures of liquidity and financial strength. This negative
impact on cash flow was partially offset by savings under our global
restructuring and rationalization plan and other projects described in the
Annual Report. We believe that, under current economic and other factors and
conditions affecting us and our industry, we will be able to successfully
continue to implement our plans to manage liquidity.
LITIGATION MATTERS. Since 1997, we have been served with subpoenas, search
warrants and information requests by antitrust authorities in the United States
and elsewhere in connection with antitrust investigations. In addition, civil
antitrust lawsuits have been commenced and threatened against us and other
producers and distributors of graphite electrodes in the United States and
elsewhere. We recorded a charge against results of operations for 1997 in the
amount of $340 million as a reserve for estimated potential liabilities and
expenses in connection with antitrust investigations and related lawsuits and
claims. In April 1998, 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, payable in six annual installments. In March 1999, our Canadian
subsidiary pled guilty to a one-count charge of violating Canadian antitrust
laws in connection with the sale of graphite electrodes and was sentenced to pay
a fine of Cdn. $11 million. We have settled virtually all of the graphite
electrode antitrust claims by steelmakers in the United States and Canada as
well as antitrust claims by certain other customers. In the aggregate, the fines
and settlements are within the amounts we used for purposes of evaluating the
$340 million charge. Actual liabilities and expenses could be materially higher
than such charge.
UCAR has been named as a nominal defendant in a shareholder derivative lawsuit
and is a defendant in a securities class action lawsuit, each of which is based,
in part, on the subject matter of the antitrust investigations, lawsuits and
claims. We do not believe that the outcome of the shareholder derivative lawsuit
will have a material adverse effect on us. The securities class action is still
in its early stages and no evaluation of potential liability can yet be made.
23
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PART I (CONT.)
UCAR INTERNATIONAL INC.
The guilty pleas have made it more difficult to defend against other
investigations, lawsuits and claims.
CURRENCY MATTERS. We produce and sell our products in multiple currencies. As a
result, in general, our results of operations are affected by changes in
currency exchange rates. During the 1999 first quarter, many of the currencies
in which we manufacture and sell our products weakened against the U.S. dollar.
The most significant fluctuation occurred in Brazil, where the Brazilian
currency devalued about 40% against the U.S. dollar during the 1999 first
quarter. In the 1999 first quarter, we recorded unrealized currency transaction
gains of $3 million associated with the U.S. dollar-denominated assets and
liabilities of our Brazilian subsidiary. This unrealized gain is included in
other (income) expense (net) in the Consolidated Statements of Operations.
We account for our non-U.S. subsidiaries under the provisions of Statement of
Financial Accounting Standards ("SFAS") 52, "Foreign Currency Translation," and
accordingly, their assets and liabilities are translated into U.S. dollars for
consolidation and reporting purposes. Foreign currency translation adjustments
are generally recorded as part of stockholders' equity and identified as
accumulated other comprehensive income (loss) in the Consolidated Balance
Sheets. In the 1999 first quarter, stockholders' equity decreased by $41 million
as a result of cumulative translation adjustments, including $30 million
associated with our Brazilian subsidiary.
In both 1998 and 1999, the Russian economy was considered highly inflationary,
defined as cumulative inflation of approximately 100% or more over a 3-year
period. Accordingly, translation gains and losses relating to operations of our
Russian subsidiary are included in other (income) expense (net) in the
Consolidated Statements of Operations rather than as part of stockholders'
equity.
Since 1997, the Mexican economy has also been considered highly inflationary.
Accordingly, the financial statements of our Mexican subsidiary have been
remeasured as if its functional currency were the U.S. dollar. In 1999, we began
to account for our Mexican subsidiary using the U.S. dollar as its functional
currency, irrespective of Mexico's inflationary status, because its sales and
purchases are predominantly U.S. dollar-denominated.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
1998. Net sales of $202 million in the 1999 first quarter represented a 17%
decrease from net sales of $244 million in the 1998 first quarter. Gross profit
of $63 million in the 1999 first quarter represented a 32% decrease from gross
profit of $93 million in the 1998 first quarter. Gross profit margin was 31.2%
in the 1999 first quarter as compared to 38.1% in the 1998 first quarter.
The decrease in net sales and gross profit was primarily due to lower volumes
and sales revenue per metric ton and the impact of currency exchange rate
changes. The lower volumes and sales revenue per metric ton were due primarily
to changes in global economic conditions which reduced demand for steel and
other metals. This, in turn, reduced demand for most of our products,
24
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PART I (CONT.)
UCAR INTERNATIONAL INC.
particularly graphite electrodes. The decrease in gross profit margin was
primarily due to the fact that the percentage decrease in net sales was greater
than a corresponding decrease in cost of sales.
GRAPHITE ELECTRODE BUSINESS SEGMENT. Net sales of graphite electrodes decreased
21%, or $35 million, to $132 million in the 1999 first quarter from $167 million
in the 1998 first quarter. The decrease in net sales of graphite electrodes was
primarily attributable to a reduction of 6,000 metric tons, or 11%, in the
volume of graphite electrodes sold to 46,600 metric tons in the 1999 first
quarter from 52,600 metric tons in the 1998 first quarter. The reduced volume of
graphite electrodes sold represented about $18 million of the $35 million
reduction in net sales.
The average sales revenue per metric ton (in U.S. dollars and net of changes in
currency exchange rates) of our graphite electrodes was $2,757 in the 1999 first
quarter as compared to $3,058 in the 1998 first quarter. The reduced average
sales revenue per metric ton and, to a lesser extent, changes in product mix
represented about $17 million of the $35 million reduction in net sales. The
reduction in average sales revenue per metric ton was primarily due to the
lowering of prices by our Brazilian subsidiary because of cost advantages
resulting from the Brazilian currency devaluation. This accounted for about $8
million of the reduction in net sales. Other currency exchange rate changes
accounted for an additional $2 million of the reduction in net sales.
Cost of sales for graphite electrodes decreased 12% to $88 million in the 1999
first quarter from $100 million in the 1998 first quarter. The reduction in cost
of sales was primarily due to lower volumes. The impact of cost increases was
partially offset by cost reduction programs. Gross profit margin for graphite
electrodes decreased to 33.3% in the 1999 first quarter from 40.1% in the 1998
first quarter. The decrease in gross profit margin was primarily due to the fact
that the percentage decrease in net sales was greater than a corresponding
decrease in cost of sales, a portion of which is essentially fixed.
GRAPHITE AND CARBON PRODUCTS BUSINESS SEGMENT. This business segment includes
graphite and carbon cathodes, graphite and carbon specialties (including carbon
electrodes) and flexible graphite.
Net sales of graphite and carbon products decreased 9% to $70 million in the
1999 first quarter from $77 million in the 1998 first quarter. The decrease was
primarily due to the global economic conditions which resulted in lower demand
and lower prices for carbon electrodes sold to the silicon metals industry and
for graphite specialties sold to the semiconductor, aerospace and aircraft
industries. The decreases were partially offset by increased demand for graphite
cathodes sold to the aluminum industry. Demand for and prices of other products
remained relatively stable.
Cost of sales for graphite and carbon products was $51 million in both the 1999
first quarter and the 1998 first quarter. The impact of lower overall operating
levels on cost of sales was largely offset by changes in product mix and cost
increases. Gross profit margin for graphite and carbon products decreased to
25
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PART I (CONT.)
UCAR INTERNATIONAL INC.
27.1% in the 1999 first quarter from 33.8% in the 1998 first quarter. The
decrease in gross profit margin was primarily due to the fact that the decrease
in net sales was not accompanied by a decrease in cost of sales.
OPERATING PROFIT OF THE UCAR GROUP. Operating profit in the 1999 first quarter
was $42 million, or 20.8% of net sales, as compared to $61 million, or 25.0% of
net sales, in the 1998 first quarter. The decrease in operating profit was
primarily due to lower gross profit.
Selling, administrative and other expenses decreased to $22 million in the 1999
first quarter from $26 million in the 1998 first quarter primarily due to lower
corporate administration expenses resulting from cost savings under our global
rationalization and restructuring plan and reduced variable compensation
expense.
Other (income) expense (net) was income of $3 million in the 1999 first quarter
as compared to expense of $4 million in the 1998 first quarter. The change was
primarily due to a reduction in consulting fees and exchange rate translation
and transaction gains.
OTHER ITEMS AFFECTING THE UCAR GROUP. Interest expense increased to $19 million
in the 1999 first quarter from $16 million in the 1998 first quarter. The
increase resulted from both imputed interest expense of $1 million associated
with the $110 million antitrust fine payable in six annual installments and
higher interest expense of $2 million associated with increased debt levels and
slightly higher interest rates. Average outstanding total debt was $834 million
in the 1999 first quarter as compared to $747 million in the 1998 first quarter.
The average annual interest rate was 8.62% in the 1999 first quarter as compared
to 8.53% in the 1998 first quarter. These average annual interest rates exclude
the imputed interest on the antitrust fine. The increase in the average annual
interest rate was due to an increase in the margin over LIBOR which we pay under
the Senior Bank Facilities as a result of the refinancing completed in November
1998. The impact of this increase in the margin was slightly offset by lower
LIBOR. We incurred additional debt in 1998 and in the 1999 first quarter to
finance a portion of the fines and settlements paid in connection with antitrust
investigations and related lawsuits and claims.
Provision for income taxes was $6 million for the 1999 first quarter as compared
to $10 million for the 1998 first quarter. For the 1999 first quarter, provision
for income taxes reflected a 27% effective rate, which was lower than the U.S.
federal income tax rate of 35%, primarily due to earnings resulting from
consolidated entities with lower effective tax rates. For the 1998 first
quarter, provision for income taxes reflected a 22% effective rate. The lower
rate in the 1998 first quarter was a result of certain one-time foreign tax
benefits and incentives.
As a result of the changes described above, net income was $16 million in the
1999 first quarter, a decrease of 54% from net income of $35 million in the 1998
first quarter.
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PART I (CONT.)
UCAR INTERNATIONAL INC.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of funds have consisted principally of invested capital, cash flow
from operations, and debt financing. Our uses of those funds (other than for
operations) have consisted principally of debt reduction, capital expenditures,
and payment of fines, liabilities and expenses in connection with antitrust
investigations and related lawsuits and claims.
We are highly leveraged and have substantial obligations in connection with
antitrust investigations and antitrust and securities lawsuits and claims. We
had total debt of $840 million and a stockholders' deficit of $312 million at
March 31, 1999 as compared to total debt of $804 million and a stockholders'
deficit of $287 million at December 31, 1998. Cash, cash equivalents and
short-term investments were $75 million at March 31, 1999 as compared to $69
million at December 31, 1998.
Debt (net of cash, cash equivalents and short-term investments and excluding the
$340 million reserve) was $765 million at March 31, 1999 as compared to $735
million at December 31, 1999.
CASH FLOW
CASH FLOW USED IN OPERATING ACTIVITIES. Cash flow used in operating activities
was $13 million in the 1999 first quarter as compared to $5 million in the 1998
first quarter. The increased use of cash of $8 million resulted primarily from
lower net income of approximately $20 million, partially offset primarily by a
lower use of cash flow for working capital of approximately $13 million.
Use of cash flow for working capital was $52 million in the 1999 first quarter,
an improvement of $13 million from a use of $65 million in the 1998 first
quarter. The improvement occurred despite the use of $18 million for payment of
settlements and fines in connection with antitrust investigations and related
lawsuits and claims and the use of $5 million for restructuring payments during
the 1999 first quarter. The improvement was due primarily to a reduction of $21
million in the use of cash flow for inventories and a reduction of $43 million
in the use of cash flow for payables, mainly as a result of lower production
levels attributable to global economic conditions. This was partially offset by
an increase of $25 million in receivables resulting from stronger net sales in
the latter part of the 1999 first quarter and an increase in days sales
outstanding due to slower collection rates when compared to the 1998 first
quarter.
CASH FLOW USED IN INVESTING ACTIVITIES. We used $9 million of cash flow in
investing activities during the 1999 first quarter as compared to $28 million
during the 1998 first quarter. This $19 million improvement resulted primarily
from reduced investment activity by our Brazilian subsidiary. Cash flow used for
capital expenditures was $1 million lower in the 1999 first quarter than in the
1998 first quarter.
CASH FLOW PROVIDED BY FINANCING ACTIVITIES. Cash flow provided by financing
activities was $37 million in the 1999 first quarter as compared to $26 million
in the 1998 first quarter. Financing activities consisted of $42 million of net
long-term debt borrowings under the Senior Bank Facilities in the 1999 first
quarter as compared to $21 million of net borrowings in the 1998 first quarter.
The increased
27
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC.
borrowings were used primarily to fund payment of settlements and fines
associated with antitrust investigations and related lawsuits and claims.
Increased net long-term debt borrowings were partially offset by a $5 million
net reduction in short-term debt in the 1999 first quarter as compared to $5
million net increase in short-term debt in the 1998 first quarter. This $10
million improvement in the 1999 first quarter as compared to the 1998 first
quarter resulted from reduced short-term debt levels at our Brazilian
subsidiary.
ACCOUNTING CHANGES
In 1998, we changed our method of accounting for the cost of certain U.S.
inventories from the "last-in first-out" method ("LIFO") to the "first-in
first-out" method ("FIFO"). We believe the new method to be preferable because
it provides improved consistency in accounting for worldwide inventories and
avoids potential distortion of future profits from anticipated decrements.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
We are currently evaluating the impact of SFAS 133 on our financial position,
results of operations and cash flows.
YEAR 2000 ISSUE
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 things, temporary inability to process transactions or
otherwise engage in similar normal business activities.
In 1996, we decided to upgrade and integrate substantially all of our systems,
both domestic and foreign. As part of this process, for the past three years, we
have been remediating our existing systems so that they are Year 2000 compliant.
Remediation consists of identifying, analyzing, replacing or modifying, and
testing our existing systems so that they are Year 2000 compliant. Testing
includes documentation review. In addition, since 1996, when we have installed
or plan to install new systems, whether installed as part of this upgrade and
integration, as part of process improvement or cost reduction projects or
otherwise, we believe that they have been, or will be at the time of
installation, Year 2000 compliant.
We identified the following systems that required analysis for Year 2000
compliance: finance and control systems; local and wide area networks;
production process systems and instrumentation; stand-alone and networked
personal computers; and other business equipment and site systems.
28
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC.
Substantially all of our personal computers have been analyzed, modified or
replaced, tested and are Year 2000 compliant. Substantially all of our finance
and control systems have been analyzed and modified or replaced and most have
been tested and are Year 2000 compliant. Testing of the remaining finance and
control systems will be substantially complete by the end of the 1999 second
quarter. Plant-by-plant remediation of production process systems and
instrumentation, local and wide-area networks, and other business equipment and
site systems continues with substantial completion expected by the end of the
1999 second quarter.
Independent verification of our Year 2000 compliance efforts is ongoing with
substantial completion expected for critical application systems by the end of
the 1999 second quarter.
We have conducted surveys of customers, suppliers and service providers to
determine whether they have any Year 2000 issues which, if not addressed, could
have a material impact on us. Based on responses which we have received from
these surveys, we believe that customers and critical suppliers and service
providers representing about 85% of our business activities involving third
parties will be Year 2000 compliant on a timely basis. The critical suppliers
and service providers who responded negatively to our surveys do not represent
sole suppliers or service providers where an interruption in supply or service
would materially impair continued normal business activities. No utility
provider responded negatively to our survey. Follow up is ongoing with
customers, suppliers and service providers that have not responded to our
surveys. On-site visits are planned to evaluate the compliance status of
critical suppliers and service providers.
We are continuing the development of contingency plans that respond to risks of
either one or more of our systems not becoming Year 2000 compliant or our
customers or critical suppliers or service providers not becoming Year 2000
compliant on a timely basis. We expect to have these plans finalized and in
place by the end of the 1999 third quarter. Our contingency plans will place
particular emphasis on the completion of remediation by our manufacturing
operations and the ability of certain electric utility providers that supply
electric power to our manufacturing operations to become Year 2000 compliant on
a timely basis. Contingency plans will include consideration of alternative
sources of supply or service, customer communication plans and plant and
business response plans.
The failure to sufficiently remediate Year 2000 issues in a timely fashion could
pose substantial risks for us. These risks include possible manufacturing system
malfunctions, including shutdowns. The extent of these risks to us is uncertain
at this time.
Since 1996, we estimate that we have incurred and will incur an aggregate
incremental cost of about $3 million for internal and external services in
connection with Year 2000 issues, of which management estimates about $2 million
has been incurred prior to 1999. Internal costs consist principally of payroll
costs for our information systems group.
29
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risks primarily from changes in interest rates and
currency exchange rates. To manage our exposure to these changes, we routinely
enter into various hedging transactions that have been authorized according to
documented policies and procedures. We do not use derivatives for trading
purposes or to generate income or engage in speculative activity, and we never
use leveraged derivatives.
Our exposure to changes in interest rates results primarily from floating rate
long-term debt tied to LIBOR. We use interest rate caps to manage the risk
associated with these changes.
Our exposure to changes in currency exchange rates results primarily from:
. Investments in our foreign subsidiaries and in our share of the
earnings of those subsidiaries, which are denominated in local
currencies.
. Raw material purchases made by our foreign subsidiaries in a currency
other than the local currency.
. Export sales made by our subsidiaries in a currency other than the
local currency.
When we deem it appropriate, we may attempt to limit our risks associated with
changes in currency exchange rates through both operational and financial market
activities. Financial instruments are used to hedge existing exposures, firm
commitments and, potentially, anticipated transactions. We use forward, option
and swap contracts to reduce risk by essentially creating offsetting currency
exposures. At March 31, 1999, we held contracts for the purpose of hedging these
risks with an aggregate notional amount of about $256 million. All of our
contracts mature within one year. All of our contracts are accounted for as
hedges and, accordingly, gains and losses are reflected in the cost basis of the
underlying transaction.
During the 1999 first quarter, many of the currencies of countries in which we
manufacture and sell our products weakened against the U.S. dollar. The most
significant fluctuation occurred in Brazil, where the currency devalued by about
40% against the U.S. dollar in the 1999 first quarter. These currency
fluctuations resulted in a $41 million reduction in stockholders' equity in the
1999 first quarter due to cumulative translation adjustments, including $30
million associated with our Brazilian subsidiary.
30
<PAGE>
PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC.
ITEM 1. LEGAL PROCEEDINGS
ANTITRUST INVESTIGATIONS. On June 5, 1997, we were 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 Antitrust Division of the U.S. Department of Justice (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 authority of the
European Union (the "EU AUTHORITY"), visited offices of our 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 those producers. In October 1997, we
were served with subpoenas by the DOJ to produce documents relating to, among
other things, our 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 March 13, 1998,
effective immediately, Robert P. Krass, then Chairman of the Board, President
and Chief Executive Officer, and Robert J. Hart, then Senior Vice President and
Chief Operating Officer, retired and Mr. Krass resigned as a director.
On April 7, 1998, pursuant to a plea agreement between the DOJ and UCAR, the DOJ
charged UCAR and unnamed co-conspirators with participating from at least July
1992 until at least June 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 in the United States and
elsewhere, to restrict co-conspirators' capacity and to restrict non-conspiring
producers' access to manufacturing technology for graphite electrodes. On April
24, 1998, pursuant to the plea 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,
commencing 1998. The agreement was approved by the District Court and, as a
result, under the plea agreement, we 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 payments due in 1998 and 1999 were timely
made.
In April 1998, we became aware that the Canadian Competition Bureau (the
"COMPETITION BUREAU") had commenced a criminal investigation as to whether there
has been any violation of Canadian antitrust laws by producers of graphite
electrodes. In March 1999, pursuant to a plea agreement between our Canadian
subsidiary and the Competition Bureau, our Canadian subsidiary pled guilty to a
one count charge of violating Canadian antitrust laws in connection with the
31
<PAGE>
PART II (CONT.)
UCAR INTERNATIONAL INC.
sale of graphite electrodes and was sentenced to pay a fine of Cdn.$11 million.
The plea agreement was approved by the court and, as a result, under the plea
agreement, we will not be subject to prosecution by the Competition Bureau with
respect to any antitrust violations occurring prior to the date of the plea
agreement. The fine was timely paid.
The guilty pleas make it more difficult for us to defend against other
investigations as well as civil lawsuits and claims.
In June 1998, we became aware that the Japanese Fair Trade Commission (the
"JFTC") had commenced an investigation as to whether there has been any
violation of Japanese antitrust laws by producers and distributors of graphite
electrodes. In January 1999, UCAR received a request from the JFTC to explain,
among other things, the purpose of various alleged meetings which took place
between us and other producers of graphite electrodes. We believe that, among
other things, we have good defenses to any claim that we are subject to the
jurisdiction of the JFTC, and we do not intend to comply with this request. The
independent distributor of our products in Japan has been required to produce
documents and witnesses to the JFTC. In March 1999, the JFTC issued a "warning"
letter to the four Japanese graphite electrode producers. While the JFTC did not
issue a similar "warning" letter to us, the "warning" letter issued to the
Japanese producers did reference us as a member of an alleged cartel.
We have been vigorously protecting, and intend to continue to vigorously
protect, our interests in connection with the investigations described above. We
may, however, at any time settle any possible unresolved charges. We are
cooperating with the EU authority in its investigation and with the DOJ and the
Competition Bureau in their continuing investigations of others. In connection
with these investigations, we have produced and are producing documents and
witnesses. It is possible that antitrust investigations seeking, among other
things, to impose fines and penalties against us could be initiated by
authorities in other jurisdictions.
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 (sometimes called
the "ANTITRUST CLASS ACTION LAWSUIT"). In the consolidated complaint to the
antitrust class action lawsuit, the plaintiffs allege that the defendants
violated U.S. federal antitrust laws in connection with the sale of graphite
electrodes and seek, among other things, an award of treble damages resulting
from such alleged violations. In August 1998, the District Court certified a
class of plaintiffs consisting of all persons who purchased graphite electrodes
in the United States (sometimes called the "CLASS") directly from the defendants
during the period from July 1, 1992 through June 30, 1997 (sometimes 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 (sometimes called the "OPT-OUT
LAWSUIT"). In the complaint to the opt-out lawsuit, the plaintiffs allege that
32
<PAGE>
PART II (CONT.)
UCAR INTERNATIONAL INC.
the defendants violated U.S. federal antitrust laws in connection with the sale
of graphite electrodes and seek, among other things, an award of treble damages
resulting from such alleged antitrust violations.
In 1998, the UCAR Group, other producers of graphite electrodes, Union Carbide
Corporation ("UNION CARBIDE") and Mitsubishi Corporation ("Mitsubishi") were
served with a complaint by Nucor Corporation and an affiliate commencing a civil
antitrust and fraudulent transfer lawsuit in the District Court (sometimes
called the "NUCOR LAWSUIT"). In the complaint to the Nucor lawsuit, the
plaintiffs allege that the UCAR Group and certain other defendants violated U.S.
federal antitrust laws in connection with the sale of graphite electrodes and
that payments to Union Carbide and Mitsubishi in connection with the
recapitalization violated applicable state fraudulent transfer laws. The
plaintiffs seek, 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 and Mitsubishi in connection with our 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.
In 1998, the UCAR Group and other producers of graphite electrodes were served
with a petition by Chaparral Steel Company and two affiliates commencing a
separate civil antitrust lawsuit entitled CHAPARRAL STEEL COMPANY, ET AL. V.
SHOWA DENKO CARBON, INC., ET AL. in the District Court of Ellis County, Texas
(sometimes called the "TEXAS LAWSUIT"). In the petition to the Texas lawsuit,
the plaintiffs allege that the defendants violated Texas antitrust laws in
connection with the sale of graphite electrodes and seek, among other things, an
award of treble damages resulting from such alleged violations.
In 1998, certain other steelmakers in the United States and Canada also served
complaints commencing five separate civil antitrust lawsuits (four in the United
States and one in Canada) in various courts (sometimes called the "OTHER
LAWSUITS"). The UCAR Group and other producers of graphite electrodes have been
named as defendants in some or all of the complaints. In the complaints to the
other lawsuits, the plaintiffs allege that the defendants violated applicable
antitrust laws (and applicable conspiracy laws, in the case of the lawsuit in
Canada) in connection with the sale of graphite electrodes and seek, among other
things, an award of treble damages (in the case of lawsuits in the United
States) or actual and punitive damages (in the case of the lawsuit in Canada)
resulting from such alleged violations. Each of the other lawsuits in the United
States has been consolidated with the antitrust class action lawsuit, the
opt-out lawsuit and the Nucor lawsuit for purposes of discovery.
All antitrust lawsuits against one producer of graphite electrodes, SGL Carbon
Corporation, the U.S. subsidiary of SGL Carbon AG, have been stayed as a result
of the filing in December 1998 of a petition by SGL Carbon Corporation in the
United States District Court for the District of Delaware for reorganization
under Chapter 11 of the U.S. Bankruptcy Code.
In 1999, the UCAR Group and other producers of graphite electrodes were served
with a complaint by 26 steelmakers and related parties, all but one of whom is
located outside the United States, commencing a separate civil antitrust lawsuit
33
<PAGE>
PART II (CONT.)
UCAR INTERNATIONAL INC.
entitled FERROMIN INTERNATIONAL TRADE CORPORATION, ET AL. VS. UCAR INTERNATIONAL
INC., ET AL. in the District Court (sometimes called the "FOREIGN CUSTOMER
LAWSUIT"). The plaintiffs allege that the defendants violated U.S. federal
antitrust laws in connection with the sale of graphite electrodes sold or
sourced from the United States and those sold and sourced outside the United
States. The plaintiffs seek, among other things, an award of treble damages
resulting from such alleged antitrust violations. We believe that, among other
things, we have strong defenses against claims alleging that purchases of
graphite electrodes outside the United States are actionable under U.S. federal
antitrust laws.
In April 1999, the UCAR Group and other producers of graphite electrodes were
served with a complaint by Bayou Steel Corporation and an affiliate commencing a
separate civil antitrust lawsuit entitled BAYOU STEEL CORPORATION, ET AL. V. THE
CARBIDE/GRAPHITE GROUP, INC., ET AL. in the District Court (sometimes called the
"BAYOU LAWSUIT"). In the complaint to the Bayou lawsuit, the plaintiffs allege
that the defendants violated U.S. federal antitrust laws in connection with the
sale of graphite electrodes and seek, among other things, an award of treble
damages resulting from such alleged violations.
Certain steelmakers in other countries who purchased graphite electrodes from
us, and certain customers who purchased other products from us, have threatened
to commence civil antitrust lawsuits against us in the United States and in
other jurisdictions.
Through May 7, 1999, we have settled the antitrust class action lawsuit, the
opt-out lawsuit, the Nucor lawsuit, all of the other lawsuits (in Canada as well
as in the United States), certain of the threatened civil antitrust lawsuits and
certain possible civil antitrust claims by customers who negotiated directly
with us. The settlements cover, among other things, virtually all of the actual
and potential claims against us (but not other defendants) by steelmakers in the
United States and Canada arising out of alleged antitrust violations occurring
prior to the date of the respective settlements in connection with the sale of
graphite electrodes. The only material exceptions are the Texas lawsuit, the
foreign customer lawsuit, the Bayou lawsuit and possible claims by steelmakers
in the United States and Canada whose aggregate purchases of graphite electrodes
do not constitute a material portion of our sales of graphite electrodes in the
United States and Canada. Although each settlement is unique, in the aggregate
the settlements consist primarily of current and deferred cash payments with
some product credits and, in a few instances, discounts. Through May 7, 1999,
all payments due under the settlements have been timely made. Through March 31,
1999, an aggregate of $163 million (including fines) was paid. As of March 31,
1999 and based on information known to us at May 7, 1999, the aggregate amount
remaining due under the settlements was about $24 million, most of which is
payable in 1999. Amounts due under the settlement of the antitrust class action
may be increased if additional claims are filed by members of the class or if it
is determined that steelmakers outside the United States who purchased graphite
electrodes sourced within the United States are members of the class and such
steelmakers file claims thereunder.
The Texas lawsuit, the foreign customer lawsuit and the Bayou lawsuit have not
been settled and are still in their early stages. We have been vigorously
defending, and intend to continue to vigorously defend, against the Texas
34
<PAGE>
PART II (CONT.)
UCAR INTERNATIONAL INC.
lawsuit, the foreign customer lawsuit and the Bayou lawsuit as well as all
threatened civil antitrust lawsuits and possible civil antitrust claims,
including those mentioned above. We may at any time, however, settle the Texas
lawsuit, the foreign customer lawsuit and the Bayou lawsuit as well as any
threatened lawsuits and possible claims and we are actively negotiating
settlements which we consider fair and reasonable with certain customers or
their counsel.
We recorded a charge of $340 million 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 than $340 million. To the extent that these
liabilities and expenses are reasonably estimable, at May 7, 1999, $340 million
continues to represent our estimate of these liabilities and expenses. In the
aggregate, the fines and settlements described above are within the amounts we
used to evaluate the $340 million charge.
It is possible that additional civil antitrust lawsuits seeking, among other
things, to recover damages could be commenced against us in the United States
and other jurisdictions.
SHAREHOLDER DERIVATIVE LAWSUIT. On March 4, 1998, UCAR was served with a
complaint commencing a shareholder derivative lawsuit entitled JAROSLAWICZ V.
KRASS, ET AL. in the Connecticut Superior Court (Judicial District of Danbury).
Messrs. Krass and Hart, 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 Messrs. Cartledge and Hall, Robert D. Kennedy, current
Chairman of the Board, 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. On March 13, 1998, effective immediately,
Messrs. Krass and Hart retired and Mr. Krass resigned as a director. On March
18, 1998, Mr. Kennedy was elected Chairman of the Board and Chief Executive
Officer, Mr. Wiemels became Vice President and Chief Operating Officer and Mr.
Wolf became Vice President and Chief Financial Officer. On October 1, 1998,
Messrs. Wiemels and Wolf retired. 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 UCAR Group 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 UCAR Group resulting from
these 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 court permission to
file an amended complaint. The amended complaint was served in July 1998. In
35
<PAGE>
PART II (CONT.)
UCAR INTERNATIONAL INC.
August 1998, UCAR and the individual defendants moved to dismiss the complaint
on the same grounds. The motion has been fully briefed.
This lawsuit is still in its early stages. This lawsuit is being pursued for
recovery from the individual defendants on behalf of (and payable to) UCAR and
any indemnification obligations which UCAR may have to the individual defendants
would result from judgments or settlements in favor of UCAR. As a result, we
believe that UCAR's ultimate exposure in this lawsuit is limited to expenses,
including defense costs, and possibly reimbursement of certain of plaintiff's
attorneys' fees and expenses.
SECURITIES CLASS ACTION LAWSUIT. In April and May 1998, UCAR was served with
complaints commencing securities class actions in the United States District
Court for the District of Connecticut. The complaints have been consolidated
into a single lawsuit entitled IN RE: UCAR INTERNATIONAL INC. SECURITIES
LITIGATION 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 the consolidated amended complaint are UCAR and each of
Messrs. Krass, Hart, Mancino, Wiemels, Wolf, Hutchins, Lipson, Peterson and
Schwarzman. The proposed class consists of all persons (other than the
defendants) who purchased common stock during the period from August 1995
through March 1998.
In the consolidated amended complaint, the plaintiffs allege that, during such
period, the defendants violated U.S. federal securities laws in connection with
purchases and sales of common stock by making material misrepresentations and
omissions regarding alleged violations of antitrust laws. The plaintiffs seek,
among other things, to recover damages resulting from such alleged violations.
UCAR and each of the individual defendants has filed a motion to dismiss the
consolidated amended complaint.
This lawsuit is still in its early stages and no evaluation of liability related
to this lawsuit can yet be made. As mentioned above, the guilty pleas make it
more difficult for UCAR to defend against claims asserted against it.
36
<PAGE>
PART II (CONT.)
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
Report.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
27.1 Financial Data Schedule for the quarter
ended March 31, 1999 (for Commission use only)
27.2 Financial Data Schedule restated for
the quarters ended March 31, 1997 and 1998
(for Commission use only)
27.3 Financial Data Schedule restated for
the quarters ended June 30, 1997 and 1998
(for Commission use only)
27.4 Financial Data Schedule restated for
the quarters ended September 30, 1997
and 1998 (for Commission use only)
(B) REPORTS ON FORM 8-K
No Report on Form 8-K was filed during the quarter for which this Report
is filed.
37
<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: May 14, 1999 By: /S/ CORRADO F. DEGASPERIS
-------------------------
Corrado F. DeGasperis
Controller
(Principal Accounting Officer)
38
<PAGE>
UCAR INTERNATIONAL INC.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule for the quarter
ended March 31, 1999 (for Commission use only)
27.2 Financial Data Schedule restated for
the quarters ended March 31, 1997 and 1998
(for Commission use only)
27.3 Financial Data Schedule restated for
the quarters ended June 30, 1997 and 1998
(for Commission use only)
27.4 Financial Data Schedule restated for
the quarters ended September 30, 1997
and 1998 (for Commission use only)
E-1
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF UCAR INTERNATIONAL INC.,INCLUDED IN ITS
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 68
<SECURITIES> 7
<RECEIVABLES> 179
<ALLOWANCES> 5
<INVENTORY> 254
<CURRENT-ASSETS> 586
<PP&E> 1,160
<DEPRECIATION> 727
<TOTAL-ASSETS> 1,110
<CURRENT-LIABILITIES> 336
<BONDS> 761
0
0
<COMMON> 0
<OTHER-SE> (312)
<TOTAL-LIABILITY-AND-EQUITY> 1,110
<SALES> 202
<TOTAL-REVENUES> 202
<CGS> 139
<TOTAL-COSTS> 139
<OTHER-EXPENSES> 2
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 23
<INCOME-TAX> 6
<INCOME-CONTINUING> 17
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1998
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF UCAR INTERNATIONAL INC.,INCLUDED IN ITS
FORM 10-Q FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> MAR-31-1997 MAR-31-1998
<CASH> 77 51
<SECURITIES> 0 34
<RECEIVABLES> 176 198
<ALLOWANCES> 6 6
<INVENTORY> 229 <F1> 256 <F1>
<CURRENT-ASSETS> 534 <F1> 604 <F1>
<PP&E> 1,190 1,287
<DEPRECIATION> 694 730
<TOTAL-ASSETS> 1,095 <F1> 1,259 <F1>
<CURRENT-LIABILITIES> 242 454
<BONDS> 599 623
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 54 <F1> (201)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,095 <F1> 1,259 <F1>
<SALES> 238 244
<TOTAL-REVENUES> 238 244
<CGS> 150 151
<TOTAL-COSTS> 150 151
<OTHER-EXPENSES> 2 2
<LOSS-PROVISION> (1) 0
<INTEREST-EXPENSE> 15 16
<INCOME-PRETAX> 47 45
<INCOME-TAX> 12 10
<INCOME-CONTINUING> 37 35
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 37 35
<EPS-PRIMARY> 0.79 0.77
<EPS-DILUTED> 0.76 0.74
<FN>
<F1> Restated for change in accounting for the cost of certain U.S. inventories
from the last-in first-out (LIFO) method to the first-in first-out (FIFO)
method.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTERS ENDED JUNE 30, 1997 AND 1998
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF UCAR INTERNATIONAL INC.,INCLUDED IN ITS
FORM 10-Q FOR THE QUARTERS ENDED JUNE 30, 1997 AND 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> JUN-30-1997 JUN-30-1998
<CASH> 60 70
<SECURITIES> 13 35
<RECEIVABLES> 215 198
<ALLOWANCES> 6 6
<INVENTORY> 242 <F1> 279 <F1>
<CURRENT-ASSETS> 586 <F1> 652 <F1>
<PP&E> 1,296 1,286
<DEPRECIATION> 714 727
<TOTAL-ASSETS> 1,230 <F1> 1,302 <F1>
<CURRENT-LIABILITIES> 279 423 <F1>
<BONDS> 667 675
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 50 <F1> (177)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,230 <F1> 1,302 <F1>
<SALES> 528 492
<TOTAL-REVENUES> 528 492
<CGS> 330 303
<TOTAL-COSTS> 330 303
<OTHER-EXPENSES> 4 4
<LOSS-PROVISION> (1) 0
<INTEREST-EXPENSE> 31 35
<INCOME-PRETAX> 112 94
<INCOME-TAX> 34 27
<INCOME-CONTINUING> 79 66
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 79 66
<EPS-PRIMARY> 1.71 1.47
<EPS-DILUTED> 1.64 1.41
<FN>
<F1> Restated for change in accounting for the cost of certain U.S. inventories
from the last-in first-out (LIFO) method to the first-in first-out (FIFO)
method.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE FOR THE QUARTERS ENDED SEPTEMBER 30, 1997 AND
1998
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF UCAR INTERNATIONAL INC.,INCLUDED IN ITS
FORM 10-Q FOR THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> SEP-30-1997 SEP-30-1998
<CASH> 72 86
<SECURITIES> 15 27
<RECEIVABLES> 207 177
<ALLOWANCES> 6 7
<INVENTORY> 235 <F1> 284 <F1>
<CURRENT-ASSETS> 578 <F1> 645 <F1>
<PP&E> 1,269 1,295
<DEPRECIATION> 720 821
<TOTAL-ASSETS> 1,214 <F1> 1,199 <F1>
<CURRENT-LIABILITIES> 284 452 <F1>
<BONDS> 629 668
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 81 <F1> (299)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,214 <F1> 1,199 <F1>
<SALES> 806 725
<TOTAL-REVENUES> 806 725
<CGS> 504 454
<TOTAL-COSTS> 504 454
<OTHER-EXPENSES> 7 6
<LOSS-PROVISION> (1) 0
<INTEREST-EXPENSE> 48 54
<INCOME-PRETAX> 166 (19)
<INCOME-TAX> 51 26
<INCOME-CONTINUING> 116 (47)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 116 (47)
<EPS-PRIMARY> 2.52 (1.05)
<EPS-DILUTED> 2.42 0.00
<FN>
<F1> Restated for change in accounting for the cost of certain U.S. inventories
from the last-in first-out (LIFO) method to the first-in first-out (FIFO)
method.
</FN>
</TABLE>
