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FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ....... to ...........
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Commission file number: (1-13888)
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UCAR INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1385548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of September 30, 1999, 45,087,798 shares of common stock, par value $.01 per
share, were outstanding.
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<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
<S> <C>
Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999................................................................... Page 3
Consolidated Statements of Operations for the Three Months ended
September 30, 1998 and 1999 and for the Nine Months
ended September 30, 1998 and 1999........................................................ Page 4
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1998 and 1999........................................................ Page 5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Nine Months ended September 30, 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 35
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings...................................................................... Page 37
Item 6. Exhibits and Reports on Form 8-K....................................................... Page 44
SIGNATURE............................................................................................ Page 45
INDEX TO EXHIBITS.................................................................................... Page E-1
</TABLE>
2
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
December 31, September 30,
ASSETS 1998 1999
---- ----
Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents........................................................ $ 58 $ 13
Short-term investments........................................................... 11 6
Notes and accounts receivable.................................................... 198 181
Inventories:
Raw materials and supplies.................................................... 58 56
Work in process............................................................... 150 132
Finished goods................................................................ 56 46
------- -------
264 234
Prepaid expenses................................................................. 12 10
Other current assets............................................................. 35 23
------- -------
Total current assets................................................. 578 467
------- -------
Property, plant and equipment........................................................ 1,220 1,156
Less: accumulated depreciation....................................................... 752 720
------- -------
Net fixed assets..................................................... 468 436
Other assets......................................................................... 91 89
------- -------
Total assets......................................................... $ 1,137 $ 992
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................. $ 67 $ 72
Short-term debt.................................................................. 19 -
Payments due within one year on long-term debt................................... 63 81
Accrued income and other taxes................................................... 28 25
Other accrued liabilities........................................................ 198 133
------- -------
Total current liabilities............................................ 375 311
------- -------
Long-term debt....................................................................... 722 651
Other long-term obligations.......................................................... 266 247
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 September 30, 1999................................ - -
Additional paid-in capital....................................................... 521 523
Accumulated other comprehensive income (loss).................................... (157) (204)
Retained earnings (deficit)...................................................... (566) (511)
Common stock held in treasury at cost, 2,226,498 shares at
December 31, 1998, 2,338,038 shares at September 30, 1999..................... (85) (87)
------- -------
Total stockholders' equity (deficit)................................. (287) (279)
------- -------
Total liabilities and stockholders' equity (deficit)................. $ 1,137 $ 992
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales............................................... $ 233 $ 210 $ 725 $ 623
Cost of sales........................................... 151 140 454 417
--------- -------- -------- ----------
Gross profit....................................... 82 70 271 206
Research and development................................ 2 3 6 7
Selling, administrative and other expenses.............. 27 20 79 65
Other (income) expense, (net)........................... 1 (1) 5 (7)
Restructuring charge (credit)........................... 86 (6) 86 (6)
Impairment loss on Russian assets....................... 60 - 60 -
Securities class action and stockholder
derivative lawsuits.................................. - 13 - 13
---------- -------- -------- --------
Operating profit (loss)............................ (94) 41 35 134
Interest expense........................................ 19 20 54 64
--------- -------- -------- --------
Income (loss) before provision for income taxes.... (113) 21 (19) 70
Provision for income taxes.............................. (1) - 26 13
--------- -------- -------- --------
Income (loss) of consolidated entities........... (112) 21 (45) 57
Minority stockholders' share of income.................. 1 - 2 2
--------- -------- -------- --------
Net income (loss).................................. $ (113) $ 21 $ (47) $ 55
========= ======== ======== ========
Basic earnings (loss) per common share:
Net income (loss) per share........................ $ (2.51) $ 0.46 $ (1.05) $ 1.22
Weighted average common shares outstanding
(in thousands).................................. 44,977 45,087 44,959 45,120
========= ======== ======== ========
Diluted earnings (loss) per common share:
Net income (loss) per share........................ $ (2.51) $ 0.45 $ (1.05) $ 1.18
Weighted average common shares outstanding
(in thousands).................................. 44,977 46,747 44,959 46,585
========= ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<CAPTION>
Nine Months
Ended September 30,
Cash flow from operating activities: 1998 1999
---- ----
<S> <C> <C>
Net income (loss)................................................................ $ (47) $ 55
Non-cash charges to net income (loss):
Depreciation and amortization................................................. 38 34
Deferred income taxes......................................................... (7) 2
Restructuring charge (credit)................................................. 86 (6)
Impairment loss on Russian assets............................................. 60 -
Securities class action and stockholder derivative lawsuits................... - 13
Other non-cash charges........................................................ 2 13
Working capital *................................................................ (79) (45)
Long-term assets and liabilities................................................. (5) (6)
------- -------
Net cash provided by operating activities................................. 48 60
------- -------
Cash flow from investing activities:
Capital expenditures............................................................. (40) (42)
Purchases of short-term investments.............................................. (29) (20)
Maturity of short-term investments............................................... 22 25
Sale of assets................................................................... 2 4
------- -------
Net cash used in investing activities..................................... (45) (33)
------- -------
Cash flow from financing activities:
Short-term debt borrowings (reductions), net..................................... (47) (18)
Long-term debt borrowings........................................................ 210 108
Long-term debt reductions........................................................ (138) (159)
Sale of common stock............................................................. 1 -
Dividends paid to minority stockholder........................................... - (1)
------- -------
Net cash provided by (used in) financing activities........................... 26 (70)
------- -------
Net increase (decrease) in cash and cash equivalents................................. 29 (43)
Effect of exchange rate changes on cash and cash equivalents......................... (1) (2)
Cash and cash equivalents at beginning of period..................................... 58 58
------- -------
Cash and cash equivalents at end of period........................................... $ 86 $ 13
======= =======
Supplemental disclosures of cash flow information:
Net cash paid during the period for:
Interest expense.............................................................. $ 56 $ 64
Income taxes.................................................................. 44 29
* Net change in working capital due to the following components:
(Increase) decrease in current assets:
Notes and accounts receivable................................................. $ 42 $15
Inventories................................................................... (47) 14
Prepaid expenses and other current assets..................................... - 2
Increase (decrease) in accounts payable and accruals............................. (36) (10)
Antitrust investigations and related lawsuits and claims, net.................... (38) (46)
Restructuring payments........................................................... - (20)
------- -------
Working capital........................................................... $ (79) $ (45)
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE>
<TABLE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in millions)
(Unaudited)
<CAPTION>
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................................ - - - 55 - 55
Foreign currency translation adjustments.. - - (47) - - (47)
--- ----- ----- ----- ---- -----
Total comprehensive income (loss)... - - (47) 55 - 8
Acquisition of common stock held in
treasury.................................. - 2 - - (2) -
--- ----- ----- ----- ---- ----
Balance at September 30, 1999.............. $ - $ 523 $ (204) $ (511) $ (87) $ (279)
=== ===== ===== ===== ==== =====
</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 nine
months ended September 30, 1999 are not necessarily indicative of the results of
operations that may be expected for the entire year ending December 31, 1999.
Important Terms
We use the following terms 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 our public parent
company and the issuer of the 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 our
outstanding 12% senior subordinated notes due 2005 (the "Subordinated Notes")
and is the primary borrower under our senior secured bank credit facilities (the
"Senior Bank Facilities").
"Subsidiaries" refers to those companies which, at the relevant time, were
majority owned or wholly owned directly or indirectly by UCAR or its
predecessors described below. All of UCAR's subsidiaries have been wholly owned
(with de minimis exceptions in the case of certain foreign subsidiaries) from at
least January 1, 1996 through September 30, 1999, except for: our German
subsidiary, which was acquired in early 1997 and 70% owned until early 1999,
when it became 100% owned; Carbone Savoie S.A.S., which was acquired in early
1997 and has been 70% owned; and our South African subsidiary, which was 50%
owned until April 1997, when it became 100% owned.
"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 or, if the context so requires otherwise,
individually to UCAR or UCAR Global.
Business and Structure
We operate 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,
carbon electrodes and flexible graphite.
7
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(1) Interim Financial Presentation (Cont.)
Foreign Currency Translation
Generally, except for subsidiaries in Russia and Mexico, 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 Sheets until such time as the operations are sold or
substantially or completely liquidated.
Translation gains and losses relating to subsidiaries in countries where
high inflation exists are included in income in the Consolidated Financial
Statements. This principle only applies to our Russian subsidiary for the
periods covered by the Consolidated Financial Statements. Our Mexican subsidiary
began using the U.S. dollar as its functional currency during 1999, despite its
inflationary status, because its sales and purchases are predominantly U.S.
dollar-denominated. Accordingly, its translation gains and losses are included
in income in the Consolidated Financial Statements.
Inventories
Inventories are stated at cost or market, whichever is lower. Cost is
determined generally using the "first-in first-out" method ("FIFO") in the
United States. The "average cost" method is used elsewhere.
Accounting Changes
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, 2000. 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:
8
<PAGE>
<TABLE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(2) UCAR Global Enterprises Inc. (Cont.)
<CAPTION>
December 31, September 30,
1998 1999
---- ----
(Dollars in millions)
<S> <C> <C>
Assets:
Current assets.................................................. $ 578 $ 467
Non-current assets.............................................. 559 525
-------- ---------
Total assets................................................ $ 1,137 $ 992
======== =========
Liabilities:
Current liabilities............................................. $ 375 $ 311
Non-current liabilities......................................... 1,036 947
-------- ---------
Total liabilities........................................... $ 1,411 $ 1,258
======== =========
Minority stockholders' equity in consolidated entities............... $ 13 $ 13
======== =========
</TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1999 1998 1999
---- ---- ---- ----
(Dollars in millions) (Dollars in millions)
Net sales........... $ 233 $ 210 $ 725 $ 623
Gross profit........ 82 70 271 206
Net income (loss)... (113) 21 (47) 55
(3) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are calculated in accordance
with SFAS 128, using the following data:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for basic calculation............... 44,976,599 45,086,939 44,958,726 45,120,494
Add: Effect of dilutive stock options............... - 1,659,962 - 1,464,221
---------- ---------- ---------- ----------
Weighted average common shares
outstanding, adjusted for diluted calculation... 44,976,599 46,746,901 44,958,726 46,584,715
========== ========== ========== ==========
</TABLE>
The calculation of weighted average common shares outstanding for the 1998
periods excludes all outstanding options because they were not dilutive due to
the net loss for the 1998 periods. The calculation of weighted average common
shares outstanding for the diluted calculation
9
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(3) Earnings (Loss) Per Share (Cont.)
in the 1999 periods excludes outstanding options for 1,844,958 shares in the
1999 third quarter, and 1,940,256 shares in the 1999 first nine months, because
they were not dilutive due to the fact that the exercise prices were greater
than the weighted average market price of the common stock for those periods.
(4) Segment Reporting
We have two reportable operating segments: graphite electrodes, and
graphite and carbon products. The graphite electrode segment manufactures and
markets graphite electrodes to electric arc furnace and ladle furnace
steelmakers. The graphite and carbon products segment manufactures 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.
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.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1999 1998 1999
---- ---- ---- ----
(Dollars in millions) (Dollars in millions)
<S> <C> <C> <C> <C>
Net sales to external customers:
Graphite electrodes............................. $ 161 $ 144 $ 501 $ 417
Graphite and carbon products.................... 72 66 224 206
-------- -------- ------- -------
Consolidated net sales....................... $ 233 $ 210 $ 725 $ 623
======== ======== ======= =======
Gross profit:
Graphite electrodes............................. $ 61 $ 51 $ 194 $ 149
Graphite and carbon products.................... 21 19 77 57
-------- -------- ------- -------
Consolidated gross profit.................... $ 82 $ 70 $ 271 $ 206
======== ======== ======= =======
</TABLE>
(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 plants in Welland, Canada and Berlin, Germany, and
the centralization and consolidation of administrative and financial functions.
These actions will result in the elimination of approximately 430 administrative
and manufacturing positions.
10
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(5) Restructuring Plan (Cont.)
In the 1999 third quarter, it was determined that plant closure activities
are estimated to result in lower cash costs than originally anticipated. These
savings represent lower net anticipated demolition costs resulting primarily
from the outsourcing of a majority of the planned demolition at our Welland
plant and, to a lesser extent, lower severance and related costs. These
developments resulted in a net reduction of our restructuring cost estimate of
$6 million in the 1999 third quarter. 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, ------------------------------------- September 30,
1998 Change in 1999
---- ----
Payments Estimate Other
<S> <C> <C> <C> <C> <C>
Severance and related costs............... $ 30 $ 15 $ 1 $ - $ 14
Plant shut down and related costs......... 18 3 5 - 10
Postmonitoring and environmental.......... 9 2 - - 7
Foreign currency translation.............. - - - $ (1) 1
------ ------ ------ ------- ------
$ 57 $ 20 $ 6 $ (1) $ 32
====== ====== ====== ======= ======
</TABLE>
Our Berlin plant ceased production activities in 1998. Our Welland plant
ceased production activities in April 1999. In addition, the relocation of our
corporate headquarters to Nashville, Tennessee was completed during the 1999
first quarter.
Cash payments of $20 million were made in the 1999 first nine months.
Payments of $5 million were associated with our Berlin plant, payments of $14
million were associated with our Welland plant and payments of $1 million were
associated with the centralization and consolidation of administrative
functions. In the 1999 first nine months, 356 positions were eliminated. The
restructuring accrual is included in other accrued liabilities on the
Consolidated Balance Sheets.
(6) Financial Instruments
Certain of our foreign subsidiaries sold receivables of $63 million in the
1998 first nine months and $54 million in the 1999 first nine months.
Receivables sold with recourse and remaining on the Consolidated Balance Sheets
were $12 million at September 30, 1998 and nil at September 30, 1999.
(7) 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 law
11
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(7) Contingencies (Cont.)
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 law 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 "DOJ
fine"). The DOJ fine is payable in six annual installments of $20 million, $15
million, $15 million, $18 million, $21 million and $21 million, commencing in
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 law 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.
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 law 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 law 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 other violations of Canadian antitrust
law occurring prior to the date of the plea agreement. The fine was timely paid.
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 law by producers and distributors of graphite
electrodes. We believe that, among other things, we have good
12
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(7) Financial Instruments (Cont.)
defenses to any claim that we are subject to the jurisdiction of 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.
In October 1999, we became aware that Korean antitrust authorities had
commenced an investigation of producers and distributors of graphite electrodes.
We have no facilities or employees in Korea.
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.
The guilty pleas make it more difficult for us to defend against other
investigations as well as civil lawsuits and claims.
Antitrust Lawsuits
In 1997, various producers of graphite electrodes (including us) 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 (the "antitrust class action lawsuit").
The plaintiffs allege that the defendants violated U.S. federal antitrust law 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, 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, various producers of graphite electrodes (including us) were
served with a complaint by about 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 law 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, various producers of graphite electrodes (including us), 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 producer defendants violated U.S. federal antitrust
law in connection with the sale of graphite electrodes and that payments to
Union Carbide and Mitsubishi by us 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 violations and an order to have payments made by us
to Union
13
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(7) Contingencies (Cont.)
Carbide and Mitsubishi in connection with our recapitalization returned to us
for purposes of enabling us to satisfy any judgments resulting from such alleged
violations.
In 1998, various producers of graphite electrodes (including us) 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 law 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 various producers of graphite electrodes (including us) with complaints
commencing five separate civil antitrust lawsuits (four in the United States and
one in Canada) in various courts (the "other initial 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.
In 1999, various producers of graphite electrodes (including us) were named
as defendants in two complaints commencing two separate civil antitrust lawsuits
in the United States (the "foreign customer lawsuits"). The first complaint was
filed by about 26 steelmakers and related parties, all but one of whom are
located outside the United States, and the second complaint was filed by 4
steelmakers, all of whom are located outside the United States. We have been
served with the first complaint, but not the second complaint. In each
complaint, the plaintiffs allege that the defendants violated U.S. federal
antitrust law 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 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 law.
In 1999, various producers of graphite electrodes (including us) 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 law 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.
14
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(7) Contingencies (Cont.)
Through October 31, 1999, we have settled the antitrust class action
lawsuit, the opt-out lawsuit, the Nucor lawsuit, all of the other initial
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 to which we are a
party 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 lawsuits, 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 October 31, 1999,
all payments due under the settlements have been timely made.
The Texas lawsuit, the foreign customer lawsuits 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 lawsuits 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 lawsuits and the Bayou lawsuit as well as any
threatened lawsuits and possible claims and are actively negotiating settlements
with certain customers or their counsel.
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.
1997 Earnings Charge
We recorded a pre-tax 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. The $340 million
reserve is calculated on a basis net of imputed interest on installments
payments of the DOJ fine. Actual liabilities and expenses (including settled
investigations, lawsuits and claims as well as the continuing investigation by
the EU authority and unsettled pending, threatened and possible lawsuits and
claims mentioned above) could be materially higher than $340 million. To the
extent that these liabilities and expenses are reasonably estimable, at October
31, 1999, $340 million continues to represent our estimate of these liabilities
and expenses. In the aggregate, the fines and settlements described above as
well as related defense costs and other expenses are within the amounts we used
to evaluate the $340 million charge.
Through September 30, 1999, we have paid an aggregate of $191 million of
fines, settlements and expenses and $7 million of imputed interest. As of
September 30, 1999, $149
15
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(7) Contingencies (Cont.)
million remains in the reserve and, based on information known to us at October
31, 1999, the aggregate amount of remaining committed payments for fines and
settlements was about $87 million and the aggregate amount of remaining
committed payments for imputed interest was about $12 million. About $31 million
of these payments for fines and settlements are due on or before September 30,
2000. Amounts due under the settlement of the antitrust class action may be
increased if additional claims are filed by members of the class.
Stockholder Derivative Lawsuit
In March 1998, UCAR was served with a complaint commencing a stockholder
derivative lawsuit. Certain of our current and former 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 us 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 us resulting from these alleged breaches
and sales. In 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 June 1999, the motion was granted.
In July 1999, the plaintiff filed a notice indicating an intent to appeal the
dismissal.
This lawsuit has been pursued for recovery from the individual defendants
on behalf of (and payable to) UCAR. 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 would be limited to defense costs and possibly reimbursement of certain
of plaintiff's attorneys' fees and expenses.
As described in Note 8 to the Consolidated Financial Statements, in October
1999, UCAR entered into an agreement settling this lawsuit. The settlement is
subject to court approval, customary notice and termination provisions, and
other terms and conditions. Although UCAR does not expect such an outcome, it is
possible that the court could reject the settlement. In such event, it is
possible that UCAR could be required to defend against this lawsuit or enter
into a less favorable settlement.
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
16
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(7) Contingencies (Cont.)
from August 1995 through March 1998. The plaintiffs allege that, during such
period, the defendants violated U.S. federal securities law 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. In 1999, UCAR
and each of the individual defendants filed a motion to dismiss the consolidated
amended complaint.
We have been vigorously defending against this lawsuit. This lawsuit is
still in its early stages.
As described in Note 8 to the Consolidated Financial Statements, in October
1999, UCAR entered into an agreement settling this lawsuit. The settlement is
subject to court approval, court certification of the class, customary notice
and termination provisions, and other terms and conditions. Although UCAR does
not expect such an outcome, it is possible that the court could reject the
settlement. In such event, it is possible that UCAR could be required to defend
against this lawsuit or enter into a less favorable settlement. As mentioned
above, the guilty pleas make it more difficult to defend against claims asserted
against us.
(8) Settlement of Securities Class Action and Stockholder Derivative Lawsuits
In October 1999, UCAR entered into agreements settling the securities class
action and stockholder derivative lawsuits. Under the agreements, $40.5 million
will be contributed to one or more escrow accounts for the benefit of former and
current stockholders who are members of the class for whom the securities class
action was brought, as well as plaintiffs' attorney's fees. UCAR will contribute
$11 million and the insurers under our directors and officers insurance policies
at the time the lawsuits were filed will contribute the balance of $29.5
million. In addition, a new outside director, acceptable to both UCAR and the
lead securities class action plaintiff, will be added to UCAR's Board of
Directors. We expect to incur about $2 million of unreimbursed expenses related
to the lawsuits. These expenses, together with the $11 million, were recorded as
a one-time charge to operations of $13 million in the 1999 third quarter.
17
<PAGE>
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 our public parent
company and the issuer of the 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 our senior secured bank credit facilities (the
"Senior Bank Facilities").
Subsidiaries refers to those companies which, at the relevant time, were
majority owned or wholly owned directly or indirectly by UCAR or its
predecessors described below. All of UCAR's subsidiaries have been wholly owned
(with de minimis exceptions in the case of certain foreign subsidiaries) from at
least January 1, 1996 through September 30, 1999, except for: our German
subsidiary, which was acquired in early 1997 and 70% owned until early 1999,
when it became 100% owned; Carbone Savoie S.A.S. ("Carbone Savoie"), which was
acquired in early 1997 and has been 70% owned; and our South African subsidiary,
which was 50% owned until April 1997, when it became 100% owned.
Home markets refers to North America, Western Europe, Brazil and South
Africa. We have major manufacturing facilities located in each of these markets,
and these are our largest markets. All other markets are called "export
markets."
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 or, if the context so requires otherwise,
individually to UCAR or UCAR Global.
Presentation of Financial, Market and Legal Data
Separate consolidated financial statements of UCAR Global are not presented
because they would not be materially different than the Consolidated Financial
Statements.
We present our financial information on a consolidated basis. This means
that we consolidate financial information for all subsidiaries where our
ownership is greater than 50%. 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 the financial
information for our German subsidiary and Carbone Savoie is consolidated, since
their acquisitions, on each line of the Consolidated Financial Statements and
the equity of the other 30% owners (until early 1999, in the case of our German
subsidiary) in those subsidiaries is reflected on the lines
18
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC.
entitled "minority stockholders' equity in consolidated entities" and "minority
stockholders' share of income."
References to cost in the context of our low-cost producer strategy do not
include the unusual, one-time or nonrecurring charges identified in the
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 1998 (the "Annual Report") or this Report on the lines
entitled "antitrust investigations and related lawsuits and claims,"
"restructuring charge (credit)," "impairment loss on Russian assets" or
"securities class action and stockholder derivative lawsuits," or the impact of
accounting changes.
Unless otherwise noted, all cost savings and reductions are estimates based
on a comparison to costs in 1998 or the 1998 fourth quarter (annualized) and on
the assumption that net sales and other operating conditions are the same in
1999, 2000, 2001 and thereafter as they were in 1998.
Neither any statement in this Report nor any charge taken by us relating to
any legal proceedings constitutes an admission as to any wrongdoing or
liability.
Reference is made to the Annual Report and our subsequent Reports on Form
10-Q 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 volumes of and demand for graphite electrodes and other
products, future operational and financial performance of various businesses,
strategic plans and cost savings programs, impacts of regional and global
economic conditions, divestiture, joint venture, operating, global integration,
debt recapitalization, tax planning and capital projects, legal matters and
related fees and costs, consulting fees and related projects, and future costs,
expenses, cost savings and reductions, margins and earnings. The words
"estimate," "believe," "anticipate," "intend," "expect" and similar expressions
identify some of 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:
o the possibility that global economic conditions may not improve
or may worsen;
o the possibility that announced or anticipated additions to
capacity for producing steel in electric arc furnaces or
announced or anticipated reductions in graphite electrode
manufacturing capacity may not occur;
o the possibility that increased production of steel in electric
arc furnaces may not result in increased demand for or price or
volume stability or increases for graphite electrodes;
19
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC.
o the occurrence of unanticipated events or circumstances relating
to pending antitrust investigations or pending antitrust,
stockholder derivative or securities lawsuits;
o the commencement of investigations or lawsuits relating to the
same subject matter as these pending investigations or lawsuits;
o the possibility of delays in or failure to achieve
commercialization of proton exchange membrane ("PEM") fuel cells
or to achieve successful development of next generation flexible
graphite-based flow field plates used in PEM fuel cells; the
possibility of delays in or failure to achieve successful
development and commercialization of other new or improved
products; the possibility of delays in meeting or failure to meet
targeted development objectives; the possible inability to fund
and successfully complete expansion of manufacturing capacity to
meet growth in demand for our products, if any;
o the occurrence of unanticipated events or circumstances relating
to strategic or other plans, cost savings programs, or
divestiture, joint venture, operational, capital, global
integration, debt recapitalization, tax planning or other
projects;
o changes in interest or currency exchange rates, changes in
capital markets, changes in regional economic conditions, changes
in competitive conditions, technological developments by others,
Year 2000 issues, 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.
All subsequent written and oral forward-looking statements by or
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these factors. Except as otherwise required for 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.
20
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We are the world's largest manufacturer of high quality graphite and carbon
electrodes and cathodes as well as flexible graphite. We sell our products in
more than 80 countries and have manufacturing facilities on four continents. We
operate in two business segments: graphite electrodes, which are our principal
products, and graphite and carbon products, which include carbon electrodes,
graphite and carbon cathodes, flexible graphite, and graphite and carbon
specialties. Our graphite and carbon products business segment contributes about
one-third of our net sales.
Graphite electrodes are consumed primarily in the production of steel in
electric arc furnaces, the steelmaking technology used by all "mini-mills."
Mini-mills constitute the growth sector of the steel industry. Graphite
electrodes are also used for refining steel in ladle furnaces and in other
smelting 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. Flexible graphite, which we sell
under the tradename GRAFOIL(R), is used in gaskets and for other sealing
purposes. In addition to the steel and metals industries, we sell our products
to the semiconductor, automotive, aerospace, chemical and transportation
industries.
We have the largest share of the free trading markets in all of our major
product lines except for graphite specialties. We believe that our average cost
of sales of graphite electrodes is currently the lowest among major producers in
our industry. In addition to our large market shares and position as a low-cost
producer of high quality products, we believe that our strengths include our new
management team, our global manufacturing base (which includes multiple low cost
locations and fully integrated state-of-the-art facilities), our exceptional
customer technical service, our diversified customer base and our record of
product innovation and process improvement.
Our strategic goal is to be the best global manufacturer and customer
service-driven company with the best product performance in the graphite and
carbon industry. We are focused on reducing costs and improving operating
efficiencies, improving product performance and technical and commercial
customer service, and developing and expanding new and existing profitable
technologies. We seek to be the lowest cost supplier in our industry and to use
that to our competitive advantage. We seek to use our strategies and build on
our 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, which we believe is the most aggressive major cost
reduction plan currently being implemented in the graphite and carbon industry.
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
21
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC.
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 third quarter and we
believe that the plan will continue to have a positive impact on earnings in the
1999 fourth quarter. Planned plant rationalization is on or ahead of schedule.
Savings under the plan were ahead of target for the 1999 third quarter,
aggregating $24 million. We achieved savings of $12 million in cost of sales,
including $10 million in graphite electrode cost of sales and $2 million in
graphite and carbon products cost of sales, as well as savings of $12 million in
overhead and taxes.
For the 1999 first nine months, savings under the plan aggregated $55
million. We achieved savings of $31 million in cost of sales, including $26
million in graphite electrode cost of sales and $5 million in graphite and
carbon products cost of sales, as well as savings of $24 million in overhead and
taxes. We expect to achieve about $75 million in savings in 1999, exceeding our
original target of $64 million.
As planned, our Berlin, Germany plant ceased production activities in 1998.
Our Welland, Canada plant ceased production activities in April 1999. We have
completed, ahead of schedule, our consolidation of administrative offices with
the relocation of headquarter activities to Nashville, Tennessee and European
administration activities in our Swiss subsidiary. About 356 positions have been
eliminated pursuant to the plan.
We believe that the cost savings under the plan have enabled us to
strengthen our competitiveness. We also believe that we must continue and
enhance our focus on cost savings to achieve the ultimate objectives of the
plan. Accordingly, in October 1999, we announced and launched new initiatives to
add another $30 million of targeted cost savings to the plan by the end of 2002.
The following table summarizes the new targets of the plan.
<TABLE>
<CAPTION>
Summary of Enhanced Targeted Cost Savings as Measured by
Year End Annualized Run Rates
(Dollars in millions)
Cost Item 1999 2000 2001 2002
--------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of sales (graphite electrodes).................. $ 40 $ 59 $ 70 $ 75
Cost of sales (graphite and carbon products)........ 8 9 11 12
Total overhead (consisting of research and
development, selling, administrative and
other expenses and other income and expense).... 24 25 32 37
Interest expense................................... 2 12 24 31
Provision for income tax expense.................... 6 7 8 10
New savings targets................................. 80 112 145 165
Original savings targets............................ 80 111 135 135
</TABLE>
22
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC.
We have increased the number of identified cost savings projects in our
operating facilities to 230. Several of the new projects are expected to result
in additional benefits in terms of product quality and supply chain
improvements. As a result of our success in identifying these cost savings
opportunities in our supply chain, we are now evaluating every aspect of our
supply chain performance. This includes realignment and standardization of
critical business processes, standardization of enterprise wide systems, and
improvement of information technology infrastructure and interfaces with trading
partners. Our goals include decreasing inventories for our current production
levels by over 20%, or $50 million, and reducing our cash cycle time by about
one-third.
During the 1999 third quarter, we launched a global benchmarking study that
will evaluate the performance of certain key global administrative and
transaction processing functions. This study has identified opportunities for
performance improvements and cost savings that should allow for achievement of
our target of reducing selling, administrative and other expenses to 8% of net
sales. This study will include work process redesign efforts that will seek to
optimize shared services for maximum global efficiencies and to standardize
enterprise wide resource planning systems. The majority of the savings expected
from implementation of opportunities which have been and are expected to be
identified by this study are anticipated to be realized during 2001 and 2002.
We are evaluating our existing debt, capital and other structures with the
objective of optimizing cash management and minimizing debt service and taxes.
Among other things, we are planning a debt recapitalization for the 2000 first
half. This debt recapitalization should allow us to benefit from a lower average
cost of debt of one to two percentage points. In addition, this debt
recapitalization, along with our tax planning initiatives, should allow us to
benefit from our existing and anticipated tax credits, helping us to achieve our
targeted effective tax rate of an average of 25% over 1999, 2000, 2001 and
2002.
Our plan contemplates the reduction of gross debt to a target of $550
million by the end of 2002 and a substantial reduction in interest expense. Our
ability to realize these savings could be affected materially by unfavorable
timing in implementing the plan, change in capital market conditions, market
interest rate levels or conditions affecting us, our industry or our cost
savings, tax planning or other initiatives.
Consistent with our strategic goals, we are seeking strategic alliances to
enhance our strengths and growth in existing product lines and related new and
niche markets. Our relationship with Aluminium Pechiney S.A. in the cathode
business is an example of a successful strategic alliance.
In the 1999 third quarter, we entered into an exclusive product development
collaboration agreement and an exclusive long-term supply agreement with Ballard
Power Systems, Inc. ("Ballard"), the world's leader in the development and
commercialization of PEM fuel cells. Industry sources expect wide
commercialization of fuel cells to occur early in the next century. We have been
actively working with Ballard for the past 7 years in developing flexible
graphite-based material for use as flow field plates, which are essential
elements of PEM fuel cells.
23
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC.
During the collaboration period, we and Ballard have agreed to cooperate
with each other, exclusively, in the research and development of flow field
plates using flexible graphite, including next generation flow field plates. We
expect substantial sales growth beginning in 2003. The agreements, which are
expected to continue well into the next decade, contain customary product
pricing and delivery, technology ownership and licensing, termination and other
provisions. In addition, we have organized our flexible graphite business into a
newly formed, wholly owned subsidiary, UCAR Graph-Tech Inc.
Other current areas of focus for possible alliances include our graphite
specialties business and our carbon specialties business as well as our flexible
graphite business where we see possible opportunities in semiconductor and flame
retardant applications. Alliances may be structured as joint ventures,
licensing, supply or other arrangements. In lieu of or in addition to possible
alliances, we may divest or rationalize 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.
As a result of the continued strength of the U.S. economy and the beginning
of recovery in other areas of the global economy, we believe that worldwide
electric arc furnace steel production began to gradually recover from that
downturn in the 1999 second quarter. Signs of recovery which we see include
price increases of various steel end products that we believe are being
implemented and operating rates of electric arc furnace steelmakers that we
believe are increasing.
We are benefiting from that recovery. Our volume of graphite electrodes
sold in our home markets has gradually increased. However, we remain cautious on
improvements in our volume of graphite electrodes sold overall, particularly in
the export markets where prices are still depressed. Our average graphite
electrode prices have fallen about 15% since the 1998 second quarter, with a
much sharper decline in Europe and in our export markets. Recently, we announced
a 6% price
24
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC.
increase for graphite electrodes in Europe and various export markets, effective
with new orders placed after November 1, 1999. Fully implemented, this price
increase should result in an improvement in net sales starting in 2000. We
believe that industry fundamentals support our long-term strategy and the
beginning of recovery in pricing for our products worldwide.
Demand for most of our other products is stable. In particular, we have
seen steady demand for graphite cathodes from the aluminum industry, and demand
for flexible graphite has remained healthy. The demand for certain products sold
to the silicon metals industry has, however, remained weak. Pricing for most
products in our graphite and carbon products business segment has also remained
weak.
Highlights of Third Quarter Operating Results. Net sales were stable at
$210 million in the 1999 third quarter as compared to $211 million in the 1999
second quarter. Gross profit margin decreased to 33.3% in the 1999 third quarter
from 34.6% in the 1999 second quarter.
Gross profit for our graphite electrode business segment was $51 million
(35.4% of segment net sales) in the 1999 third quarter as compared to $54
million (38.3% of segment net sales) in the 1999 second quarter. The decline in
graphite electrode business segment gross profit margin was largely due to
overall lower production utilization, primarily caused by activities undertaken
to improve cash cycle time and reduce inventory levels and, to a lesser degree,
by higher fixed cost per metric ton due to scheduled downtime at certain
manufacturing facilities, partially offset by cost savings.
Gross profit for our graphite and carbon products business segment was $19
million (28.8% of segment net sales) for both the 1999 second and third
quarters, while segment net sales declined $4 million in the 1999 third quarter
from the 1999 second quarter. The decline was primarily the result of lower
volume of cathodes sold. The impact of the decline on segment gross profit was
largely offset by cost savings.
Operating profit decreased by $10 million to $41 million (19.5% of net
sales) in the 1999 third quarter from $51 million (24.2% of net sales) in the
1999 second quarter. Operating profit in the 1999 third quarter includes a $13
million charge for the settlement of securities class action and stockholder
derivative lawsuits as well as a $6 million restructuring credit.
Despite this charge and credit, net income increased by $1 million in the
1999 third quarter from the 1999 second quarter due to lower interest expense
and lower provision for income taxes. The decrease in interest expense was
primarily the result of lower average total debt outstanding during the 1999
third quarter as compared to the 1999 second quarter. Our effective tax rate for
the 1999 third quarter benefited from tax planning strategies, earnings
repatriation plans, tax settlements and earnings from consolidated entities with
lower effective tax rates. Earnings for the 1999 third quarter were $0.45 per
diluted share as compared to $0.44 per diluted share in the 1999 second quarter.
Refinancing, Management of Liquidity and Debt Reduction. In November 1998,
the Senior Bank Facilities were refinanced and the indenture governing the
Subordinated Notes (the
25
<PAGE>
PART I. (Cont.)
UCAR INTERNATIONAL INC.
"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 plans. 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 are continuing to manage our liquidity as described in the Annual Report
and our subsequent Reports on Form 10-Q. Cash flow from operations for the 1999
third quarter was $38 million (before net antitrust fines, settlements and
expenses of $11 million and restructuring payments of $6 million). Cash flow
from changes in our working capital (before net antitrust fines, settlements and
expenses and restructuring payments) was $8 million in the 1999 third quarter.
This improvement resulted from both operating efficiencies and benefits under
our global restructuring and rationalization plan as well as our continuing
focus on improving cash management (including short term investments, short term
debt and prepaid expenses as well as cash and cash equivalents), reducing
inventories, factoring and reducing accounts receivable, and improving payment
timing and terms of accounts payable. Total debt decreased by $15 million to
$732 million at the end of the 1999 third quarter from $747 million at the end
of the 1999 second quarter. Net debt (total debt less cash, cash equivalents and
short term investments) at September 30, 1999 was $713 million, a decrease of $9
million from June 30, 1999. Other measures of liquidity and financial strength
at September 30, 1999 and for the 1999 third quarter are somewhat below those at
September 30, 1998 and for the 1998 third quarter, however, reflecting the
impact of global economic conditions which worsened throughout 1998 and into the
1999 first quarter, largely offset by the cost savings and working capital and
other improvements described above. 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,
the European Union 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 pre-tax 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 law in connection with the sale of graphite
electrodes and was sentenced to pay a fine in the aggregate amount of $110
million, payable in six annual installments (the "DOJ fine"), of which $91
million is treated as a fine and $19 million is treated as imputed interest for
accounting purposes. In March 1999, our Canadian subsidiary pled guilty to a
one-count charge of violating Canadian antitrust law 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. None of the settlement or plea agreements contain
restrictions on future prices of our graphite electrodes. We are continuing to
cooperate with the antitrust authority in the European Union in its
investigation. Through September 30, 1999, we have
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PART I. (Cont.)
UCAR INTERNATIONAL INC.
paid an aggregate of $191 million of fines, settlements and expenses and an
aggregate of $7 million of imputed interest. In the aggregate, the fines,
settlements and expenses 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. The guilty pleas make it more difficult to
defend against other investigations, lawsuits and claims. Our insurance has not
and will not materially offset liabilities which have or may become due in
connection with antitrust investigations or related lawsuits or claims.
UCAR has been named as a nominal defendant in a stockholder 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. In October 1999, UCAR and the other defendants entered into
agreements settling these lawsuits for an aggregate of $40.5 million, of which
$11 million will be paid by us. These settlements are subject to court approval
and other conditions. We recorded a charge of $13 million, which includes $2
million of expenses, in the 1999 third quarter in connection with these
settlements.
Currency Matters. We incur manufacturing costs and sell our products in
multiple currencies. As a result, in general, our results of operations and
financial condition are affected by changes in currency exchange rates and by
inflation in countries with highly inflationary economies where we have
manufacturing facilities. To manage certain exposures to risks caused by changes
in currency exchange rates, we engage in hedging activities and use various
off-balance sheet financial instruments. To account for translation of foreign
currencies into U.S. dollars for consolidation and reporting purposes, we record
foreign currency translation adjustments in accumulated other comprehensive
income (loss) as part of stockholders' equity in the Consolidated Balance
Sheets, except in the case of operations in highly inflationary economies (or
which predominantly use the U.S. dollar for their purchases and sales) where we
record foreign currency translation gains and losses as part of other (income)
expense (net) in the Consolidated Statement of Operations. We also record
foreign currency transaction gains and losses as part of other (income) expense
(net).
During the 1999 first nine months, many of the currencies in which we
manufacture and sell our products weakened against the U.S. dollar. The most
significant change occurred in Brazil, where the Brazilian currency devalued
about 60% against the U.S. dollar during the 1999 first nine months. In the 1999
first nine months, our stockholders' equity decreased by $47 million as a result
of cumulative translation adjustments, including $39 million associated with our
Brazilian subsidiary. In the 1999 first nine months, the net impact of currency
changes included in other (income) expense (net) was a $1 million gain from
cumulative foreign currency translation. Net foreign currency transaction gains
and losses in the 1999 first nine months were nil (after taking into account $4
million of unrealized gains associated with the U.S. dollar-denominated assets
and liabilities of our Brazilian subsidiary).
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PART I. (Cont.)
UCAR INTERNATIONAL INC.
Results of Operations
Three Months Ended September 30, 1999 as Compared to Three Months Ended
September 30, 1998. Net sales of $210 million in the 1999 third quarter
represented a $23 million, or 10%, decrease from $233 million in the 1998 third
quarter. Gross profit of $70 million in the 1999 third quarter represented a $12
million, or 15%, decrease from $82 million in the 1998 third quarter. Gross
profit margin was 33.3% in the 1999 third quarter as compared to 35.2% in the
1998 third quarter.
The decrease in net sales and gross profit was primarily due to lower sales
revenue per metric ton and the impact of currency exchange rate changes. The
impact of these factors on gross profit was partially offset by lower costs of
sales. Lower sales revenue per metric ton was due primarily to changes in global
economic conditions that affected volumes and prices of many of our products,
particularly graphite electrodes. Lower cost of sales was primarily due to cost
savings under our global rationalization and restructuring plan, partially
offset by lower production levels which has the effect of increasing the average
fixed cost per ton produced. The decrease in gross profit margin was primarily
due to the fact that the percentage decrease in net sales was greater than the
percentage decrease in cost of sales.
Graphite Electrode Business Segment. Net sales of graphite electrodes
decreased 11%, or $17 million, to $144 million in the 1999 third quarter from
$161 million in the 1998 third quarter. The decrease was primarily attributable
to a reduction in average sales revenue per metric ton (in U.S. dollars and net
of changes in currency exchange rates). The average sales revenue per metric ton
(in U.S. dollars and net of changes in currency exchange rates) of our graphite
electrodes was $2,662 in the 1999 third quarter as compared to $2,971 in the
1998 third quarter. The reduced average sales revenue per metric ton represented
$16 million of the decrease in net sales. Included in the reduction in average
sales revenue per metric ton is the lowering of prices by our Brazilian
subsidiary because of competitive cost advantages resulting from the Brazilian
currency devaluation, which accounted for about $6 million of the $16 million
decrease in net sales. Other currency exchange rate changes accounted for about
$3 million of the $16 million decrease in net sales. The balance of the $16
million decrease in net sales was largely attributable to lower graphite
electrode selling prices both in home and export markets.
Volume of graphite electrodes sold increased 200 metric tons, or less than
1%, to 53,100 metric tons in the 1999 third quarter from 52,900 metric tons in
the 1998 third quarter. The increased volume of graphite electrodes sold
represented an increase in net sales of $1 million.
Cost of sales for graphite electrodes decreased 7%, or $7 million, to $93
million in the 1999 third quarter from $100 million in the 1998 third quarter.
Gross profit declined 16%, or $10 million, to $51 million in the 1999 third
quarter from $61 million in the 1998 third quarter. Gross profit margin for
graphite electrodes decreased to 35.4% in the 1999 third quarter from 37.9% in
the 1998 third quarter.
The decrease in cost of sales was primarily due lower average graphite
electrode cost per ton resulting from cost savings under our global
restructuring and rationalization plan. The impact of the cost savings on
average graphite electrode cost per ton was partially offset by the lower
production
28
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PART I. (Cont.)
UCAR INTERNATIONAL INC.
levels which has the effect of increasing the average fixed cost per ton
produced. The decrease in gross profit margin was primarily due the fact that
the percentage decrease in net sales was greater than the percentage decrease in
cost of sales.
Graphite and Carbon Products Business Segment. Net sales of graphite and
carbon products decreased 8%, or $6 million, to $66 million in the 1999 third
quarter from $72 million in the 1998 third quarter. The decrease was primarily
due to the global economic conditions that resulted in lower demand and lower
prices for graphite specialties sold to the semiconductor, aerospace and
aircraft industries, as well as lower demand and lower prices for certain
products sold to the silicon metals industry. Increased demand for graphite
cathodes was offset by lower demand for carbon cathodes.
Cost of sales for graphite and carbon products decreased 8%, or $4 million,
to $47 million in the 1999 third quarter from $51 million in the 1998 third
quarter. This decrease resulted primarily from cost savings, changes in product
mix and seasonal declines in certain plant support costs, partially offset by
inefficiencies from reduced production levels and higher average fixed costs per
unit due to lower production levels. As a result of the changes described above,
gross profit declined 10%, or $2 million, to $19 million in the 1999 third
quarter from $21 million in the 1998 third quarter. Gross profit margin for
graphite and carbon products decreased to 28.8% in the 1999 third quarter from
29.2% in the 1998 third quarter. The decrease in gross profit margin was due to
the fact that the decrease in net sales exceeded the decrease in cost of sales.
Operating Profit for Us as a Whole. Operating profit in the 1999 third
quarter was $41 million, or 19.5% of net sales, as compared to an operating loss
in the 1998 third quarter of $94 million. Operating profit in the 1999 third
quarter includes a $13 million charge for the settlement of the securities class
action and stockholder derivative lawsuits, as well as a $6 million
restructuring credit related to plant closure activities. The operating loss in
the 1998 third quarter includes an $86 million restructuring charge and a $60
million impairment loss on Russian assets. Excluding those charges, credit and
impairment loss, operating profit in the 1999 third quarter was lower than in
the 1998 third quarter due to lower gross profit, partially offset by lower
selling, administrative and other expense.
Selling, administrative and other expense decreased to $20 million in the
1999 third quarter from $27 million in the 1998 third quarter primarily due to
lower corporate administration expenses resulting from cost savings under our
global rationalization and restructuring plan and, to a lesser extent, reduced
variable compensation expense.
Other (income) expense, (net) was income of $1 million in the 1999 third
quarter as compared to expense of $1 million in the 1998 third quarter. The
change was primarily due to a reduction in consulting fees, partially offset by
lower interest income due to a decrease in short-term investments.
Other Items Affecting Us as a Whole. Interest expense increased to $20
million in the 1999 third quarter from $19 million in the 1998 third quarter.
The increase primarily resulted from higher average annual interest rates,
partially offset by lower average total debt outstanding. Average outstanding
total debt was $768 million in the 1999 third quarter as compared to $772
million in the
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PART I. (Cont.)
UCAR INTERNATIONAL INC.
1998 third quarter. The average annual interest rate was 9.6% in the 1999 third
quarter as compared to 8.8% in the 1998 third quarter. These average annual
interest rates exclude imputed interest on the DOJ 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.
Provision for income taxes was nil in the 1999 third quarter as compared to
a tax benefit of $1 million in the 1998 third quarter. The effective tax rate
for the 1999 third quarter, excluding the impact of the settlement of the
securities class action and stockholder derivative lawsuits, adjustments to our
global restructuring and rationalization plan and adjusting for the change in
the annualized effective tax rate, is 15%, which is lower than the U.S. federal
statutory income tax rate of 35%. The lower rate in the 1999 third quarter was
primarily a result of tax planning strategies, earnings repatriation plans, tax
settlements and earnings from consolidated entities with lower effective tax
rates. The income tax benefit of $1 million for the 1998 third quarter reflects
the impact of the restructuring charge and impairment loss on Russian assets as
well as global integration and other projects. The effective tax rate for the
1998 third quarter excluding the restructuring charge and impairment loss was
30%.
As a result of the changes described above, net income was $21 million in
the 1999 third quarter, an increase of $134 million from a net loss of $113
million in the 1998 third quarter.
Nine Months Ended September 30, 1999 as Compared to Nine Months Ended
September 30, 1998. Net sales of $623 million in the 1999 first nine months
represented a $102 million, or 14%, decrease from net sales of $725 million in
the 1998 first nine months. Gross profit of $206 million in the 1999 first nine
months represented a $65 million, or 24%, decrease from gross profit of $271
million in the 1998 first nine months. Gross profit margin was 33.1% in the 1999
first nine months as compared to 37.4% in the 1998 first nine months.
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 impact of those factors was partially offset by lower cost of
sales. The lower volumes and sales revenue per metric ton were due primarily to
changes in global economic conditions that reduced demand for steel and other
metals. This, in turn, reduced demand for many of our products, particularly
graphite electrodes. Lower cost of sales was primarily due to cost savings under
our global rationalization and restructuring plan, partially offset by lower
production levels which has the effect of increasing the average fixed cost per
ton produced. The decrease in gross profit margin was primarily due to the fact
that the percentage decrease in net sales was greater than the percentage
decrease in cost of sales.
Graphite Electrode Business Segment. Net sales of graphite electrodes
decreased 17%, or $84 million, to $417 million in the 1999 first nine months
from $501 million in the 1998 first nine months. The decrease was primarily
attributable to a decrease in average sales revenue per metric ton. The average
sales revenue per metric ton (in U.S. dollars and net of changes in currency
exchange rates) of our graphite electrodes was $2,701 in the 1999 first nine
months as compared to $3,034 in the 1998 first nine months. The reduced average
sales revenue per metric ton represented about $55 million of the $84 million
decrease in net sales. The reduction in average sales revenue
30
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PART I. (Cont.)
UCAR INTERNATIONAL INC.
per metric ton was partially due to the lowering of prices by our Brazilian
subsidiary because of competitive cost advantages resulting from the Brazilian
currency devaluation, which accounted for about $19 million of the $55 million
decrease in net sales. Other currency exchange rate changes accounted for about
$12 million of the $55 million decrease in net sales. The balance of the $55
million decrease in net sales was largely attributable to lower graphite
electrode selling prices both in home and export markets and, to a lesser
extent, changes in product mix.
The balance of the $84 million decrease in net sales was attributable to a
reduction of 9,400 metric tons, or 6%, in the volume of graphite electrodes sold
to 151,000 metric tons in the 1999 first nine months from 160,400 metric tons in
the 1998 first nine months. The reduced volume of graphite electrodes sold
represented about $29 million of the $84 million decrease in net sales.
Cost of sales for graphite electrodes decreased 13%, or $39 million, to
$268 million in the 1999 first nine months from $307 million in the 1998 first
nine months. Gross profit declined 23%, or $45 million, to $149 million in the
1999 first nine months from $194 million in the 1998 first nine months. Gross
profit margin for graphite electrodes decreased to 35.7% in the 1999 first nine
months from 38.7% in the 1998 first nine months.
The decrease in cost of sales was primarily due to lower average graphite
electrode cost per ton resulting from cost savings under our global
restructuring and rationalization plan. The impact of the cost savings on
average graphite electrode cost per ton was partially offset by the lower
production levels which has the effect of increasing the average fixed cost per
ton produced. The decrease in gross profit margin cost was primarily due the
fact that the percentage decrease in net sales was greater than the percentage
decrease in cost of sales.
Graphite and Carbon Products Business Segment. Net sales of graphite and
carbon products decreased 8%, or $18 million, to $206 million in the 1999 first
nine months from $224 million in the 1998 first nine months. The decrease was
primarily due to the global economic conditions that resulted in lower demand
and lower prices for graphite specialties sold to the semiconductor, aerospace
and aircraft industries and lower demand for carbon electrodes sold to the
silicon metals industry, partially offset by increased demand for graphite
cathodes sold to the aluminum industry.
Cost of sales for graphite and carbon products increased 1%, or $2 million,
to $149 million in the 1999 first nine months from $147 million in the 1998
first nine months. The impact of cost increases resulting from changes in
product mix and lower operating levels were partially offset by cost savings
under our global rationalization and restructuring plan. As a result of the
changes described above, gross profit declined 26%, or $20 million, to $57
million in the 1999 first nine months from $77 million in the 1998 first nine
months. Gross profit margin for graphite and carbon products decreased to 27.7%
in the 1999 first nine months from 34.4% in the 1998 first nine months. The
decrease in gross profit margin was due to the combination of the decrease in
net sales and the increase in cost of sales.
Operating Profit of Us as a Whole. Operating profit in the 1999 first nine
months was $134 million, or 21.5% of net sales, as compared to $35 million, or
4.8% of net sales, in the 1998 first nine months. Operating profit in the 1999
first nine months includes a $13 million charge for the settlement of the
securities class action and stockholder derivative lawsuits, as well as a $6
million
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PART I. (Cont.)
UCAR INTERNATIONAL INC.
restructuring credit related to plant closure activities. Operating loss in the
1998 first nine months includes an $86 million restructuring charge and a $60
million impairment loss on Russian assets. Excluding those charges, credit and
impairment loss, operating profit in the 1999 third quarter was lower than in
the 1998 third quarter due to lower gross profit, partially offset by lower
selling, administrative and other expense.
Selling, administrative and other expense decreased to $65 million in the
1999 first nine months from $79 million in the 1998 first nine months primarily
due to lower corporate administration expenses resulting from cost savings under
our global rationalization and restructuring plan and, to a lesser extent,
reduced variable compensation expense.
Other (income) expense (net) was income of $7 million in the 1999 first
nine months as compared to expense of $5 million in the 1998 first nine months.
The change was primarily due to a reduction in consulting fees and a gain of $2
million on the sale of the assets of our spray cooled systems business,
partially offset by a reduction in interest income due to a reduction in
short-term investments.
Other Items Affecting Us as a Whole. Interest expense increased to $64
million in the 1999 first nine months from $54 million in the 1998 first nine
months. The increase primarily resulted from higher average annual interest
rates and higher average total debt outstanding. Average outstanding total debt
was $806 million in the 1999 first nine months as compared to $769 million in
the 1998 first nine months. The average annual interest rate was 9.9% in the
1999 first nine months as compared to 8.7% in the 1998 first nine months. These
average annual interest rates exclude imputed interest on the DOJ 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, partially offset by a decrease in
LIBOR. We incurred additional debt in 1998 and early in 1999 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 $13 million in the 1999 first nine months as
compared to $26 million in the 1998 nine months. During the 1999 first nine
months, the provision for income taxes excluding the charge and credit reflected
a 23% effective tax rate, which is lower than the U.S. federal statutory income
tax rate of 35%, primarily as a result of tax planning strategies, earnings
repatriation plans, tax settlements and earnings from consolidated entities with
lower effective tax rates. For the 1998 first nine months, the provision for
income taxes excluding the restructuring charge and impairment loss reflected a
29% effective tax rate.
As a result of the changes described above, net income was $55 million in
the 1999 first nine months, an increase of $102 million from a net loss of $47
million in the 1998 first nine months.
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.
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PART I. (Cont.)
UCAR INTERNATIONAL INC.
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 $732 million and a stockholders' deficit of $279 million at
September 30, 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 $19 million at September 30, 1999 as compared to $69
million at December 31, 1998.
Debt (net of cash, cash equivalents and short-term investments) was $713
million at September 30, 1999 as compared to $735 million at December 31, 1998.
Cash Flow Provided by Operating Activities. Cash flow provided by operating
activities was $60 million in the 1999 first nine months as compared to $48
million in the 1998 first nine months. This improvement of $12 million resulted
primarily from a lower use of cash flow for working capital of approximately $34
million, partially offset by lower net income (including non-cash items) of
approximately $21 million and an increased use of cash associated with long term
assets and liabilities of $1 million.
Use of cash flow for working capital was $45 million in the 1999 first nine
months, an improvement of $34 million from a use of $79 million in the 1998
first nine months. The improvement occurred despite the use of $46 million for
payment of net fines, settlements and expenses in connection with antitrust
investigations and related lawsuits and claims during the 1999 first nine months
(as compared to $38 million in the 1998 first nine months) and the use of $20
million for restructuring payments during the 1999 first nine months.
The working capital improvement was due primarily to reductions in the use
of cash of $61 million for inventories ($47 million use of cash in 1998 versus
$14 million source of cash in 1999), $26 million for payables and accruals ($36
million use of cash in 1998 versus $10 million use of cash in 1999), and $2
million for prepaid expenses and other assets, partially offset by an increase
in the use of cash of $27 million for receivables ($42 million source of cash in
1998 versus $15 million source of cash in 1999). The working capital improvement
resulted primarily from improved cash and inventory management.
Cash Flow Used in Investing Activities. We used $33 million of cash flow in
investing activities during the 1999 first nine months as compared to $45
million during the 1998 first nine months. This reduction of $12 million was
primarily due to a reduction in cash used in short term investments by our
Brazilian subsidiary of $12 million, partially offset by an increase in cash
used for capital expenditures of $2 million. In addition, cash provided from the
sale of assets was $4 million in the 1999 first nine months (including $3
million from the sale of assets of our spray cooled systems business assets) as
compared to cash provided from the sale of assets in the ordinary course of
business of $2 million in the 1998 first nine months.
Cash Flow Provided by (Used in) Financing Activities. Cash flow used in
financing activities was $70 million in the 1999 first nine months as compared
to cash provided by financing activities of $26 million in the 1998 first nine
months. Financing activities from long-term debt consisted of $51 million of net
payments under the Senior Bank Facilities in the 1999 first nine
33
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PART I. (Cont.)
UCAR INTERNATIONAL INC.
months as compared to $72 million of net borrowings in the 1998 first nine
months. The net payments made in the 1999 first nine months were funded
primarily through improved cash and inventory management and decreased working
capital requirements as compared to the 1998 first nine months. Net short-term
debt reductions were $18 million in the 1999 first nine months as compared to
$47 million in the 1998 first nine months. Net short-term debt reductions were
lower in the 1999 first nine months due to lower short-term borrowings by our
Brazilian subsidiary and lower borrowings by other non-U.S. subsidiaries to meet
local cash needs.
Accounting Changes
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, 2000. 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 or miscalculations or failures causing disruptions of operations,
including, among other things, temporary inability to process transactions,
continue production or otherwise engage in 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, 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. Remediation
of substantially all of our personal computers, our finance and control systems,
our production process systems and instrumentation, our local and wide-area
networks, and our other business equipment and site systems has been
substantially completed. Independent verification of our Year 2000 compliance
efforts was substantially completed in the 1999 second quarter.
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PART I. (Cont.)
UCAR INTERNATIONAL INC.
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 90% 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 underway to evaluate the Year 2000 compliance status
of critical suppliers and service providers.
We are currently completing the development of contingency plans to respond
to risks of either one or more of our systems not being Year 2000 compliant or
our customers or critical suppliers or service providers not being Year 2000
compliant on a timely basis. Contingency plan development at our various sites
is about 90% complete. Our contingency plans will place particular emphasis on
the ability of certain raw material suppliers and electric utility providers
that supply electric power to our manufacturing operations to be Year 2000
compliant on a timely basis as well as on completion of remediation by our
manufacturing operations. Contingency plans will include consideration of
alternative sources of supply or service, customer communication plans and plant
and business response plans. In addition, transition plans have been developed
defining the steps to be taken by each site to handle the transition from the
year 1999 to the year 2000.
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.
We estimate that the aggregate incremental cost we will incur for internal
and external services in connection with Year 2000 issues will be about $3
million. We estimate that about $2 million of the cost was incurred prior to
1999. Internal costs consist principally of payroll costs for our information
systems group.
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:
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PART I. (Cont.)
UCAR INTERNATIONAL INC.
o investments in our foreign subsidiaries and in our share of the
earnings of those subsidiaries, which are denominated in local currencies,
o raw material purchases made by our foreign subsidiaries in a
currency other than the local currency, and
o 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. We held contracts for the purpose of hedging these risks
with an aggregate notional amount of about $368 million at September 30, 1999.
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. Unrealized gains and losses on outstanding
foreign currency contracts were not material at September 30, 1999.
During the 1999 first nine months, many of the currencies of countries in
which we manufacture and sell our products weakened against the U.S. dollar. The
most significant change occurred in Brazil, where the currency devalued by about
60% against the U.S. dollar in the 1999 first nine months. These currency
changes resulted in a $47 million reduction in stockholders' equity in the 1999
first nine months due to cumulative translation adjustments, including $39
million associated with our Brazilian subsidiary.
36
<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 law 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 law 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 DOJ fine
is payable in six annual installments of $20 million, $15 million, $15 million,
$18 million, $21 million and $21 million, commencing in 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 law 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 law 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 law 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, under the plea
agreement, we will not be subject to
37
<PAGE>
PART II. (Cont.)
UCAR INTERNATIONAL INC.
prosecution by the Competition Bureau with respect to any other violations of
Canadian antitrust law occurring prior to the date of the plea agreement. The
fine was timely paid.
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 law by producers and distributors 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. 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.
In October 1999, we became aware that Korean antitrust authorities had
commenced an investigation of producers and distributors of graphite electrodes.
We have no facilities or employees in Korea.
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.
The guilty pleas make it more difficult for us to defend against other
investigations as well as civil lawsuits and claims.
Antitrust Lawsuits. In 1997, various producers of graphite electrodes
(including us) 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 law 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, 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, various producers of graphite electrodes (including us) were
served with a complaint by about 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 the defendants violated U.S. federal antitrust law 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, various producers of graphite electrodes (including us), Union
Carbide Corporation ("Union Carbide") and Mitsubishi Corporation ("Mitsubishi")
were served with a complaint by
38
<PAGE>
PART II. (Cont.)
UCAR INTERNATIONAL INC.
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 producer
defendants violated U.S. federal antitrust law in connection with the sale of
graphite electrodes and that payments by us 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 violations and an
order to have payments made by us to Union Carbide and Mitsubishi in connection
with our recapitalization declared to be fraudulent conveyances and returned to
us for purposes of enabling us to satisfy any judgments resulting from such
alleged violations.
In 1998, various producers of graphite electrodes (including us) 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 law 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
initial lawsuits"). Various producers of graphite electrodes (including us) have
been named as defendants in some or all of the complaints. In the complaints to
the other initial 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 initial
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, various producers of graphite electrodes (including us) were named
as defendants in two complaints filed in the District Court, commencing two
separate civil antitrust lawsuits entitled Ferromin International Trade
Corporation, et al. vs. UCAR International Inc., et al. and BHP New Zealand,
Ltd., et al. vs. UCAR International Inc., et al., respectively (sometimes called
the "foreign customer lawsuits"). The first complaint was filed by about 26
steelmakers and related parties, all but one of whom are located outside the
United States, and the second complaint was filed by 4 steelmakers, all of whom
are located outside the United States. We have been served with the first
complaint but not the second complaint. In each complaint, the plaintiffs allege
that the defendants violated U.S. federal antitrust law 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 violations. We
believe
39
<PAGE>
PART II. (Cont.)
UCAR INTERNATIONAL INC.
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 law.
In 1999, various producers of graphite electrodes (including us) 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 law 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 October 31, 1999, we have settled the antitrust class action
lawsuit, the opt-out lawsuit, the Nucor lawsuit, all of the other initial
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 to which we are a
party 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 lawsuits, 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. None of the settlements (or the plea agreements in connection
with antitrust investigations) contain restrictions on future prices of our
graphite electrodes. 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 October 31, 1999,
all payments due under the settlements have been timely made.
The Texas lawsuit, the foreign customer lawsuits 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 lawsuits 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 lawsuits 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.
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.
1997 Earnings Charge. We recorded a pre-tax 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. The $340 million reserve is calculated on a basis net
40
<PAGE>
PART II. (Cont.)
UCAR INTERNATIONAL INC.
of imputed interest on installment payments of the DOJ fine. Actual liabilities
and expenses (including settled investigations, lawsuits and claims as well as
the continuing investigations by the EU authority and unsettled pending,
threatened and possible lawsuits and claims mentioned above) could be materially
higher than $340 million. To the extent that these liabilities and expenses are
reasonably estimable, at October 31, 1999, $340 million continues to represent
our estimate of these liabilities and expenses. In the aggregate, the fines,
settlements and expenses described above are within the amounts we used to
evaluate the $340 million charge.
Through September 30, 1999, we have paid an aggregate of $191 million of
fines, settlements and expenses and $7 million of imputed interest has been
paid. As of September 30, 1999, $149 million remains in the reserve and, based
on information known to us at October 31, 1999, the aggregate amount of
remaining committed payments for fines and settlements was about $87 million and
the aggregate amount of remaining committed payments for imputed interest was
about $12 million. About $31 million of these payments for fines and settlements
are due on or before September 30, 2000. Amounts due under the settlement of the
antitrust class action may be increased if additional claims are filed by
members of the class.
Stockholder Derivative Lawsuit. On March 4, 1998, UCAR was served with a
complaint commencing a stockholder 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 us and our
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 us resulting from these alleged
breaches and sales. In 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 June 1999, the
motion was granted. In July 1999, the plaintiff filed a notice indicating an
intent to appeal the dismissal.
This lawsuit has been pursued for recovery from the individual defendants
on behalf of (and payable to) UCAR. 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
41
<PAGE>
PART II. (Cont.)
UCAR INTERNATIONAL INC.
that UCAR's ultimate exposure in this lawsuit would be limited to expenses,
including defense costs, and possibly reimbursement of certain of plaintiff's
attorneys' fees and expenses.
As described below, in October 1999, UCAR entered into an agreement
settling this lawsuit. The settlement is subject to court approval, customary
notice and termination provisions, and other terms and conditions. Although UCAR
does not expect such an outcome, it is possible that the court could reject the
settlement. In such event, it is possible that UCAR could be required to defend
against this lawsuit or enter into a less favorable settlement.
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 law 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 filed a motion to dismiss
the consolidated amended complaint.
We have been vigorously defending against this lawsuit. This lawsuit is
still in its early stages.
As described below, in October 1999, UCAR entered into an agreement
settling this lawsuit. The settlement is subject to court approval, court
certification of the class, customary notice and termination provisions, and
other terms and conditions. Although UCAR does not expect such an outcome, it is
possible that the court could reject the settlement. In such event, it is
possible that UCAR could be required to defend against this lawsuit or enter
into a less favorable settlement. As mentioned above, the guilty pleas make it
more difficult to defend against claims asserted against us.
Settlement of Securities Class Action and Stockholder Derivative Lawsuits.
In October 1999, UCAR entered into agreements settling the securities class
action and stockholder derivative lawsuits. Under the agreements, $40.5 million
will be contributed to one or more escrow accounts for the benefit of former and
current stockholders who are members of the class for whom the securities class
action was brought, as well as plaintiffs' attorney's fees. UCAR will contribute
$11 million and the insurers under our directors and officers insurance policies
at the time the lawsuits were filed will contribute the balance of $29.5
million. In addition, a new outside director, acceptable to both UCAR and the
lead securities class action plaintiff, the Florida State Board of
Administration, the eighth largest state employees' pension fund, will be added
to UCAR's Board of
42
<PAGE>
PART II. (Cont.)
UCAR INTERNATIONAL INC.
Directors. We expect to incur about $2 million of unreimbursed expenses related
to the lawsuits. These expenses, together with the $11 million, were recorded as
a one-time charge to operations of $13 million in the 1999 third quarter.
43
<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
------ ----------------------
10.50 Stipulation and Agreement of Settlement dated
October 13, 1999 among David Jaroslawicz and
Robert P. Krass, Robert J. Hart, Peter B. Mancino,
William P. Wiemels, Fred C. Wolf, Eugene
Cartledge, John R. Hall, Glenn H. Hutchins,
Robert D. Kennedy, Howard A. Lipson, Peter G.
Peterson, Stephen A. Schwarzman and UCAR
International Inc.
10.51 Stipulation and Agreement of Settlement dated
October 13, 1999 among the Florida State Board
of Administration and UCAR International Inc.,
Peter G. Peterson, Stephen A. Schwarzman,
Howard A. Lipson, Glenn H. Hutchins, Robert P.
Krass, Robert J. Hart, William P. Wiemels, Fred C.
Wolf and Peter B. Mancino.
27.1 Financial Data Schedule for the quarter ended
September 30, 1999 (for SEC 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.
44
<PAGE>
UCAR INTERNATIONAL INC.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UCAR INTERNATIONAL INC.
Date: November 15, 1999 By: /s/ Corrado F. DeGasperis
-------------------------
Corrado F. DeGasperis
Controller
(Principal Accounting Officer)
45
<PAGE>
UCAR INTERNATIONAL INC.
INDEX TO EXHIBITS
Exhibit No. Description Page No.
10.50 Stipulation and Agreement of Settlement dated
October 13, 1999 among David Jaroslawicz and
Robert P. Krass, Robert J. Hart, Peter B. Mancino,
William P. Wiemels, Fred C. Wolf, Eugene Cartledge,
John R. Hall, Glenn H. Hutchins, Robert D. Kennedy,
Howard A. Lipson, Peter G. Peterson, Stephen A.
Schwarzman and UCAR International Inc.
10.51 Stipulation and Agreement of Settlement dated
October 13, 1999 among the Florida State Board of
Administration and UCAR International Inc., Peter G.
Peterson, Stephen A. Schwarzman, Howard A. Lipson,
Glenn H. Hutchins, Robert P. Krass, Robert J. Hart,
William P. Wiemels, Fred C. Wolf and Peter B. Mancino.
27.1 Financial Data Schedule for the quarter ended
September 30, 1999 (for SEC use only)
E-1
DOCKET NO. CV-98-0331117-S : SUPERIOR COURT
:
DAVID JAROSLAWICZ, derivatively : JUDICIAL DISTRICT OF DANBURY
on behalf of UCAR INTERNATIONAL INC., :
:
Plaintiff, :
:
v. :
: AT DANBURY
ROBERT P. KRASS, ROBERT J. HART, :
PETER B. MANCINO, WILLIAM P. :
WIEMELS, FRED C. WOLF, R. EUGENE :
CARTLEDGE, JOHN R. HALL, GLENN H. :
HUTCHINS, ROBERT D. KENNEDY, :
HOWARD A. LIPSON, PETER G. :
PETERSON, and STEPHEN A. :
SCHWARZMAN, :
:
Defendants, :
:
-and- : OCTOBER 13, 1999
:
UCAR INTERNATIONAL INC. :
:
Nominal Defendant. :
:
:
:
STIPULATION AND AGREEMENT OF SETTLEMENT
---------------------------------------
IT IS HEREBY STIPULATED AND AGREED by and among the undersigned attorneys
for the Plaintiff David Jaroslawicz, on behalf of himself and derivatively on
behalf of Nominal Defendant UCAR International Inc. ("UCAR"), and Defendants
Peter G. Peterson, Stephen A. Schwarzman, Howard A. Lipson, Glenn H. Hutchins,
Robert P. Krass, Robert J. Hart, William P. Wiemels, Fred C. Wolf, R. Eugene
Cartledge, John R. Hall, Robert D. Kennedy, Peter B. Mancino and UCAR, and David
A. Stockman, that, subject to the approval of the Court
<PAGE>
and the satisfaction of the conditions set forth herein, the Litigation (as
defined herein) shall be finally and fully compromised and settled, as follows:
I. DEFINITIONS
1.1 "Plaintiff" means plaintiff David Jaroslawicz on behalf of himself and
all shareholders (as of the Effective Date) of UCAR (as defined in Paragraph
1.7).
1.2 "Defendants" means UCAR (as defined in Paragraph 1.7) and Peter G.
Peterson, Stephen A. Schwarzman, Howard A. Lipson, Glenn H. Hutchins, David A.
Stockman, Robert P. Krass, Robert J. Hart, William P. Wiemels, Fred C. Wolf, R.
Eugene Cartledge, John R. Hall, Robert D. Kennedy and Peter B. Mancino. The
"Individual Defendants" means all Defendants listed in this paragraph other than
UCAR.
1.3 "Effective Date" means the first date by which all of the events and
conditions specified in paragraph 12.1 of this Stipulation have occurred and
have been satisfied, all possible appeals or other appellate procedures related
to this Litigation and/or this Stipulation are finally concluded and the time
for taking any further appeals or other appellate procedures related to this
Litigation and/or Stipulation has expired.
1.4 "Counsel for the Plaintiff" shall mean Pomerantz Haudek Block Grossman
& Gross LLP, 100 Park Avenue, 26th Floor, New York, New York 10017, Telephone
(212) 661-1100; and Hurwitz & Sagarin, P.C., 147 North Broad Street, P.O. Box
112, Milford, Connecticut 06460, Telephone: (203) 877-8000.
1.5 "Litigation" means the action titled Jaroslawicz v. Krass, et al.,
Docket No. CV98-0331117S (Connecticut Superior Court, Judicial District of
Danbury at Danbury), appealed as AC No. 19780 (Connecticut Appellate Court).
2
<PAGE>
1.6 "Securities Litigation" means the consolidated actions titled In re:
UCAR International Inc. Securities Litigation, 3:98CV00600 (JBA), pending in the
United States District Court for the District of Connecticut.
1.7 "UCAR" or the "Company" means UCAR International Inc.
1.8 "UCAR's Counsel" means Kelley Drye & Warren LLP, Two Stamford Plaza,
281 Tresser Boulevard, Stamford, Connecticut 06901, Telephone (203) 324-1400.
1.9 Other capitalized terms used herein shall have the meanings assigned to
them elsewhere herein.
II. COMPLAINT
2.1 The Amended Complaint, the operative complaint in the Litigation (the
"Complaint"), was filed on July 17, 1998 in the Connecticut Superior Court
(Judicial District of Danbury at Danbury). The Complaint is brought as a
shareholders derivative action on behalf of UCAR and its shareholders and
alleges that Defendants violated certain duties owing to UCAR.
III. PROCEEDINGS
3.1 Defendants moved to dismiss the Amended Complaint. On June 16, 1999,
the Connecticut Superior Court (Moraghan, J.) granted Defendants' motion.
Judgment dismissing the Litigation was entered on July 16, 1999. Plaintiff filed
an appeal of the Judgment on July 6, 1999.
IV. PLAINTIFF'S STATEMENT
4.1 Plaintiff believes that the claims asserted in the Litigation have
merit and that the pending appeal has a good chance of success. If the appeal
were successful, Plaintiff believes that the damages could be in excess of the
settlement amount. Plaintiff, however, has concluded that the settlement herein,
which confers substantial financial benefits on UCAR, is in
3
<PAGE>
the best interests of UCAR and its shareholders because further litigation would
be protracted and expensive, UCAR would potentially have to indemnify the
Individual Defendants for any attorneys' fees and/or judgments incurred by the
Individual Defendants, and because of the uncertainty and risks inherent in this
complex litigation.
V. DEFENDANTS' STATEMENT
5.1 The Defendants deny the material allegations in the Complaint and
believe that the pending appeal does not have a good chance of success. The
Defendants, however, have determined that it is desirable and beneficial to them
that this Litigation be fully and finally compromised and settled upon the terms
and conditions set forth in this Stipulation because further litigation would be
protracted and expensive, because the possible potential damages could be in
excess of the settlement amount, because of the uncertainty and risks inherent
in this complex litigation, and because settlement will facilitate a settlement
and compromise of the Securities Litigation, permitting UCAR to move forward
with its business and operations without the distraction of time consuming,
complex litigation.
VI. COMPROMISE AGREEMENT
6.1 This Stipulation, therefore, is a compromise disposition of
controverted claims and is the result of substantial, protracted arm's length
negotiations to resolve the Litigation. No consideration for this Stipulation,
and nothing contained in this Stipulation, shall be construed as an admission of
any liability, or any lack of merit to the claims or defenses asserted, by or on
behalf of any of the parties to the Litigation.
VII. INTENT OF THIS STIPULATION OF SETTLEMENT
7.1 It is the intent of this Stipulation to effect a fair, reasonable,
adequate, full and final settlement of all Claims, as defined herein, including
claims for attorneys' fees
4
<PAGE>
and costs which were or could have been asserted against the Defendants by
Plaintiff in this Litigation. Nothing in this Settlement is intended to, and
shall not be construed to, affect or modify the settlement or release, or any
settlement, release or other provision, in the Securities Litigation.
VIII. TERMS OF STIPULATION AND AGREEMENT OF SETTLEMENT
8.1 Within ten (10) days after the Court signs the Order Preliminarily
Approving Derivative Action Settlement, and Notice and Scheduling a Settlement
Hearing (the "Preliminary Order"), Defendants (other than UCAR) and/or their
insurance carriers shall wire transfer to, or cause to be wire transferred to,
or otherwise deposited, the sum of Four Million Seven Hundred Fifty Thousand
Dollars ($4,750,000.00) (the "Settlement Amount") in an escrow account held by
UCAR's Counsel. Interest on such account will accrue and be part of the
Settlement Amount for the benefit of UCAR so long as this Stipulation is finally
approved and becomes effective. The Settlement Amount and interest thereon shall
hereinafter be referred to as the "Settlement Fund." If this Stipulation is not
approved or does not become effective, UCAR shall return and/or direct UCAR's
Counsel to return the Settlement Fund to Defendants or the insurance carrier
which made payment(s) to that fund.
8.2 Since the initiation of this suit and the Securities Litigation, UCAR
has expanded its Board of Directors and increased the percentage of outside
directors on its Board, appointed a new Chairman of the Board, a new Chief
Executive Officer, a new President, a new Chief Financial Officer and a new
Treasurer, continued its investigation of the underlying allegations of
antitrust violations and updated and revised its antitrust compliance program.
UCAR has also agreed as part of the Settlement of the Securities Litigation that
another Board
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<PAGE>
member may appointed from a list of candidates developed by the Lead Plaintiff
in the Securities Litigation and by UCAR, as set forth in the Stipulation of
Settlement in the Securities Litigation.
8.3 Delivery to UCAR of the Settlement Fund, less the attorneys' fees
applied for under Section XI herein by Counsel for the Plaintiff, may occur no
sooner than three (3) business days after the Settlement Amount is deposited in
the Settlement Fund Account. UCAR is entitled to and anticipates using the
proceeds of the Settlement Fund delivered to it to settle the Securities
Litigation. Payment of Plaintiff's attorneys' fees and expenses shall be
governed by Section XI herein.
8.4 The Litigation shall be withdrawn immediately upon approval of this
Stipulation and the settlement by the Court, and any and all Claims as defined
in Section X herein shall be released in accordance with this Stipulation.
Nothing in this Stipulation shall preclude UCAR acting on its own behalf from
asserting any claims, counterclaims or cross claims.
IX. STATUS OF THE LITIGATION AND
APPROVAL OF THE SETTLEMENT
9.1 For purposes of this Stipulation only (a) the Litigation shall be
considered properly maintained as a derivative action under Conn. Gen. Stat. ss.
33-721; and (b) Defendants agree that Plaintiff Jaroslawicz is an appropriate
and adequate derivative plaintiff.
9.2 Promptly after this Stipulation is signed, the parties to this
Stipulation shall submit this Stipulation together with its Exhibits to the
Court and shall jointly request that a hearing to consider the adequacy of the
settlement be scheduled (the "Settlement Hearing") and for entry of the
Preliminary Order substantially in the form and content of Exhibit "A" to this
Stipulation.
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9.3 On or before the dates set forth in the Preliminary Order, Plaintiff's
counsel shall mail (a) a notice substantially in the form annexed hereto as
Exhibit B (the "Notice"), describing this Stipulation and advising of the
scheduling of a hearing to consider the settlement of the Litigation as set
forth in this Stipulation, to UCAR shareholders of record as of September 30,
1999 pursuant to Conn. Gen. Stat. ss.33-725 in the manner provided for in the
Preliminary Order; and shall cause to be published (b) a summary notice
substantially in the form attached as Exhibit C (the "Summary Notice"), in the
Danbury News Times.
9.4 The cost of the Notice and the Summary Notice and related expenses
shall be paid by UCAR.
9.5 Within five (5) business days of the signing of this Stipulation,
UCAR's Counsel shall provide to Pomerantz Haudek Block Grossman & Gross LLP a
list of the names and addresses of all UCAR shareholders of record as of
September 30, 1999.
9.6 If, after considering the fairness of the proposed settlement, the
Court finds the settlement described in this Stipulation to be fair, reasonable,
and adequate, the parties to this Stipulation shall move the Court to enter the
Final Judgment, substantially in the form and content of Exhibit D to this
Stipulation.
X. RELEASES OF THE PARTIES
10.1 Upon the Effective Date, Plaintiff shall be deemed to have fully,
finally and forever released, relinquished and discharged any and all known and
unknown, contingent and non-contingent Claims against UCAR, the Individual
Defendants, the attorneys and insurers for the Defendants, and the Individual
Defendants' immediate families, heirs, successors and assigns. All the
Individual Defendants acknowledge and agree that such release does not include
any release of Claims by UCAR, acting on its own behalf.
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10.2 "Claims" means all claims, whether known or unknown, suspected or
unsuspected, disclosed or undisclosed, at law or equity, whether for damages,
penalties, injunctive or other relief, which had been, could have been, or could
in the future be asserted derivatively by or on behalf of Plaintiff or other
shareholders in connection with, arising out of, or in any way related to any
acts, failures to act, omissions, representations, misrepresentations, facts,
events, transactions, occurrences, or other subject matters set forth, alleged,
embraced, or otherwise referred to in the Complaint or in the Litigation or
which could have been set forth, alleged, embraced or otherwise referred to in
the Complaint or in the Litigation, including but not limited to claims for
breach of fiduciary duty, breach of UCAR's policies or procedures, waste,
mismanagement, violations of any statute, rule, regulation or common law, or
conduct which is negligent, intentional, with or without malice which Plaintiff
or other shareholder has, had or may have up to the signing of this Stipulation.
Notwithstanding anything above, "Claims" does not, and shall not be construed
to, include any claims which might be asserted by UCAR acting on its own behalf.
10.3 Claims include those which Plaintiff does not know of or suspect to
exist in his favor against the Defendants and their attorneys at the Effective
Date of the release which, if known by him might have affected his settlement
with and release of the Defendants, or might have affected his decision not to
object to this settlement.
10.4 Plaintiff acknowledges that the foregoing waiver of unknown claims was
separately bargained for and is a key element of the settlement of which this
release is a part.
10.5 Upon the Effective Date, each of the Defendants shall be deemed to
have, by operation of the Final Judgment, fully, finally and forever released,
relinquished and discharged any and all known and unknown, contingent and
non-contingent claims against David
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Jaroslawicz and Counsel for the Plaintiff, their immediate families, heirs,
successors, and assignees that were asserted or could have been asserted in
connection with or related to, bringing, maintaining, prosecuting, or taking
other action in the course of this Litigation. Such release shall further
encompass both known and unknown claims to the same extent as specified in P. P.
10.1 through 10.3 herein.
XI. PLAINTIFF'S COUNSEL'S ATTORNEYS' FEES
AND REIMBURSEMENT OF EXPENSES
11.1 The allowance or disallowance by the Court of any payment of
attorneys' fees to Counsel for the Plaintiff is not part of the settlement set
forth in this Stipulation, and is to be considered by the Court separately from
the Court's consideration of the fairness, reasonableness and adequacy of the
settlement set forth in this Stipulation, and any order or proceedings relating
to such attorneys' fees or any appeal from any order relating thereto, shall not
operate to terminate or cancel this Stipulation or affect or delay the finality
of the Judgment and the settlement of the Litigation set forth herein.
11.2 Counsel for the Plaintiff will submit an application to the Court for
attorneys' fees and expenses not to exceed Five Hundred Thousand Dollars
($500,000.00). Defendants will not oppose any such application.
11.3 Any attorneys' fees and expenses awarded by the Court to Counsel for
the Plaintiff shall be paid out of the Settlement Fund within three (3) business
days after the later of: (i) the Effective Date or (ii) the date the Court
enters an Order granting an award of attorneys' fees and expenses. Any amount
held in the Settlement Fund pursuant to this paragraph which is not awarded to
Counsel for Plaintiff shall be paid over to UCAR.
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<PAGE>
XII. THE EFFECTIVE DATE OF THIS STIPULATION OF SETTLEMENT, EFFECT
OF DISAPPROVAL, CANCELLATION OR TERMINATION
12.1 The Effective Date of this Stipulation shall be the date when all of
the following events have occurred:
(a) The Court has entered the Preliminary Order, as required by
paragraph 9.2, above;
(b) The Settlement Fund, less any attorneys' fees and reimbursement
awarded by the Court to Counsel for the Plaintiff, shall have been transferred
to UCAR;
(c) The Order approving this Stipulation has become final, and no
right of appeal or other appellate procedures exists and all rights to appeal
have expired; and
(d) The Stipulation of Settlement in the Securities Litigation becomes
effective.
12.2 If all of the conditions specified in paragraph 12.1 are not met,
then the Stipulation may be canceled and terminated by either party.
XIII. MISCELLANEOUS PROVISIONS
13.1 The parties to this Stipulation (a) acknowledge that it is their
intent to consummate this agreement; and (b) agree to cooperate to the extent
necessary to effectuate and implement all terms and conditions of this
Stipulation and to exercise their best efforts to accomplish the foregoing terms
and conditions of the Stipulation.
13.2 Defendants agree that the amount of the Settlement Fund, as well as
the other terms and conditions of this Stipulation reflect a good faith
settlement of Plaintiff's Claims, reached voluntarily after consultation with
experienced legal counsel. UCAR has determined by a majority vote of independent
directors present at a meeting of the Board of Directors, where the
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<PAGE>
independent directors constituted a quorum, in good faith after conducting a
reasonable inquiry that the amount of the Settlement Fund, as well as the other
terms and conditions of this Stipulation, are in the best interests of UCAR and
constitute reasonably equivalent value for the Claims released. This Stipulation
may be used in such proceedings as may be necessary to consummate or enforce
this Stipulation, the settlement set forth herein or in the Final Judgment, and
Defendants may file this Stipulation and/or the Final Judgment in any derivative
action that may be brought against them in order to support a defense or
counterclaim based on principles of res judicata, collateral estoppel, release,
good faith settlement, judgment bar or reduction or any other theory of claim
preclusion or issue preclusion or any other similar defense or counterclaim.
Except as provided in this paragraph, this Stipulation shall not be used to
prove any allegation, claim or released claim in this Litigation and/or
Settlement.
13.3 All of the Exhibits to this Stipulation are material and integral
parts hereof and are fully incorporated herein by this reference.
13.4 This Stipulation may be amended or modified only by a written
instrument signed by or on behalf of all parties to the Litigation or their
successors-in-interest.
13.5 This Stipulation and the Exhibits attached hereto constitute the
entire agreement among the parties to the Stipulation hereto with respect to the
subject matter hereof and no representations, warranties or inducements have
been made to any party concerning this Stipulation or its Exhibits other than
the representations, warranties and covenants contained and memorialized in such
documents. Except as otherwise provided herein, each party shall bear its own
costs.
13.6 Each attorney executing this Stipulation or any of its Exhibits on
behalf of any party to the Stipulation hereby warrants that such attorney has
the full authority to do so.
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13.7 This Stipulation may be executed in one or more counterparts. All
executed counterparts and each of them shall be deemed to be one and the same
instrument. Counsel for the parties to this Stipulation shall exchange among
themselves original signed counterparts and a complete set of original executed
counterparts shall be filed with the Court.
13.8 The Stipulation shall be binding upon, and inure to the benefit of,
the successors and assigns of the parties to the Litigation.
13.9 In the event that the Stipulation is not approved by the Court or the
settlement set forth in this Stipulation is terminated or fails to become
effective in accordance with its terms, the parties to the Stipulation shall be
restored to their respective positions in the Litigation as of the date of this
Stipulation. In such event, the terms and provisions of the Stipulation shall
have no further force and effect with respect to such parties and shall not be
used in the Litigation or in any other proceeding for any purpose, and any Order
entered by the Court in accordance with this Stipulation shall be treated as
vacated, nunc pro tunc. No order of the Court or modification or reversal on
appeal of any order of the Court concerning attorneys' fees and/or reimbursement
for Counsel for the Plaintiff shall constitute grounds for cancellation or
termination of the Stipulation.
13.10 Without further Order of the Court, the parties hereto may agree to
reasonable extensions of time to carry out any of the provisions of this
Stipulation.
13.11 This Stipulation and its Exhibits shall be considered to have been
negotiated, executed and delivered, and to be wholly performed, in the State of
Connecticut, and the rights and obligations of all individuals and entities
hereunder shall be construed and enforced in accordance with, and governed by,
the internal, substantive laws of the State of Connecticut without giving effect
to that State's choice of law principles.
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<PAGE>
IN WITNESS WHEREOF, the parties to the Stipulation have caused this
Stipulation to be executed, by their duly authorized attorneys, as of October
13, 1999.
FOR THE PLAINTIFF
/s/ Stanley M. Grossman
Stanley M. Grossman
Shaheen Rushd
Pomerantz Haudek Block Grossman &
Gross LLP
100 Park Avenue, 26th Floor
New York, New York 10017
(212) 661-1100
- and -
J. Daniel Sagarin
Elias Alexiades
Huwitz & Sagarin, P.C.
147 North Broad Street
P.O. Box 112
Milford, Connecticut 06460
(203) 877-8000
Juris No. 26616
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FOR DEFENDANTS UCAR
INTERNATIONAL INC., FRED C.
WOLF, ROBERT D. KENNEDY and
PETER B. MANCINO
/s/ Robert E. Crotty
Robert E. Crotty
Mark S. Gregory
Kelley Drye & Warren LLP
Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901
(203) 324-1400
Juris No. 13140
FOR DEFENDANTS PETER G.
PETERSON, STEPHEN A.
SCHWARZMAN, HOWARD A. LIPSON
and GLENN H. HUTCHINS
/s/ John C. Fusco
John C. Fusco
Holland, Kaufman & Bartels, LLC
289 Greenwich Avenue
Greenwich, Connecticut 06830
(203) 869-5600
Juris No.
- and -
Charles E. Koob
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York
(212) 455-2000
14
<PAGE>
FOR DEFENDANT ROBERT P. KRASS
/s/ Thomas D. Goldberg
Thomas D. Goldberg
Lorey R. Leddy
Day Berry & Howard
One Canterbury Green
Stamford, Connecticut 06901
(203) 977-7300
Juris No. 14230
FOR DEFENDANT ROBERT J. HART
/s/ Steven D. Ecker
Steven D. Ecker
Cowdery, Ecker & Murphy, L.L.C.
750 Main Street
Hartford, Connecticut 06103
(860) 278-5555
Juris No. 102203
FOR DEFENDANT WILLIAM P. WIEMELS
/s/ William H. Narwold
William H. Narwold
Lauren R. Greenspoon
Cummings & Lockwood
City Place 1 - 36th Floor
185 Asylum Street
Hartford, Connecticut 06103
(860) 275-6707
Juris No. 102419
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FOR DEFENDANTS R. EUGENE
CARTLEDGE AND
JOHN R. HALL
/s/ Robert A. Harris
Robert A. Harris
Zeldes, Needle & Cooper, P.C.
1000 Lafayette Boulevard
P.O. Box 1740
Bridgeport, Connecticut 06601-1740
(203) 333-9441
Juris No. 69695
- and -
Daniel A. Dreisbach
Richards, Layton & Finger
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
(302) 658-6541
16
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
- -------------------------------------------:
: 3:98-CV-00600(JBA)
:
In re UCAR International Inc. Securities : LEAD DOCKET NUMBER
Litigation :
: October 13, 1999
:
- -------------------------------------------:
STIPULATION AND AGREEMENT OF SETTLEMENT
IT IS HEREBY STIPULATED AND AGREED by and among the undersigned attorneys
for the Plaintiff Florida State Board of Administration ("Lead Plaintiff"), on
behalf of itself and each Settlement Class Member (as defined herein), and for
the Defendants UCAR International Inc. ("UCAR"), Peter G. Peterson, Stephen A.
Schwarzman, Howard A. Lipson, Glenn H. Hutchins, Robert P. Krass, Robert J.
Hart, William P. Wiemels, Fred C. Wolf and Peter B. Mancino, that, subject to
the approval of the Court and the satisfaction of the conditions set forth
herein, the Litigation (as defined herein) shall be finally and fully
compromised and settled, as follows:
I. DEFINITIONS
1.1 "Class" means all purchasers of UCAR common stock between August 10,
1995 and March 31, 1998, inclusive, except for UCAR and the other named
Defendants, members of the immediate family of any individual named Defendant,
any limited partnerships, trusts or other entities for the benefit of any
individual named Defendant or member of the immediate family of each individual
named Defendant, the subsidiaries and controlled affiliates of UCAR, the
officers of UCAR as of March 31, 1998 and prior thereto, and the legal
<PAGE>
representatives, heirs, estates, successors and assigns of any of the foregoing
excepted individuals or entities.
1.2 "Class Member" means a member or members of the Class.
1.3 "Defendants" means the Company, Peter G. Peterson, Stephen A.
Schwarzman, Howard A. Lipson, Glenn H. Hutchins, Robert P. Krass, Robert J.
Hart, William P. Wiemels, Fred C. Wolf and Peter B. Mancino.
1.4 "Effective Date" means the first date by which all of the events and
conditions specified in paragraph 16.1 of this Stipulation have occurred and
have been satisfied, and the Judgment becomes final, all possible appeals or
other appellate procedures are concluded and the time for taking any further
appeals or other appellate procedures has expired.
1.5 "Settlement Hearing" means the hearing to be scheduled by the United
States District Court for the District of Connecticut described in the Notice
Order in substantially the form of Exhibit A to this Stipulation.
1.6 "Judgment" means the final judgment in substantially the form of
Exhibit B to this Stipulation.
1.7 "Lead Counsel for the Lead Plaintiff" or "Plaintiff's Lead Counsel"
means Burt & Pucillo, LLP, 515 North Flagler Drive, Suite 1701, West Palm Beach,
FL 33401, Telephone (561) 835-9400.
1.8 "Lead Plaintiff" means Florida State Board of Administration.
1.9 "Litigation" means the consolidated actions in In re UCAR Securities
Litigation, 3098-CV-00600 (JBA), pending in the United States District Court for
the District of Connecticut.
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1.10 "Settlement Class Member" means a Class Member who does not opt out of
the Class. Settlement Class means the Class of Settlement Class Members.
1.11 "Settlement Class Period" means the period from August 10, 1995
through March 31, 1998, inclusive.
1.12 "Shareholder Derivative Litigation" means the action titled
Jaroslawicz v. Krass, et al. pending in the Connecticut Superior Court (Judicial
District of Danbury at Danbury) as Docket No. CV98-0331117S and the Connecticut
Appellate Court as AC No. 19780.
1.13 "The Company" means UCAR, its past and present parents, affiliates,
subsidiaries and divisions, and their past and present directors, officers,
employees, attorneys, agents, insurers, counsel and representatives.
1.14 Other capitalized terms used herein shall have the meanings assigned
to them elsewhere herein.
II. COMPLAINT
2.1 The Amended Consolidated Class Action Complaint, the operative
Complaint in the Litigation (the "Complaint"), was filed on September 15, 1998
in the United States District Court for the District of Connecticut. The
Complaint is brought under the federal securities laws as a securities fraud
class action on behalf of persons who purchased UCAR common stock from August
15, 1995 to March 31, 1998 and alleges that financial information and other
statements regarding the Company's business in certain of UCAR's filings with
the Securities and Exchange Commission as well as in certain of its reports to
stockholders and certain of the Company's other public statements during the
period between August 15, 1995 through March 31, 1998 were materially false and
misleading due to, among
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<PAGE>
other things, a failure to disclose that a portion of the Company's revenues
were derived from an illegal antitrust conspiracy.
III. PRETRIAL PROCEEDINGS AND DISCOVERY IN THE LITIGATION
3.1 Prior to the Litigation, the Lead Plaintiff and/or attorneys on behalf
of the Lead Plaintiff researched the facts relating to the allegations in the
Complaint. In addition, plaintiffs Solomon Eisenberg and Alan Broadwin filed
separate complaints setting forth similar allegations on April 1, 1998 and on
April 16, 1998, respectively. Lead Plaintiff Florida State Board of
Administration filed its class action complaint on May 28, 1998. Plaintiff
Florida State Board of Administration's motion to be designated Lead Plaintiff
and to have Burt & Pucillo, LLP designated as Lead Plaintiff's Counsel was
granted on June 26, 1998. After the Court appointed the Lead Plaintiff and
Counsel for the Lead Plaintiff, Counsel for the Lead Plaintiff, after reviewing
all of the complaints and conducting further factual investigation regarding the
allegations, filed the Complaint on September 15, 1998. The three complaints
were also consolidated in the Litigation.
3.2 Defendants moved to dismiss the Complaint. The statutory stay of
discovery has been in effect prior to and since that time. Lead Plaintiff's
motion to lift the stay was denied by the Court on November 20, 1998.
3.3 Counsel for the Lead Plaintiff has conducted an extensive factual and
legal investigation during the prosecution of the Litigation and will conduct
confirmatory discovery as described herein. This investigation has included (and
will include in the case of (v), (vi) and (vii)), inter alia: (i) inspection of
certain documents produced by the Company and various non-parties to the
Litigation; (ii) inspection of public court files in suits brought against the
Company and/or others regarding the underlying alleged antitrust violations
including
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<PAGE>
affidavits setting forth the factual basis for those suits; (iii) inspection of
the Department of Justice's public files relating to the underlying alleged
antitrust violations, including the information, plea agreement, sentencing
memoranda and allocutions; (iv) interviews of antitrust counsel who reported
directly to the independent Special Committee of UCAR's Board established to
conduct the investigation of alleged violations of antitrust laws; (v) interview
of named Defendant Peter B. Mancino, UCAR's Vice President and former General
Counsel; (vi) interview of named Defendant Stephen A. Schwarzman; (vii) review
of documents concerning the actions of the Special Committee of the UCAR Board
of Directors in connection with its investigation of UCAR's conduct that gave
rise to criminal indictments; (viii) consultation with experts on damages and
accounting issues; (ix) review of UCAR's filings with the Securities and
Exchange Commission, reports to stockholders as well as the Company's other
public statements; (x) review of reports prepared by securities analysts who are
not parties to the Litigation; and (xi) research of applicable law with respect
to the claims asserted in the Complaint and the potential defenses thereto.
IV. DEFENDANTS DENY THE ALLEGATIONS OF THE COMPLAINT
4.1 The Defendants deny the material allegations in the Complaint and also
deny that the Lead Plaintiff or the Class has suffered damage and have moved to
dismiss the Complaint on the grounds, inter alia, that the Complaint does not
state a claim upon which relief can be granted, that as a matter of law there
was no violation of securities laws and that the pleadings do not meet the
requirements of the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"). The Defendants, however, have determined that it is desirable and
beneficial to them that this Litigation be fully and finally compromised and
settled upon the terms and conditions set forth in this Stipulation because
further litigation would be protracted
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<PAGE>
and expensive and because of the uncertainty and risks inherent in complex
litigation like this one.
V. PLAINTIFFS' STATEMENT
5.1 The Lead Plaintiff believes that the claims asserted in the Litigation
have merit. The Lead Plaintiff, however, has determined that it is desirable and
beneficial to it and to the Class that the Litigation be compromised and settled
upon the terms and conditions set forth in this Stipulation because the
settlement confers substantial financial and other benefits on the Class and on
each Class Member, because further litigation would be protracted and expensive
and because of the uncertainty and risks inherent in complex litigation like
this one.
VI. COMPROMISE AGREEMENT
6.1 This Stipulation is, therefore, a compromise disposition of
controverted claims and is the result of substantial, protracted arm's length
negotiations to resolve the Litigation. No consideration for this Stipulation,
and nothing contained in this Stipulation, shall be construed as an admission of
any liability, or any lack of merit to the claims or defenses asserted, by or on
behalf of any of the parties to the Litigation.
VII. INTENT OF THIS STIPULATION OF SETTLEMENT
7.1 It is the intent of this Stipulation of Settlement to effect a fair,
reasonable, adequate, full and final settlement of all Claims (as defined
herein), including claims for attorneys' fees and costs, which were or could
have been asserted against Defendants and any and all other individuals and
entities by any and all claimants and Class Members in the Litigation. This
Stipulation shall not be offered into evidence or received into evidence as
proof of any allegation made or which could have been made in the Complaint or
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<PAGE>
as proof of any Claim released herein. Nothing contained in this paragraph,
however, shall affect the provisions of paragraph 18.2 herein.
VIII. TERMS OF STIPULATION AND AGREEMENT OF SETTLEMENT
8.1.1 The Lead Plaintiff and UCAR will mutually develop a short list of
four individuals possessing relevant business, financial, antitrust compliance,
corporate governance and other experience to be considered as candidates for
membership on UCAR's Board of Directors. The Lead Plaintiff shall recommend from
the short list, for approval by UCAR, one individual to become a member of
UCAR's Board of Directors and its Audit Committee.
8.1.2 If such individual is approved by UCAR and is ready, willing and able
to serve, UCAR shall, promptly after the Effective Date, cause such individual
to be elected to UCAR's Board of Directors and its Audit Committee. UCAR shall
take and cause to be taken all reasonable and appropriate steps for the
nomination for re-election and re-election of such individual to UCAR's Board of
Directors at UCAR's annual meeting of stockholders in 2000, 2001 and 2002 unless
such individual (i) resigns or retires, (ii) is unable to serve by reason of
death or disability, (iii) is removed or is not re-nominated by UCAR's Board of
Directors for good cause shown, (iv) is removed or resigns in connection with a
takeover or other change in control of UCAR (including a bankruptcy), or (v) is
not re-elected by the UCAR stockholders.
8.1.3. If such individual is not approved by UCAR, is not ready, willing or
able to serve or, prior to UCAR's annual meeting of stockholders in 2001, ceases
to be a director for any of the reasons mentioned in clause (i), (ii), (iii) or
(v) of paragraph 8.1.2, then the Lead Plaintiff and UCAR shall repeat the
process set forth in paragraphs 8.1.1 and 8.1.2. If such individual ceases to be
a director for any of the foregoing reasons after UCAR's annual
7
<PAGE>
meeting of shareholders in 2001, UCAR shall have no further obligations, and
Lead Plaintiff shall have no further rights, under paragraphs 8.1.1 and 8.1.2 or
this paragraph 8.1.3.
8.2.1 Within ten (10) days after the Notice Order is signed, Defendants or
their insurance carrier shall wire transfer, or cause to be wire transferred or
otherwise deposited, $40,000,000 ("the Settlement Fund") to an interest-bearing
escrow account held by Plaintiff's Lead Counsel (the "Settlement Fund Account").
Plaintiff's Lead Counsel may use $100,000 from the Settlement Fund Account (the
"Notice and Administration Fund") to pay costs and expenses reasonably and
necessarily incurred in connection with providing notice to the Class, locating
Class Members, soliciting Class claims, assisting with the filing of claims,
administering and distributing the Settlement Fund to Settlement Class Members,
processing Proofs of Claim and Release and paying escrow fees and costs, if any
("Administrative Expenses"). Expenses either paid or accrued in connection with
the Notice and Administration Fund need not be reimbursed or repaid irrespective
of whether the settlement is approved. The Settlement Fund Account shall accrue
interest for the benefit of the Class or as provided in paragraph 9.2, as the
case may be.
8.3 Upon Court approval of the foregoing, the Litigation shall be dismissed
with prejudice and on the merits, and any and all Claims shall be released in
accordance with this Stipulation.
IX. THE SETTLEMENT FUND
9.1 Plaintiff's Lead Counsel shall open the Settlement Fund Account at
First Union National Bank to receive the Settlement Fund. The Settlement Fund
shall be deemed to be in custodia legis of the Court and shall remain subject to
the jurisdiction of the Court until
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<PAGE>
such time as the Settlement Fund shall be distributed pursuant to this
Stipulation and/or further order(s) of the Court.
9.2 In the event that this Stipulation is not approved, is terminated or
canceled or fails to become effective for any reason, the Settlement Fund
(including accrued interest), less expenses actually incurred or due and owing
in connection with the settlement provided herein, shall be refunded to the
Defendants and their insurance carriers in the same proportions as their
respective contributions to the Settlement Fund.
9.3 The Settlement Fund shall be treated as being at all times a "qualified
settlement fund" within the meaning of Treas. Reg. Section 1.468B-1. In
addition, Counsel for the Lead Plaintiff and, as required, the Defendants shall
jointly and timely make the "relation-back election" (as defined in Treas. Reg.
Section 1.468B-1) back to the earliest permitted date. Such election shall be
made in compliance with the procedures and requirements contained in such
Treasury Regulation. It shall be the responsibility of Counsel for the Lead
Plaintiff to timely and properly prepare and deliver to all necessary parties
for signature the documentation necessary to effect such election and cause the
appropriate filing to occur. For the purposes of Treas. Reg. Section 1.468B, the
"administrator" shall be Plaintiff's Lead Counsel.
X. COUNSEL FOR LEAD PLAINTIFF'S DUTIES WITH RESPECT TO
ADMINISTRATION OF THE SETTLEMENT FUND
10.1 With the exception of the $100,000 Notice and Administration Fund set
forth in 8.2.1 above, Counsel for the Lead Plaintiff shall not disburse the
Settlement Fund except as provided in this Stipulation or by an Order of the
Court.
10.2 Counsel for the Lead Plaintiff shall invest the Settlement Fund in
instruments backed by the full faith and credit of the United States Government
or fully insured by the United States Government or an agency thereof or funds
consisting solely of instruments
9
<PAGE>
which are fully insured by the United States Government, and shall reinvest the
proceeds of these instruments as they mature in similar instruments, at then
current market rates.
10.3 Subject to further Order by the Court, Counsel for the Lead Plaintiff
is authorized to execute such transactions on behalf of the Settlement Class
Members as are consistent with the terms of this Stipulation.
10.4 Counsel for the Lead Plaintiff shall file all informational and other
tax returns necessary or advisable with respect to the Settlement Fund and shall
be responsible for paying out of the Settlement Fund any and all (i) taxes
(including any estimated taxes, interest or penalties) arising with respect to
the income earned by the Settlement Fund ("Taxes") and (ii) expenses and costs
incurred in connection with the operation and implementation of this paragraph
10.4 (including, without limitation, expenses of tax attorneys and/or
accountants and mailing and distribution costs and expenses relating to filing
(or failing to file) the returns described in this paragraph 10.4 ("Tax
Expenses")).
10.5 Counsel for the Lead Plaintiff shall treat all Taxes and Tax Expenses
as a cost of administration of this settlement and shall timely pay all Taxes
and Tax Expenses out of the Settlement Fund without prior order from the Court.
Counsel for the Lead Plaintiff shall be obligated (notwithstanding anything
contained herein to the contrary) to withhold from distribution to Class Members
any funds necessary to pay such amounts (as well as any amounts that may be
required to be withheld under Treas. Reg. Section 1.468B-2(1)(2)).
XI. COUNSEL FOR THE LEAD PLAINTIFF'S DUTIES WITH RESPECT TO THE
CALCULATION OF CLAIMS, FINAL AWARDS AND SUPERVISION AND
DISTRIBUTION OF THE SETTLEMENT FUND
11.1 After the Effective Date, Counsel for the Lead Plaintiff, or their
authorized agents, acting on behalf of the Class, and subject to the supervision
and approval of
10
<PAGE>
the Court, shall administer and calculate the claims submitted by Settlement
Class Members and shall oversee distribution of that portion of the Settlement
Fund that is finally awarded by the Court to the Settlement Class Members.
11.2 Counsel for the Lead Plaintiff's fees, expenses and costs, and the
fees and expenses of other plaintiff's counsel, with interest thereon (the "Fee
and Expense Award"), if and to the extent allowed by the Court, shall be paid
from the Settlement Fund to Counsel for the Lead Plaintiff.
11.3 Counsel for the Lead Plaintiff shall pay from the Settlement Fund all
reasonably and actually incurred Administration Expenses.
11.4 After the Effective Date and subject to such further approval and
further Order(s) of the Court as may be required, Counsel for the Lead Plaintiff
shall distribute the Settlement Fund to those Settlement Class Members who
submit valid, timely filed Proofs of Claim and Release ("Authorized Claimants"),
subject to and in accordance with the following:
(i) Within forty-five (45) days after the Settlement Hearing or such
other time as may be set by the Court, each Settlement Class Member shall be
required to submit to Counsel for the Lead Plaintiff, or their designee as
approved by the Court, a completed Proof of Claim and Release substantially in
the form of Exhibit C to this Stipulation, signed under penalty of perjury and
supported by such documents as specified in the Proof of Claim and Release and
as are reasonably available to the Authorized Claimant.
(ii) Except as otherwise ordered by the Court, all Class Members who
fail to timely submit a Proof of Claim and Release within the period set out
this paragraph 11.4(i), or such other period as may be ordered by the Court, or
who have not already done so, shall be forever barred from receiving any
payments pursuant to this Stipulation and the
11
<PAGE>
Judgment, but will in all other respects be subject to and bound by the
provisions of this Stipulation and the Judgment, including the settlement and
releases contained in this Stipulation and in the Judgment.
11.5 Counsel for the Lead Plaintiff, or its designee, has the sole right to
accept or reject claims based on the Plan of Allocation. If Counsel for the Lead
Plaintiff rejects a claim and such rejection is not resolved prior to submission
of a final list of approved claims to the Court, Counsel for Lead Plaintiff
shall submit such rejection to the Court, on notice to Counsel for the
Defendants, for final determination of the Claim. Any Claimant whose claim is
finally rejected shall not receive any payments from the Settlement Fund, but
will in all other respects be subject to and bound by the provisions of this
Stipulation and the Judgment, including the settlement and releases contained in
this Stipulation and in the Judgment.
11.6 The Settlement Fund shall be distributed to the Authorized Claimants
in accordance with, and subject to, the Plan of Allocation (as defined herein)
to be described in the Notice mailed to Class Members. Neither the actual nor
any proposed Plan of Allocation shall be a part of this Stipulation and no
change, alteration, modification, replacement or amendment of, or to, the Plan
of Allocation shall affect the Effective Date or the finality of this
Stipulation or the Judgment.
11.7 Any Class Member desiring to preserve appellate rights with respect to
any portion of this settlement, the Plan of Allocation or the attorneys' fee
application must intervene as a party plaintiff pursuant to Rule 24 of the
Federal Rules of Civil Procedure to preserve such rights of appeal.
11.8 No Plaintiff, Authorized Claimant, Class Member, Settlement Class
Member, person, corporation, partnership, trust or other type of entity shall
have any claim
12
<PAGE>
against Lead Plaintiff's Counsel or any claims administrator, or other agent
designated by Counsel for the Lead Plaintiff, based on the distributions made
substantially in accordance with this Stipulation and the settlement contained
herein, the Plan of Allocation or further orders of the Court.
11.9 "Plan of Allocation" means a plan or formula of allocation of the
Settlement Fund which shall be described in the "Notice of Pendency and
Settlement of Class Action" to be sent to Class Members whereby the Settlement
Fund shall be distributed to Authorized Claimants after payment of
Administrative Expenses or Tax Expenses and such attorneys' fees, costs,
expenses and interest as may be awarded by the Court.
11.10 Defendants shall not be responsible for the implementation of any
part of the Plan of Allocation.
XII. DEFENDANTS HAVE NO RESPONSIBILITY FOR, OR OBLIGATIONS WITH
RESPECT TO, THE SETTLEMENT FUND, ITS ADMINISTRATION AND
CALCULATION OF CLAIMS, ETC. AND/OR WITH RESPECT TO THE PLAN
OF ALLOCATION
12.1 The Defendants and their counsel shall have no responsibility for,
interest in or liability whatsoever with respect to the investment or
distribution of the Settlement Fund, the Plan of Allocation, the determination,
administration, calculation or payment of claims, or any losses incurred in
connection therewith. The investment of Settlement Funds shall be solely the
responsibility of Lead Plaintiff's Counsel or its designees.
12.2 No Plaintiff, Authorized Claimant, Class Member, Settlement Class
Member, person, corporation, partnership, trust or other type of entity shall
have any claim against Defendants or their counsel relating to the
administration, investment or distribution of the Settlement Fund or the Plan of
Allocation.
13
<PAGE>
XIII. THE NOTICE ORDER AND SETTLEMENT HEARING
13.1 Promptly after this Stipulation is signed, the parties to the
Litigation shall submit this Stipulation together with its Exhibits to the Court
and shall jointly apply for entry of the "Notice Order", substantially in the
form and content of Exhibit "A" to this Stipulation.
XIV. RELEASES OF THE PARTIES AND THE SETTLEMENT CLASS
14.1 Upon the Effective Date, the Lead Plaintiff shall and each of the
Settlement Class Members shall be deemed to have, and by operation of the
Judgment shall have, fully, finally and forever released, relinquished and
discharged any and all known and unknown, contingent and non-contingent Claims
against the Defendants, members of the immediate family of any individual named
Defendant, limited partnerships, trusts or other entities established for the
benefit of any individual named Defendant or member of the immediate family of
any individual named Defendant, and the legal representatives, heirs, estates,
successors and assigns of any of the foregoing ("the Released Parties").
14.2 "Claims" means any and all claims, causes of action, actions, damages,
demands, rights, liabilities, costs, expenses, debts or obligations (including
attorneys fees or costs related to the Litigation or this Stipulation), however
characterized, for any and all violations or alleged violations of any and all
federal, foreign or state laws, statutes, rules, regulations or common law,
including but not limited to claims for fraud, fraudulent disclosure, failure to
disclose, inadequate disclosure, misrepresentation, recklessness, insider
trading, negligence or breach of fiduciary duty arising out of or relating to
disclosure or failure to disclose information to the public in any public
document, public statement or like kind disclosure that arose or could be deemed
to have arisen at any time or times during the Settlement Class Period and that
was, or that could have been, asserted in this or any other
14
<PAGE>
forum by or on behalf of the Lead Plaintiff, the Class, any Class Member or any
Settlement Class Member.
14.3 Claims include those which Lead Plaintiff, other named Plaintiffs or
Class Members do not know of or suspect to exist in his, her or its favor
against the Released Parties, whether contingent or non-contingent, concealed or
hidden, as of the date of the Settlement Hearing, the release of which, if known
by him, her or it, might have affected his, her or its settlement with and
release of the Released Parties, or might have affected his, her or its decision
not to object to this Settlement or not to request exclusion from the Settlement
Class. The parties stipulate and agree that, upon the Effective Date, the Lead
Plaintiffs shall and each of the Settlement Class Members shall be deemed to,
and by operation of the Judgment shall, waive and relinquish, insofar as it
relates to the Claims, to the fullest extent permitted by law, the provisions,
rights and benefits of ss.1542 of the California Civil Code, which provides:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor.
14.4 Upon the Effective Date, the Lead Plaintiff shall and each of the
Settlement Class Members shall be deemed to, and by operation of the Judgment
shall, also waive any and all provisions, rights and benefits conferred by any
law of any state or territory of the United States, any foreign law or any
principle of common law or equity, which is similar, comparable or equivalent to
ss.1542 of the California Civil Code.
14.5 Lead Plaintiff and Counsel for the Lead Plaintiff acknowledge that the
foregoing waiver as set forth in paragraphs 14.3 and 14.4 was separately
bargained for and a key element of the settlement of which this release is a
part.
15
<PAGE>
14.6 Upon the Effective Date, each of the Defendants shall be deemed to
have, by operation of the Judgment, fully, finally and forever released,
relinquished and discharged any and all known and unknown contingent and
non-contingent claims against Lead Plaintiff, Counsel for Lead Plaintiff and the
Class, other named Plaintiffs and their counsel, and members of the Settlement
Class, their immediate families, heirs, successors, and assignees that were
asserted or could have been asserted in connection with or related to bringing,
maintaining, prosecuting, or other action in the course of this Litigation. Such
release shall further encompass both known and unknown claims to the same extent
as specified in paragraphs 14.3 to 14.4 herein.
XV. LEAD PLAINTIFF'S COUNSEL'S ATTORNEYS' FEES AND
REIMBURSEMENT OF EXPENSES
15.1 Counsel for the Lead Plaintiff may submit an application or
applications (the "Fee and Expense Application") for distributions to it on
behalf of itself and on behalf of other plaintiff's counsel from the Settlement
Fund for: (i) an award of attorneys' fees in an amount equal to up to 22.5% of
the Settlement Fund; plus (ii) reimbursement of all expenses and costs,
including the fees of any experts or consultants, incurred in connection with
prosecuting or assisting in the settlement of the Litigation. No other attorneys
shall have the right to make an application for attorneys fees, costs and
expenses.
15.2 Counsel for the Lead Plaintiff's attorneys' fees, expenses and costs,
including the fees of other plaintiff's counsel and any experts and consultants,
as awarded by the Court (the "Fee and Expense Award"), shall be transferred to
Counsel for the Lead Plaintiff from the Settlement Fund three (3) business days
after the Court executes an Order awarding such fees, expenses and costs.
Counsel for the Lead Plaintiff shall thereafter allocate the Fee and Expense
Award amongst all other plaintiffs' counsel in a manner in which it in good
faith
16
<PAGE>
believes reflects the contributions of such counsel to the prosecution and
settlement of the Litigation.
15.3 In the event that this Stipulation or the Judgment does not become
effective for any reason, or the Order making the Fee and Expense Award is
reversed or modified on appeal, and the Fee and Expense Award has been paid to
any extent, then Lead Plaintiff's Counsel, within five (5) business days from
the event which precludes the Effective Date from occurring or such reversal or
modification, shall refund to the Settlement Fund the entire payment previously
made to it from the Settlement Fund in accordance with paragraph 15.2, including
any amounts allocated to other plaintiff's counsel and including accrued
interest in an amount consistent with such reversal or modification.
15.4 The procedure for and the allowance or disallowance by the Court of
any applications by Counsel for the Lead Plaintiff's attorneys' fees, costs and
expenses, including the fees of any other plaintiff's counsel, experts and
consultants, to be paid out of the Settlement Fund, are not part of the
settlement set forth in this Stipulation, and may be considered by the Court
separately from the Court's consideration of the fairness, reasonableness and
adequacy of the settlement set forth in this Stipulation, and any order or
proceedings relating to the Fee and Expense Application, or any appeal from any
order relating thereto, shall not operate to terminate or cancel this
Stipulation or affect or delay the finality of the Judgment and the settlement
of the Litigation set forth herein.
XVI. THE EFFECTIVE DATE OF THIS STIPULATION OF SETTLEMENT,
EFFECT OF DISAPPROVAL, CANCELLATION OR TERMINATION
16.1 The Effective Date of this Stipulation shall be the date when all of
the following events have occurred:
17
<PAGE>
(a) The full amount of the Settlement Fund shall have been
transferred to the Settlement Fund Account;
(b) The Court has entered the Notice Order, as required by P.13.1,
above;
(c) The Lead Plaintiff shall have recommended an individual to
become a member of UCAR's Board of Directors who shall have been approved by
UCAR as described in paragraphs 8.1.1 - 8.1.3;
(d) The Court has entered the Judgment, or a judgment substantially
in the form and content of Exhibit A to this Stipulation;
(e) The Judgment has become final, and no right of appeal or other
appellate procedures exists and all rights to appeal have expired; and
(f) A final judgment of dismissal with prejudice or a Withdrawal
with prejudice is entered in the Shareholder Derivative Litigation and all
appeals have been terminated and the time to take any further appeal has passed.
16.2 Upon the occurrence of all of the events referenced in P. 16.1 above,
any and all interest or right of the Defendants to the Settlement Fund shall be
absolutely and forever extinguished.
16.3 If all of the conditions specified in P. 16.1 are not met, then this
Stipulation shall be canceled and terminated unless Counsel for the Lead
Plaintiff and counsel for Defendants mutually agree in writing to proceed with
the Stipulation.
XVII. PLAINTIFFS' RIGHT TO TERMINATE THIS STIPULATION
17.1 UCAR shall produce for interview its Vice President and former General
Counsel, Peter B. Mancino, and shall produce certain documents concerning the
actions of the
18
<PAGE>
Special Committee of the UCAR Board of Directors in connection with its
investigation of UCAR's conduct that gave rise to criminal indictments, and
Defendant Stephen A. Schwarzman shall appear for an interview, for the purpose
of confirming the accuracy to Lead Plaintiffs and Counsel for Lead Plaintiff of
certain facts made available to Counsel for the Lead Plaintiff prior to
execution of this Stipulation.
17.2 If this discovery does not confirm the accuracy of Lead Plaintiff's
prior factual investigation of the merits of the Action, Counsel for the Lead
Plaintiff shall have the option to terminate this Stipulation. To exercise such
option, Counsel for the Lead Plaintiff must give written notice to that effect
to UCAR or its counsel within seven (7) days after completion of the interviews.
If Lead Plaintiff fails to exercise such option in accordance with this
Paragraph 17.2, the option described in this Paragraph 17.2 shall terminate
automatically.
XVIII.MISCELLANEOUS PROVISIONS
18.1 The parties to the Litigation (a) acknowledge that it is their intent
to consummate this Stipulation; and (b) agree to cooperate to the extent
necessary to effectuate and implement all terms and conditions of this
Stipulation and to exercise their best efforts to accomplish the foregoing terms
and conditions of this Stipulation.
18.2 Defendants agree that the amount of the Settlement Fund, as well as
the other terms and conditions of this Stipulation, reflect a good faith
settlement of the Lead Plaintiff's and the Class Member's claims, reached
voluntarily after consultation with experienced legal counsel. This Stipulation
may be used in such proceedings as may be necessary to consummate or enforce
this Stipulation, the settlement set forth herein or the Judgment, and the
Released Parties may file this Stipulation and/or the Judgment in any action
that may be brought against them in order to support a claim, defense,
counterclaim or
19
<PAGE>
crossclaim based on principles of res judicata, collateral estoppel, release,
good faith settlement, judgment bar or reduction or any other theory of claim
preclusion or issue preclusion or any other similar claim, defense, counterclaim
or crossclaim.
18.3 Counsel for the Lead Plaintiff, on behalf of the Settlement Class, is
expressly authorized by the Lead Plaintiff to take all appropriate action
required or permitted to be taken by the Settlement Class pursuant to this
Stipulation to effectuate its terms and also is expressly authorized to enter
into any modifications or amendments to this Stipulation on behalf of the Class
which it deems appropriate.
18.4 Each attorney executing this Stipulation or any of its Exhibits on
behalf of any party to the Litigation hereby warrants that such attorney has the
full authority to do so.
18.5 This Stipulation may be executed in one or more counterparts. All
executed counterparts and each of them shall be deemed to be one and the same
instrument. Counsel for the parties to this Stipulation shall exchange among
themselves original signed counterparts and a complete set of original executed
counterparts shall be filed with the Court.
18.6 The Stipulation shall be binding upon, and inure to the benefit of,
the successors and assigns of the parties to the Litigation.
18.7 In the event that the Stipulation is not approved by the
Court or the settlement set forth in this Stipulation is terminated or fails to
become effective in accordance with its terms, the parties to the Litigation
shall be restored to their respective positions in the Litigation as of the date
of this Stipulation. In such event, the terms and provisions of the Stipulation
shall have no further force and effect with respect to such parties and shall
not be used in the Litigation or in any other proceeding for any purpose, and
any Judgment entered by the Court in accordance with this Stipulation shall be
treated as vacated, nunc pro tunc. No
20
<PAGE>
order of the Court or modification or reversal on appeal of any order of the
Court concerning the Plan of Allocation or the amount of any attorneys' fees,
costs, expenses and interest awarded by the Court to the Lead Plaintiff or to
Counsel for Lead Plaintiff, including allocations to other plaintiff's counsel
shall constitute grounds for cancellation or termination of the Stipulation.
18.8 UCAR shall have the option to terminate this Stipulation if the
requests for exclusion from the Settlement Class exceed an agreed upon
percentage of shares in the class.
18.9 All of the Exhibits to this Stipulation are material and integral
parts hereof and are fully incorporated herein by this reference.
18.10 This Stipulation may be amended or modified only by a written
instrument signed by or on behalf of all parties to the Litigation or their
successors-in-interest.
18.11 This Stipulation and the Exhibits attached hereto constitute the
entire agreement among the parties to the Litigation with respect to the subject
matter hereof and no representations, warranties or inducements have been made
to any party concerning this Stipulation or its Exhibits other than the
representations, warranties and covenants contained and memorialized in such
documents. Except as otherwise provided herein, each party shall bear its own
costs.
18.12 The Court shall retain jurisdiction with respect to implementation
and enforcement of the terms of this Stipulation, and all parties to the
Litigation submit to the jurisdiction of the Court for purposes of implementing
and enforcing the settlement embodied in this Stipulation.
21
<PAGE>
18.13 This Stipulation and its Exhibits shall be considered to have been
negotiated, executed and delivered, and to be wholly performed, in the State of
Connecticut, and the rights and obligations of all individuals and entities
hereunder shall be construed and enforced in accordance with, and governed by,
the internal, substantive laws of the State of Connecticut without giving effect
to that State's choice of law principles.
22
<PAGE>
IN WITNESS WHEREOF, the parties to the Litigation have caused this
Stipulation to be executed, by their duly authorized attorneys, as of
October 13, 1999.
FOR THE PLAINTIFFS
/s/ Michael J. Pucillo
Michael J. Pucillo
Wendy H. Zoberman
Burt & Pucillo, LLP
515 North Flagler Drive
Suite 1701
West Palm Beach, Florida 33401
(561) 835-9400
Lead Counsel
/s/ William H. Clendenen, Jr.
William H. Clendenen, Jr. (ct 04261)
400 Orange Street
P.O. Box 301
New Haven, Connecticut 06502-0301
(203) 787-1183
Liaison Counsel
/s/ Horace Schow II
Horace Schow II
General Counsel
Florida State Board of Administration
1801 Hermitage Boulevard
Tallahassee, Florida 32308
(850) 488-4406
FOR DEFENDANTS
UCAR INTERNATIONAL INC., FRED C. WOLF
AND PETER B. MANCINO
/s/ Robert E. Crotty
Robert E. Crotty
Mark S. Gregory (ct 01252)
Kelley Drye & Warren LLP
Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901
23
<PAGE>
(203) 324-1400
FOR DEFENDANTS
PETER G. PETERSON,
STEPHEN A. SCHWARZMAN,
HOWARD A. LIPSON AND GLENN H. HUTCHINS
/s/ John C. Fusco
John C. Fusco
Holland, Kaufman & Bartels, LLC
289 Greenwich Avenue
Greenwich, Connecticut 06830
-and-
Charles E. Koob
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York
(212) 455-2000
FOR DEFENDANT ROBERT P. KRASS
/s/ Thomas D. Goldberg
Thomas D. Goldberg
Lorey R. Leddy
Day Berry & Howard
One Canterbury Green
Stamford, Connecticut 06901
(203) 977-7300
24
<PAGE>
FOR DEFENDANT ROBERT J. HART
/s/ Steven D. Ecker
Steven D. Ecker
Cowdery & Ecker
750 Main Street
Hartford, Connecticut 06103
(860) 278-5555
FOR DEFENDANT WILLIAM P. WIEMELS
/s/ William H. Narwold
William H. Narwold
Lauren R. Greenspoon
Cummings & Lockwood
City Place 1 - 36th Floor
185 Asylum Street
Hartford, Connecticut 06103
(860) 275-6707
25
<PAGE>
CERTIFICATION OF SERVICE
------------------------
I hereby certify that a copy of the foregoing Stipulation of Settlement and
Agreement was served via first-class mail, postage prepaid this 13th day of
October, 1999 on all counsel of record as follows:
Andrew M. Schatz, Esq.
Schatz & Nobel, P.C.
216 Main Street
Hartford, Connecticut 06106-1817
Paul Paradis, Esq.
Wolf Popper LLP
845 Third Avenue
New York, New York 10022
Victor L. Zimmermann, Jr., Esq.
O'Rourke & O'Hanlan
One Canterbury Green
12th Floor
Stamford, Connecticut 06901
Joseph Weiss, Esq.
Weiss & Yourman
551 Fifth Avenue
Suite 1600
New York, New York 10176
/s/ Mark S. Gregory
-------------------
Mark S. Gregory
26
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
<S> <C>
I. DEFINITIONS.............................................................................................1
II. COMPLAINT...............................................................................................3
III. PRETRIAL PROCEEDINGS AND DISCOVERY IN THE LITIGATION....................................................4
IV. DEFENDANTS DENY THE ALLEGATIONS OF THE COMPLAINT........................................................5
V. PLAINTIFFS' STATEMENT...................................................................................6
VI. COMPROMISE AGREEMENT....................................................................................6
VII. INTENT OF THIS STIPULATION OF SETTLEMENT................................................................7
VIII. TERMS OF STIPULATION AND AGREEMENT OF SETTLEMENT........................................................7
IX. THE SETTLEMENT FUND.....................................................................................8
X. COUNSEL FOR LEAD PLAINTIFF'S DUTIES WITH RESPECT TO ADMINISTRATION OF THE SETTLEMENT FUND...............9
XI. COUNSEL FOR THE LEAD PLAINTIFF'S DUTIES WITH RESPECT TO THE CALCULATION OF CLAIMS, FINAL AWARDS
AND SUPERVISION AND DISTRIBUTION OF THE SETTLEMENT FUND................................................10
XII. DEFENDANTS HAVE NO RESPONSIBILITY FOR, OR OBLIGATIONS WITH RESPECT TO, THE SETTLEMENT FUND, ITS
ADMINISTRATION AND CALCULATION OF CLAIMS, ETC. AND/OR WITH RESPECT TO THE PLAN OF ALLOCATION...........13
XIII. THE NOTICE ORDER AND SETTLEMENT HEARING................................................................14
XIV. RELEASES OF THE PARTIES AND THE SETTLEMENT CLASS.......................................................14
XV. LEAD PLAINTIFF'S COUNSEL'S ATTORNEYS' FEES AND REIMBURSEMENT OF EXPENSES...............................16
XVI. THE EFFECTIVE DATE OF THIS STIPULATION OF SETTLEMENT, EFFECT OF DISAPPROVAL, CANCELLATION OR
TERMINATION............................................................................................17
XVII. plaintiffs' right to terminate this stipulation........................................................18
XVIII. MISCELLANEOUS PROVISIONS...............................................................................19
</TABLE>
-i-
<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 Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, and
is qualified in its entirety by reference to such Consolidated Financial
Statements.
</LEGEND>
<CIK> 0000931148
<NAME> UCAR INTERNATIONAL INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 13
<SECURITIES> 6
<RECEIVABLES> 137
<ALLOWANCES> 5
<INVENTORY> 234
<CURRENT-ASSETS> 467
<PP&E> 1156
<DEPRECIATION> 720
<TOTAL-ASSETS> 992
<CURRENT-LIABILITIES> 311
<BONDS> 651
0
0
<COMMON> 0
<OTHER-SE> (279)
<TOTAL-LIABILITY-AND-EQUITY> 992
<SALES> 623
<TOTAL-REVENUES> 623
<CGS> 417
<TOTAL-COSTS> 417
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 70
<INCOME-TAX> 13
<INCOME-CONTINUING> 57
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55
<EPS-BASIC> 1.22
<EPS-DILUTED> 1.18
</TABLE>
