<PAGE>
==============================================================================
FORM 10-Q
---------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH
31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
.................... TO ....................
---------------
COMMISSION FILE NUMBER: (1-13888)
---------------
UCAR INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1385548
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
---------------
3102 WEST END AVENUE
SUITE 1100 37203
NASHVILLE, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 760-8227
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 2000, 47,457,826 shares of common stock, par value $.01 per
share, were outstanding.
==============================================================================
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1999
and March 31, 2000........................................... Page 3
Consolidated Statements of Operations for the Three Months
ended March 31, 1999 and 2000................................ Page 4
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1999 and 2000................................ Page 5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Three Months ended March 31, 2000............................ Page 6
Notes to Consolidated Financial Statements..................... Page 7
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1............. Page 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... Page 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS.................................................... Page 38
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS....................................... Page 40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................... Page 47
SIGNATURE............................................................ Page 48
INDEX TO EXHIBITS.................................................... Page E-1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1999 2000
---- ----
CURRENT ASSETS: (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents.............................. $ 17 $ 15
Short-term investments................................. 3 -
Notes and accounts receivable.......................... 171 145
Inventories:
Raw materials and supplies........................... 49 47
Work in process...................................... 113 114
Finished goods....................................... 42 38
---- ----
204 199
Prepaid expenses....................................... 25 28
---- ----
Total current assets........................... 420 387
---- ----
Property, plant and equipment............................. 1,071 1,053
Less: accumulated depreciation............................ 673 664
---- ----
Net fixed assets............................... 398 389
Other assets.............................................. 115 116
---- ----
Total assets................................... $ 933 $ 892
==== ====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................................... $ 80 $ 62
Short-term debt........................................ - 5
Payments due within one year on long-term debt......... 82 15
Accrued income and other taxes......................... 39 19
Other accrued liabilities.............................. 114 116
---- ----
Total current liabilities...................... 315 217
---- ----
Long-term debt............................................ 640 716
Other long-term obligations............................... 224 222
Deferred income taxes..................................... 33 35
Minority stockholders' equity in consolidated entities.... 14 14
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, 47,440,536 shares issued at December 31,
1999, 47,457,826 shares issued at March 31, 2000....... - -
Additional paid-in capital............................. 523 524
Accumulated other comprehensive income (loss).......... (205) (214)
Retained earnings (deficit)............................ (525) (536)
Less: cost of common stock held in treasury, 2,338,038
shares at December 31, 1999, 2,338,038 shares at
March 31, 2000....................................... (86) (86)
---- ----
Total stockholders' equity (deficit)........... (293) (312)
---- ----
Total liabilities and stockholders' equity
(deficit)...................................... $ 933 $ 892
===== =====
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1999 2000
---- ----
<S> <C> <C>
Net sales................................................... $ 202 $ 195
Cost of sales............................................... 139 138
----- ----
Gross profit........................................... 63 57
Research and development.................................... 2 3
Selling, administrative and other expenses.................. 22 24
Restructuring charge........................................ - 6
Other (income) expense, net................................. (3) -
----- ----
Operating profit....................................... 42 24
Interest expense............................................ 22 21
----- ----
Income before provision for income taxes............... 20 3
Provision for income taxes.................................. 5 -
----- ----
Income of consolidated entities........................ 15 3
Less: minority stockholders' share of income................ 1 1
----- ----
Income before extraordinary item....................... 14 2
Extraordinary item, net of tax.............................. - 13
----- ----
Net income (loss)................................... $ 14 $ (11)
==== ====
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Basic net income per share............................... $ 0.30 $ 0.04
Extraordinary item, net of tax........................... - (0.29)
----- -----
Net income (loss) per share.............................. $ 0.30 $ (0.25)
====== =====
Weighted average common shares outstanding (IN THOUSANDS) 45,192 45,116
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Diluted net income per share............................. $ 0.30 $ 0.04
Extraordinary item, net of tax........................... - (0.28)
----- -----
Net income (loss) per share.............................. $ 0.30 $ (0.24)
====== =====
Weighted average common shares outstanding (IN THOUSANDS) 46,501 46,183
====== ======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
CASH FLOW FROM OPERATING ACTIVITIES: 1999 2000
---- ----
<S> <C> <C>
Net income (loss) ..................................... $ 14 $ (11)
Extraordinary item, net of tax......................... - 13
Non-cash charges to net income:
Depreciation and amortization........................ 12 11
Deferred income taxes................................ 4 7
Restructuring charge ................................ - 6
Other non-cash charges............................... 5 10
Working capital *...................................... (50) (16)
Long-term assets and liabilities....................... 2 (6)
---- -----
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES....................................... (13) 14
---- ----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures................................... (12) (9)
Purchases of short-term investments.................... (13) -
Maturity of short-term investments..................... 16 2
---- -----
NET CASH USED IN INVESTING ACTIVITIES............. (9) (7)
---- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt borrowings (reductions), net........... (5) 5
Revolving credit facility borrowings, net.............. 42 59
Long-term debt borrowings.............................. - 641
Long-term debt reductions.............................. - (689)
Financing costs........................................ - (25)
---- -----
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... 37 (9)
---- -----
Net increase (decrease) in cash and cash equivalents...... 15 (2)
Effect of exchange rate changes on cash and cash
equivalents.............................................. (5) -
Cash and cash equivalents at beginning of period.......... 58 17
---- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 68 $ 15
==== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest expense..................................... $ 23 $ 33
Income taxes......................................... 8 -
*Net change in working capital due to the following
components: (Increase) decrease in current assets:
Notes and accounts receivable........................ $ (19) $ 16
Inventories.......................................... (4) 1
Prepaid expenses..................................... (2) (2)
Decrease in accounts payable and accruals.............. (2) (25)
Antitrust investigations and related lawsuits and
claims.............................................. (18) (3)
Restructuring payments................................. (5) (3)
---- -----
WORKING CAPITAL................................... $ (50) $ (16)
==== =====
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE RETAINED TOTAL
COMMON PAID-IN INCOME EARNINGS TREASURY STOCKHOLDERS'
STOCK CAPITAL (LOSS) (DEFICIT) STOCK EQUITY (DEFICIT)
----- ------- ------ --------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999........ $ - $523 $(205) $(525) $ (86) $ (293)
Comprehensive income (loss):
Net loss.......................... - - - (11) - (11)
Foreign currency translation
adjustments - - (9) - - (9)
---- ----- ----- ----- ------ ------
Total comprehensive loss............ - - (9) (11) - (20)
Sale of common stock - stock
options............................ - 1 - - - 1
---- ----- ----- ----- ------ ------
BALANCE AT MARCH 31, 2000........... $ - $524 $(214) $(536) $ (86) $(312)
==== ===== ===== ===== ====== ======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(1) INTERIM FINANCIAL PRESENTATION
The interim Consolidated Financial Statements are unaudited; however, in the
opinion of management, they have been prepared in accordance with Rule 10-01
of Regulation S-X adopted by the Securities and Exchange Commission and
reflect all adjustments (all of which are of a normal, recurring nature)
which are necessary for a fair presentation of financial position, results of
operations and cash flows for the periods presented. Results of operations
for the three months ended March 31, 2000 are not necessarily indicative of
the results of operations that may be expected for the entire year ending
December 31, 2000.
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 parent company and
the issuer of the publicly traded common stock covered by the Consolidated
Financial Statements.
"UCAR Global" refers to UCAR Global Enterprises Inc. only. UCAR Global is a
direct wholly owned subsidiary of UCAR and the direct or indirect holding
company for all of our operating subsidiaries. UCAR Global was the issuer of
our previously outstanding 12% senior subordinated notes due 2005 (the
"Subordinated Notes") and was the primary borrower under our prior senior
secured bank credit facilities (the "Prior Senior Facilities").
"UCAR Finance" refers to UCAR Finance Inc. only. UCAR Finance is a direct
wholly owned special purpose finance subsidiary of UCAR and the borrower
under our new senior secured credit facilities (the "New Senior Facilities").
"Subsidiaries" refer to those companies which, at the relevant time, were
majority owned or wholly owned directly or indirectly by UCAR. 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
December 31, 1999, except for:
o our Russian subsidiary, which was acquired in late 1996 and early
1997 and has been wholly owned since then,
o our German subsidiary, which was acquired in early 1997 and 70% owned
until early 1999, when it became wholly owned in order to facilitate
the cessation of its manufacturing operations,
7
<PAGE>
PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(1) INTERIM FINANCIAL PRESENTATION - (CONT.)
o Carbone Savoie S.A.S. ("Carbone Savoie"), which was acquired in early
1997 and has been 70% owned since then, and
o our South African subsidiary, which was 50% owned until April 1997,
when it became wholly owned.
"We," "us," or "our" refers collectively to UCAR and its subsidiaries or if
the context so requires, UCAR, UCAR Global or UCAR Finance, individually.
FOREIGN CURRENCY TRANSLATION
Generally, except for operations in Russia where high inflation has existed,
unrealized gains and losses resulting from translating assets and
liabilities of foreign operations into U.S. dollars are accumulated in other
comprehensive income on the Consolidated Balance Sheet until such time as
the operations are sold or substantially or completely liquidated. Except as
described in the next sentence, translation gains and losses relating to
operations where high inflation has existed are included in income in the
Consolidated Statement of Operations. Our Mexican subsidiary began using the
U.S. dollar as its functional currency during 1999 because its sales and
purchases are predominantly U.S. dollar-denominated. Accordingly,
translation gains and losses of its operations are included in income in the
Consolidated Statements of Operations, regardless of inflation in Mexico.
OTHER ACCOUNTING MATTERS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," which, pursuant to SFAS 137, "Deferral
of the Effective Date of FASB Statement No. 133," 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.
8
<PAGE>
PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(2) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of SFAS 128, "Earnings per Share," using the following share
data:
THREE MONTHS
ENDED MARCH 31,
---------------
1999 2000
---- ----
Weighted average common shares outstanding
for basic calculation........................ 45,192,295 45,115,505
basic calculation.......................
Add: Effect of stock options................ 1,308,443 1,061,949
----------- -----------
Weighted average common shares
Outstanding, adjusted for diluted
calculation............................. 46,500,738 46,183,454
========== ==========
The calculation of weighted average common shares outstanding for the
diluted calculation excludes stock options for 2,122,778 and 1,811,351
shares in the three months ended March 31, 1999 and 2000, respectively,
because the exercise of these options would not have been dilutive for
either of those periods due to the fact that the exercise prices were
greater than the weighted average market price of the common stock for each
of those periods.
(3) SEGMENT REPORTING
We have two reportable operating segments: graphite electrodes; and graphite
and carbon products. The graphite electrode segment produces and markets
graphite electrodes to electric arc furnace and ladle furnace steelmakers.
The graphite and carbon product segment produces and markets carbon
electrodes, flexible graphite, graphite and carbon cathodes, and graphite
and carbon specialties. These two segments are managed separately because of
the different products and markets they serve.
We evaluate the performance of our segments based on gross profit.
Intersegment sales and transfers are not material.
9
<PAGE>
PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(3) SEGMENT REPORTING - (CONT.)
The following tables summarize financial information concerning our
reportable segments.
THREE MONTHS ENDED MARCH 31,
1999 2000
---- ----
(DOLLARS IN MILLIONS)
Net sales to external customers:
Graphite electrodes............. $ 132 $ 129
Graphite and carbon products.... 70 66
--------- -------
Consolidated net sales......... $ 202 $ 195
======= ========
Gross profit:
Graphite electrodes............. $ 44 $ 40
Graphite and carbon products.... 19 17
-------- --------
Consolidated gross profit...... $ 63 $ 57
====== ========
(4) RESTRUCTURING CHARGES
In 2000 first quarter, we recorded a restructuring charge of $6 million in
connection with a restructuring of our graphite specialties business. The key
elements of the restructuring consist of elimination of certain product lines
and rationalization of operations to reduce costs and improve profitability
of remaining product lines. This rationalization includes discontinuing
certain manufacturing processes at one of our facilities in the U.S. that
will be performed at our other facilities in the future. The charge includes
estimated severance costs for 65 employees, demolition costs for selected
buildings, and related environmental costs. No cash payments were made during
the 2000 first quarter.
In September 1998, we recorded a restructuring charge of $86 million in
connection with a global restructuring and rationalization plan. The
principal actions of the plan involved the closure of manufacturing
operations at our facilities in Canada and Germany, and the centralization
and consolidation of administrative and financial functions. These actions
have eliminated 371 administrative and manufacturing positions as of March
31, 2000.
10
<PAGE>
PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(4) RESTRUCTURING CHARGES - (CONT.)
The following table summarizes activity relating to the accrued expense in
connection with the restructurings.
<TABLE>
<CAPTION>
BALANCE AT GRAPHITE PAYMENTS AND BALANCE AT
DECEMBER 31, 1999 SPECIALTIES ADJUSTMENTS MARCH 31, 2000
----------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Severance and related costs $ 13 $ 2 $ (2) $ 13
Plant shut down and related 10 3 (1) 12
costs
Postmonitoring and
environmental 5 1 6
---- ---- --- ----
$ 28 $ 6 $ (3) $ 31
==== ==== === ====
</TABLE>
Cash payments of $3 million were made in the 2000 first quarter. Payments of
$2 million were associated with our Canadian facility, and payments of $1
million were associated with our German facility. The restructuring accrual
is included in other accrued liabilities on the Consolidated Balance Sheets.
(5) 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 had been any violation of U.S. federal antitrust law by
producers of graphite electrodes. Concurrently, the antitrust enforcement
authority of the European Union (the "EU Competition Authority") visited the
offices of one of our French subsidiaries for purposes of gathering
information in connection with an investigation as to whether there had been
any violation of the antitrust law of the European Community 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 the power and authority of UCAR's Board of
Directors in connection with antitrust investigations and related lawsuits
and claims.
11
<PAGE>
PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) CONTINGENCIES - (CONT.)
In April 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 U.S.
resulting in agreements to fix prices and allocate market shares in the U.S.
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 July 23, 1998. The agreement was approved by the 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 U.S. federal antitrust law
occurring prior to April 1998. The payments due in 1998, 1999 and 2000 were
timely made.
In the 2000 first quarter, pursuant to a plea agreement with the DOJ, our
former chief executive officer and chief operating officer, both of whom
retired and resigned from all positions with us in March 1998, pled guilty
to one count of violating U.S. federal antitrust law in connection with the
sale of graphite electrodes and were sentenced to terms of incarceration and
payment of fines. In December 2000, a former director of export sales was
indicted by the DOJ on similar charges. We do not intend to reimburse those
officers for their fines or that director of export sales for any costs or
fines he may incur as a result of such indictment.
In January 2000, Mitsubishi Corporation, a former parent of UCAR, was
indicted by the DOJ on a one count charge of aiding and abetting violations
of U.S. federal antitrust law in connection with the sale of graphite
electrodes.
In April 1998, the Canadian Competition Bureau (the "Competition Bureau")
commenced a criminal investigation as to whether there had 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, under the plea agreement, 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.
12
<PAGE>
PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) CONTINGENCIES - (CONT.)
In June 1998, we became aware that the Japanese antitrust enforcement
authority had commenced an investigation as to whether there had been any
violation of Japanese antitrust law by producers and distributors of
graphite electrodes. In addition, in October 1999, we became aware that the
Korean antitrust authority had commenced an investigation as to whether
there had been a violation of Korean antitrust law by producers and
distributors of graphite electrodes. We have no facilities or employees in
Japan or Korea. We believe that, among other things, we have good defenses
to any claim that we are subject to the jurisdiction of either such
authority. In March 1999, the Japanese antitrust authority issued a warning
letter to the four Japanese graphite electrode producers. While the Japanese
antitrust authority did not issue a similar warning to us, the warning
letter issued to the Japanese producers did reference us as a member of an
alleged cartel.
In January 2000, the EU Competition Authority issued a statement of
objections initiating proceedings against UCAR and other producers of
graphite electrodes. The statement alleges that UCAR and other producers
violated the antitrust law of the European Community and the European
Economic Area in connection with the sale of graphite electrodes. The
statement does not set forth any proposed fines or the impact which
cooperation by us or other producers would have on the respective fines, if
any. The maximum fine for such a violation is ten percent of a company's
revenue during the year preceding the year in which the fine is assessed. We
believe that we have provided substantial cooperation to the EU Competition
Authority and are, therefore, entitled to a reduction in the amount of any
fine which would otherwise be assessed. We believe that proceedings of this
nature typically continue for about nine to twelve months before any fine is
assessed. Any such assessment would be subject to appeal before the Court of
First Instance in Luxembourg, although the fine or collateral security
therefor would be payable about three months after such assessment.
We are continuing to cooperate with the DOJ and the Competition Bureau in
their continuing investigations of others and with the EU Competition
Authority in its continuing investigation. In connection therewith, we have
produced and are producing documents and witnesses. It is possible that
antitrust investigations seeking, among other things, to impose fines and
penalties 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. 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.
13
<PAGE>
PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) CONTINGENCIES - (CONT.)
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"). In the consolidated complaint, 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 August 1998, the court
certified a class of plaintiffs consisting of all persons who purchased
graphite electrodes in the United States (the "class") directly from the
defendants during the period from July 1, 1992 through June 30, 1997 (the
"class period").
In 1998 and 1999, various producers of graphite electrodes (including us)
were served with complaints and petitions by steelmakers in the U.S. and
Canada commencing nine separate civil antitrust lawsuits (the "other initial
lawsuits"). Such complaints and petitions allege that the defendants
violated U.S. federal, Texas or Canadian antitrust laws or Canadian
conspiracy law in connection with the sale of graphite electrodes.
In 1999, various producers of graphite electrodes (including us) were served
with two complaints commencing two separate civil antitrust lawsuits (the
"foreign customer lawsuits"). The first complaint was filed by 26
steelmakers and related parties, all but one of whom are located outside the
U.S., and the second complaint was filed by 4 steelmakers, all of whom are
located outside the U.S. 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 U.S. and those sold and
sourced outside the U.S. The plaintiffs seek, among other things, an award
of treble damages resulting from such alleged antitrust violations. We
believe that we have strong defenses against claims alleging that purchases
of graphite electrodes outside the U.S. are actionable under U.S. federal
antitrust law.
In December 1999 and January 2000, we were served with complaints commencing
two civil antitrust lawsuits (the "carbon electrode lawsuits"). Another
producer of carbon electrodes is also a defendant in one of the lawsuits. In
the complaints, the plaintiffs allege that the defendants violated U.S.
federal antitrust law in connection with the sale of carbon electrodes and
seek, among other things, an award of treble damages resulting from such
alleged violations. The guilty pleas described above do not relate to carbon
electrodes.
14
<PAGE>
PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) CONTINGENCIES - (CONT.)
Certain customers in other countries who purchased graphite electrodes,
carbon electrodes or other products from us have threatened to commence
civil antitrust lawsuits against us in the U.S. or in other jurisdictions
with respect to the subject matter of the investigations and lawsuits
described above.
Through May 11, 2000, except as described in the next paragraph, we have
settled all of the lawsuits described above, certain of the threatened civil
antitrust lawsuits and certain possible civil antitrust claims by certain
other customers who negotiated directly with us. The settlements cover
virtually all of the actual and potential claims against us by customers in
the U.S. 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. Although each settlement is unique, in the aggregate
they consist primarily of current and deferred cash payments with some
product credits and discounts. All payments there under have been timely
paid. Amounts due under the settlement of the antitrust class action will
increase if additional claims are filed by members of the class (which
includes purchasers of graphite electrodes who are located outside the U.S.
but who purchased graphite electrodes from our U.S. subsidiaries).
The foreign customer lawsuits and the carbon electrode lawsuits have not
been settled and are still in their early stages. We have been vigorously
defending, and intend to continue to vigorously defend, against these
lawsuits as well as all threatened lawsuits and possible unasserted claims,
including those mentioned above. We may at any time, however, settle these
lawsuits as well as any threatened lawsuits and possible claims and are
actively negotiating settlements of certain of these lawsuits and claims.
It is possible that additional civil antitrust lawsuits seeking, among other
things, to recover damages could be commenced against us in the U.S. and in
other jurisdictions.
ANTITRUST EARNINGS CHARGE
We recorded a charge of $340 million against results of operations for 1997
as a reserve for potential liabilities and expenses in connection with
antitrust investigations and related lawsuits and claims. The $340 million
is calculated on a basis net of, among other things, imputed interest on
installment payments of the DOJ fine. Actual aggregate liabilities and
expenses could be materially higher than $340 million. To the extent that
aggregate liabilities and expenses, net, are known or reasonably estimable,
at March 31, 2000, $340 million continues to represent our estimate of such
liabilities and expenses. In the aggregate,
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PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) CONTINGENCIES - (CONT.)
the fines and settlements described above and related expenses, net, are
within the amounts used by us to evaluate the $340 million charge.
Through March 31, 2000, we have paid an aggregate of $212 million of fines
and net settlement and expense payments and $7 million of imputed interest.
At March 31, 2000, $128 million remains in the reserve and, based on
information known to us at May 12, 2000, the aggregate amount of remaining
committed payments for fines and settlements at March 31, 2000 was about $76
million. The aggregate amount of remaining committed payments for imputed
interest at March 31, 2000 was about $13 million. About $23 million of the
committed payments for fines and settlements are due on or before March 31,
2001.
(6) NEW LONG-TERM DEBT
On February 22, 2000, we completed a debt recapitalization. We obtained the
New Senior Facilities and used the net proceeds to repay and terminate the
Prior Senior Facilities, to redeem the Subordinated Notes at a redemption
price of 104.5% of the principal amount redeemed, plus accrued interest, to
repay certain other debt and pay related expenses.
The New Senior Facilities consist of:
o A Tranche A Facility providing for initial term loans of $137
million and of 161 million (equivalent to $158 million at
February 22, 2000) to UCAR Finance. The Tranche A Facility amortizes
in quarterly installments over six years, commencing June 30, 2000,
with installments ranging from 2 million in 2000 to 17
million in 2005, with the final installment payable on December 31,
2005.
o A Tranche B Facility providing for initial term loans of $350
million to UCAR Finance. The Tranche B Facility amortizes over eight
years, commencing June 30, 2000, with nominal quarterly installments
during the first six years, and quarterly installments of $41
million in 2006 and 2007, with the final installment payable on
December 31, 2007.
o A Revolving Facility providing for U.S. dollar and euro-denominated
revolving and swingline loans to, and the issuance of U.S.
dollar-denominated letters of credit for the account of, UCAR
Finance and certain other subsidiaries in an aggregate principal
and stated amount at any time not to exceed $250 million (or the
equivalent in euros at the time of borrowing). The Revolving
Facility terminates on February 22, 2006. As a condition to each
borrowing under the Revolving Facility, we are required to
represent, among other things, that the aggregate amount of
payments (excluding certain imputed interest) and additional
reserves created in connection with antitrust, securities and
stockholder derivative
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
investigations, lawsuits and claims do not
exceed $340 million by more than $130 million (which $130 million
is reduced by the amount of certain debt incurred by us that is
not incurred under the New Senior Facilities).
We are required to make mandatory prepayments in the amount of:
o Either 75% or 50% (depending on the ratio of adjusted net debt to
adjusted total EBITDA) of adjusted excess cash flow. The obligation
to make these prepayments, if any, arises after the end of each year
with respect to adjusted excess cash flow during the prior year.
o 100% of the net proceeds of certain asset sales or certain debt
incurrences.
o 50% of the net proceeds of certain equity securities issuances by
UCAR.
We may make voluntary prepayments under the New Senior Facilities. There is
no penalty or premium due in connection with prepayments (whether voluntary
or mandatory).
UCAR Finance makes intercompany loans of the net proceeds of borrowings
under the New Senior Facilities to UCAR Global's subsidiaries. UCAR, UCAR
Global and each of UCAR Global's subsidiaries has guaranteed, with certain
exceptions, the obligations of UCAR Global's subsidiaries under the
intercompany loans, except that our U.S. subsidiaries have not guaranteed
obligations of our foreign subsidiaries. The obligations of UCAR Global's
subsidiaries under the intercompany loans as well as these guarantees are
secured, with certain exceptions, by first priority security interests in
substantially all of our assets, except that no more than 65% of the capital
stock or other equity interests in our foreign subsidiaries held directly by
our U.S. subsidiaries and no other foreign assets secure obligations or
guarantees of our U.S. subsidiaries. The obligations of UCAR Finance under
the New Senior Facilities are secured, with certain exceptions, by first
priority security interests in all of these intercompany loans (including
the related security interests and guarantees).
UCAR has unconditionally and irrevocably guaranteed the obligations of UCAR
Finance under the New Senior Facilities. This guarantee is secured, with
certain exceptions, by first priority security interests in all of the
outstanding capital stock of UCAR Global and UCAR Finance and all of the
intercompany debt owed to UCAR.
The interest rates applicable to the Tranche A and Revolving Facilities are,
at our option, either Euro LIBOR plus a margin ranging from 1.00% to 2.50%
(depending on the leverage ratio) or the alternate base rate plus a margin
ranging from 0.00% to 1.50% (depending on
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PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
the leverage ratio). The interest rate applicable to the Tranche B Facility
is, at our option, either Euro LIBOR plus a margin ranging from 2.50% to
2.75% (depending on leverage ratio) or the alternate base rate plus a margin
ranging from 1.50% to 2.00%. The alternate base rate is the higher of the
prime rate announced by Morgan Guaranty Trust Company of New York or the
federal funds effective rate plus 0.50%. UCAR Finance pays a per annum fee
ranging from 0.375% to 0.500% (depending on the leverage ratio) on the
undrawn portion of the commitments under the Revolving Facility.
We enter into agreements with financial institutions which are intended to
limit, or cap, our exposure to incurrence of additional interest expense due
to increases in variable interest rates. Use of these agreements is allowed
under the New Senior Facilities.
The New Senior Facilities contain a number of covenants that, among other
things, significantly restrict our ability to sell assets, incur additional
debt, repay or refinance other debt or amend other debt instruments, create
liens on assets, enter into sale and lease back transactions, make
investments or acquisitions, engage in mergers or consolidations, make
capital expenditures, make intercompany dividend payments to UCAR, pay
intercompany debt owed to UCAR, engage in transactions with affiliates, pay
dividends to stockholders of UCAR or make other restricted payments and that
otherwise significantly restrict corporate activities. UCAR Global is,
however, permitted to pay dividends to UCAR of up to $15 million for the
purpose of making an investment in UCAR Graph-Tech Inc. and may also
distribute the capital stock of UCAR Graph-Tech Inc. to UCAR. In addition,
we are permitted to pay dividends on, and repurchase, common stock in an
aggregate amount of up to $25 million, plus up to an additional $25 million
if certain leverage ratio and excess cash flow requirements are satisfied.
We are also permitted to repurchase common stock from present or former
directors, officers or employees in an aggregate amount of up to the lesser
of $5 million per year (with unused amounts permitted to be carried forward)
or $25 million on a cumulative basis since February 22, 2000.
We are required to comply with specified minimum interest coverage and
maximum leverage ratios, which become more restrictive over time.
In addition to the failure to pay principal, interest and fees when due,
events of default under the New Senior Facilities include: failure to comply
with covenants; failure to pay when due, or other defaults permitting
acceleration of, other indebtedness exceeding $7.5 million;
judgment defaults in excess of $7.5 million to the extent not covered by
insurance; certain events of bankruptcy; and certain changes in control.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Aggregate payments (based on euro to U.S. dollar exchange rates at February
22, 2000) due on the Tranche A and B Facilities are: $8 million in 2000; $28
million in 2001; $68 million in 2002 and 2003; $72 million in 2004 and 2005;
and $165 million in 2006 and 2007.
EXTRAORDINARY ITEM
In February 2000, we recorded an extraordinary charge of $21 million ($13
million after tax) related to our debt recapitalization. The extraordinary
charge includes $5 million of bank and third party fees and expenses, $9
million of redemption premium on the Subordinated Notes, and the write-off
of $7 million of deferred debt issuance costs.
(7) LAWSUIT AGAINST FORMER PARENTS
On February 23, 2000, we commenced a lawsuit against our former parents,
Mitsubishi Corporation and Union Carbide Corporation. The other defendants
are Mitsubishi International Corporation, a U.S. subsidiary of Mitsubishi
Corporation, and two of the respective representatives of Mitsubishi
Corporation and Union Carbide Corporation who served on UCAR's Board of
Directors at the time of our leveraged equity recapitalization in January
1995. In the lawsuit, we allege, among other things, that certain payments
made to our former parents in connection with the recapitalization were
unlawful under the General Corporation Law of the State of Delaware, that
our former parents were unjustly enriched by receipts from their investments
in us and that our former parents aided and abetted breaches of fiduciary
duties owed to us by our former senior management in connection with illegal
graphite electrode price fixing activities. We are seeking to recover more
than $1.5 billion in damages, including interest. We expect to incur $10
million to $20 million in legal expenses to pursue this lawsuit through
trial.
(8) SUBSEQUENT EVENT - PROPOSED PUBLIC OFFERING OF COMMON STOCK OF GRAFTECH
INC.
On April 18, 2000, GRAFTECH INC., a newly formed wholly owned holding
company for UCAR Graph-Tech Inc., our wholly owned operating subsidiary in
the flexible graphite business, filed a registration statement on Form S-1
with the Securities and Exchange Commission related to a proposed initial
public offering of its common stock. A portion of the common stock to be
sold would consist of newly issued shares to be sold by GRAFTECH INC. and
the balance would consist of outstanding shares to be sold by our other
subsidiaries. On that date, we announced that we intended to proceed with
the offering, subject to market conditions, that no more than an aggregate
of 20% of the shares outstanding after the offering would be sold and that
the net proceeds received by our other subsidiaries would be used to repay
debt. Net proceeds received by GRAPHTECH INC. would be retained by it for
use by it. Costs associated with the offering, including underwriting
discounting, legal, accounting and filing fees and incremental business
realignment and separation costs, are expected to be paid from the gross
proceeds of the offering.
19
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PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
INTRODUCTION TO PART I, ITEM 2, 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 parent company
and the issuer of the publicly traded common stock covered by this Report.
"UCAR GLOBAL" refers to UCAR Global Enterprises Inc. only. UCAR Global is a
direct, wholly owned subsidiary of UCAR and the direct or indirect holding
company for all our operating subsidiaries. UCAR Global was the issuer of our
previously outstanding 12% senior subordinated notes due 2005 (the "SUBORDINATED
NOTES") and was the primary borrower under our prior senior secured bank credit
facilities (the "PRIOR SENIOR FACILITIES").
"UCAR FINANCE" refers to UCAR Finance Inc. only. UCAR Finance is a direct wholly
owned special purpose finance subsidiary of UCAR and the borrower under our new
senior secured credit facilities (the "NEW SENIOR FACILITIES").
"UCAR GRAPH-TECH" refers to UCAR Graph-Tech Inc. only. UCAR Graph-Tech is our
wholly owned operating subsidiary engaged in the development, manufacture and
sale of flexible graphite.
"CARBONE SAVOIE" refers to Carbone Savoie S.A.S. only. Carbone Savoie is a 70%
owned subsidiary engaged, along with one of our wholly owned subsidiaries, in
the development, manufacture and sale of graphite and carbon cathodes.
"SUBSIDIARIES" refer to those companies which, at the relevant time, were
majority owned or wholly owned directly or indirectly by UCAR or its
predecessors to the extent that those predecessors' activities related to the
graphite and carbon business. All of UCAR's subsidiaries have been wholly owned
(with de minimuis exceptions in the case of certain foreign subsidiaries) from
at least January 1, 1996 through December 31, 1999, except for:
o our Russian subsidiary, which was acquired in late 1996 and early 1997
and has been wholly owned since then,
o our German subsidiary, which was acquired in early 1997 and 70% owned
until early 1999, when it became wholly owned in order to facilitate
the cessation of its manufacturing operations,
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PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
o Carbone Savoie, which was acquired in early 1997 and has been 70% owned
since then, and
o our South African subsidiary, which was 50% owned until April 1997,
when it became wholly owned.
"WE", "US" or "OUR" refers collectively to UCAR and its subsidiaries or, if the
context so requires, UCAR, UCAR Global or UCAR Finance, individually.
"HOME MARKETS" refer 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."
"FREE TRADING MARKETS" refer:
o in the case of the graphite electrode, flexible graphite and graphite
specialties industries, to the entire world, excluding China, and
o in the case of cathodes, and carbon specialties, to the entire wold
excluding China and the former Soviet Union.
We sometimes use this term when describing markets for various products because
information about excluded markets is believed to be unreliable or not readily
available. We believe that China is generally a net importer of graphite
electrodes.
PRESENTATION OF FINANCIAL, MARKET AND LEGAL DATA
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 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 charges identified in the Consolidated Financial Statements
on the lines entitled "antitrust investigations and related lawsuits and
claims," "restructuring charge (credit)," "impairment loss on long-lived Russian
assets," "impairment loss on long-lived graphite specialties assets,"
"write-down of graphite specialties inventory" or "securities class action and
stockholder
21
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PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
derivative lawsuits," the impact of accounting changes, refinancing
costs or expenses incurred in connection with lawsuits initiated by us.
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, 2002 and thereafter as they were in 1998.
Neither any statements in this Report nor any charge taken by us relating to any
legal proceedings constitute an admission as to any wrongdoing or liability.
Market data relating to the steel industry has been derived from publications by
the International Iron and Steel Institute and other industry sources as well as
our own estimates. Market data relating to the fuel cell industry has been
derived from publications by securities analysts relating to Ballard Power
Systems Ltd. ("BALLARD"), other industry sources and public filings, press
releases and other public documents of Ballard as well as our own estimates.
Market and market share data relating to the graphite and carbon industry as
well as cost information relating to our competitors has been derived from the
sources described above and public filings, press releases and other public
documents of our competitors as well as our own estimates.
Unless otherwise noted, when we refer to dollars we mean U.S. dollars.
Reference is made to UCAR's Annual Report on Form 10-K for the year ended
December 31, 1999 (the "ANNUAL REPORT") for background information on various
contingencies and other matters related to circumstances affecting us and our
industry.
FORWARD LOOKING STATEMENTS
This Report contains forward looking statements. In addition, from time to time,
we or our representatives have made or may make other forward looking statements
orally or in writing. These include statements about such matters as: future
production of steel in electric arc furnaces; future prices and sales of and
demand for graphite electrodes and other products; future operational and
financial performance of various businesses; strategic plans and programs;
impacts of regional and global economic conditions; restructuring strategic
alliance, investment, acquisition, joint venture, operating, integration, tax
planning, rationalization, financial and capital projects; legal matters and
related costs; consulting fees and related projects; potential offerings and
other actions regarding common stock of a holding company for UCAR Graph-Tech;
and future costs, cost savings and reductions, margins, earnings and growth. The
words "will," "may," "plan," "estimate," "project," "believe," "anticipate,"
"intend," "expect," "could," "should," "would" and similar expressions identify
some of these statements.
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PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 or regional 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,
o the occurrence of unanticipated events or circumstances relating to
pending antitrust investigations, lawsuits or claims,
o the commencement of new investigations, lawsuits or claims relating to
the same subject matter as the pending investigations, lawsuits or
claims,
o the possibility that the lawsuit against our former parents initiated
by us could be dismissed or settled, our theories of liabilities or
damages could be rejected, material counterclaims could be asserted
against us, legal expenses and distraction of management could be
greater than anticipated or unanticipated events or circumstances may
occur,
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 and the occurrence of the
other risks and uncertainties described in the registration
statement or the most recent amendment thereto filed by GRAFTECH
INC. with the SEC, which descriptions are incorporated by reference
in this Report,
o the possibility of delays in or failure to achieve successful
development and commercialization of new or improved products, the
possibility of delays in meeting or failure to meet targeted
development objectives and the possible inability to find and
successfully complete expansion of manufacturing capacity to meet
growth in demand for new or improved products, if any,
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PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
o the occurrence of unanticipated events or circumstances relating to
strategic plans or programs or restructuring, strategic alliance,
investment, acquisition, joint venture, operating, capital,
integration, tax planning, financial or rationalization projects, and
o changes in interest or currency exchange rates, changes in capital
markets or in the business, prospects, results of operations or
financial condition of UCAR Graph-Tech or our need for funds that
may result in delay or abandonment of any potential offering or
changes in the terms of any potential offering, changes in
competitive conditions, changes in inflation affecting our raw
material, energy, or other costs, technological developments, and
other risks and uncertainties, including those described or
incorporated by reference in this Report or the Annual Report.
No assurance can be given that any future strategic alliance, joint venture,
investment or acquisition projects or any potential offering 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 to be disclosed in periodic reports
required to be filed by public companies with the SEC pursuant to the SEC's
rules, we have no duty to update these statements.
Nothing contained herein shall be deemed to constitute an admission as to
liability in connection with any lawsuit or claim or to constitute and offer to
sell or solicitation of an offer to buy any securities.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 have a global business,
selling our products in more than 80 countries and owning 15 manufacturing
facilities located in Brazil, France, Italy, Mexico, Russia, Spain, South
Africa, and the U. S. 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 is used in gasket
and other sealing applications primarily for internal combustion engines, pipe
flanges, and chemical and petrochemical industry process equipment. Flexible
graphite is a natural graphite based product, while most of our other products
are petroleum coke-based products. We are developing applications for high
quality, highly engineered natural graphite based products and solutions for
customers in the fuel cell, electronic device, thermal management, building
material, fire protection, accounts for electrical energy management and
industrial furnace heat management industries. In addition to the steel and
metals industries, we sell graphite and carbon 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.
Our strategic goal is to be the best global, low-cost manufacturer and customer
service-driven company with the best product performance in the graphite and
carbon industry.
We believe that, in addition to our large market shares, our strengths include:
o our global manufacturing base, which includes multiple, fully
integrated, state of the art facilities in diverse geographic regions,
o our successful global restructuring, reengineering, rationalization and
integration projects and programs that have generated cost savings and
operating efficiencies and reduced our
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PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
o cost structure for manufacturing graphite electrodes and cathodes,
which we believe is currently the lowest among the major producers in
the industry,
o our management team,
o our exceptional customer service,
o our diversified customer base, and
o our product innovation and process improvement capabilities.
To achieve our strategic goal, we are focusing significant efforts on further
reducing costs, improving operating efficiencies and improving product quality
and technical and commercial customer services. We are restructuring our
graphite specialties business and implementing a global business transformation
initiative entitled POWER OF ONE. We are pursuing strategic alliances and growth
opportunities that enhance or complement our existing businesses. We are also
focusing on developing new related products and expanding applications for our
existing products.
We seek to build on these strengths and use these strategies to generate revenue
growth, maximize free cash flow, reduce leverage and maintain and enhance gross
margins.
RESTRUCTURING, RATIONALIZATION AND COST SAVINGS PLANS
UCAR's Board of Directors adopted a global restructuring and rationalization
plan in September 1998, and we launched new initiatives to enhance the plan in
October 1999. We believe that the plan is the most aggressive major cost
reduction plan currently being implemented in the graphite and carbon industry.
We estimate that the enhanced plan will generate cost savings at an annualized
run rate of about $112 million by the end of 2000, $135 million by the end of
2001 and $165 million by the end of 2002 and thereafter. We achieved cost
savings of over $73 million in 1999, exceeding our original target of $64
million.
The original plan included plant rationalization, plant cost reduction and
overhead cost reduction. The plant rationalization phase of the plan involved
the closure of our higher cost manufacturing facilities in Canada and Germany
and the downsizing of our manufacturing facilities in Russia. The overhead cost
reduction phase of the plan included consolidation and relocation of our
corporate headquarter functions to Nashville, Tennessee and our European
administrative functions in our Swiss subsidiary.
We believe that the cost savings under the original plan have enabled us to
strengthen our competitiveness. We also believe, however, that we must continue
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PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
to enhance our focus on cost savings to achieve the ultimate objectives of the
plan. Accordingly, in October 1999, we launched new initiatives that we estimate
will generate cost savings at an annualized run rate of $30 million by the end
of 2002.
As a result of the enhanced plan, graphite electrode average cost of sales per
metric ton in the 2000 first quarter was 3% (or $55 per metric ton) lower than
it was in the 1999 fourth quarter and 9% lower than in the 1999 first quarter.
We estimate that the enhanced plan will generate cost savings (including an
annualized reduction in interest expense as a result of our recent debt
recapitalization) at an annualized run rate that is $32 million greater by the
end of 2000 than they were at the end of 1999.
Cost savings are helping to stabilize our gross margin. Gross margin was
essentially the same in the 2000 first quarter as it was in the 1999 fourth
quarter, despite a decline of 6% in net sales in the 2000 first quarter from the
1999 fourth quarter. We completed a global benchmarking study during the 1999
third quarter that identified opportunities for performance improvements and
cost savings in certain key global administrative and transaction processing
functions. These opportunities should allow for achievement of our target of
reducing selling and administrative expenses to 8% of net sales by the end of
2002, a reduction of almost 30% as compared to 1998.
We continue to evaluate and refine our debt, working capital and organizational
structures to improve cash management and reduce tax expense. The debt
recapitalization we completed in February 2000, 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 average annual tax rate of
25% over the four years ending 2002. The majority of the savings expected from
implementation of these initiatives are anticipated to be realized during 2001
and 2002.
Our enhanced plan targets the reduction of gross debt to $550 million by the end
of 2002 and a substantial reduction in annual interest expense. Our ability to
achieve these targets could be affected materially by such factors as changes in
market interest rate levels, delays in completing or failure to complete an
initial public offering of common stock of a holding company for our flexible
graphite business or strategic alliance, joint venture or acquisition projects,
changes in strategic plans or programs, or changes in conditions affecting us,
our industry or our cost saving, tax planning or other initiatives.
In support of our strategy, we have launched a global business transformation
initiative entitled POWER OF ONE. POWER OF ONE is a coordinated global
self-assessment and business process rationalization and transformation
initiative driving one consistent theme throughout our organization: "becoming
the best." We have mobilized global teams that are reassessing every aspect of
the way we do business. The initiative has already challenged and empowered our
workforce, identified business-to-business opportunities with existing and
potentially new trading partners and established targets for improving quality,
speed and efficiency across our extended enterprise. The initiative will require
27
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PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
an investment of approximately $5 million in 2000 and $20 million to $25 million
over the three years ending 2002. We believe, however, that most of this
investment will be funded from cost savings expected to be realized.
The POWER OF ONE initiative also includes evaluating every aspect of our supply
chain performance. We expect to achieve non-recurring improvement in cash flow
from operations by reducing inventories, as measured against inventory levels
and based on production levels for the 1999 first nine months (annualized), by
over 20% (or $50 million), to about $180 million, and reducing our cash cycle
time by about one-third by the end of 2002.
During late 1999, our graphite specialties business, which accounted for about
9% of our net sales in 1999, experienced significant adverse change due to a
decline in demand for graphite specialties (particularly from certain segments
of the semiconductor industry), growth in supply due to expansion by other
producers, a decline in prices for graphite specialties, and delays in bringing
new and improved products to market. The assets and inventory of this business
are located primarily at our plant in Clarksburg, West Virginia. Since the
future estimated undiscounted cash flows expected to result from the use of
these assets were below their respective carrying amounts, in the 1999 fourth
quarter, we wrote down the carrying value of these assets to their fair market
value. Due to these same factors, in February 2000, we announced that we would
restructure the business. The key elements of the restructuring consist of
elimination of certain product lines and rationalization of operations to reduce
costs and improve profitability of remaining product lines. Accordingly, in the
2000 first quarter we recorded a restructuring charge of $6 million. We expect
to complete the restructuring by the end of the 2001 first quarter. We expect
the restructuring to generate cost savings at an annual run rate of $7 million
by the end of 2001.
DEBT RECAPITALIZATION
In February 2000, we completed a debt recapitalization. We obtained the New
Senior Facilities, which consist of a $300 million, six year tranche A term loan
facility, a $350 million, eight year tranche B term loan facility and a $250
million, six year revolving credit facility. The tranche A and revolving
facilities are dollar/euro dual currency facilities. We used the net proceeds of
the New Senior Facilities to terminate and repay about $490 million of debt
under the Prior Senior Facilities, to redeem all $200 million of the
Subordinated Notes at a redemption price of 104.5% of the principal amount
redeemed, plus accrued interest, to replace the outstanding borrowings under our
old revolving credit facility, to repay certain other debt and to pay related
expenses.
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The debt recapitalization:
o lowers our average interest rate (at current market interest rate
levels) by about 200 basis points (equivalent to a reduction of
interest expense by about $10 million for 2000 and $12 million on an
annualized basis at current debt levels),
o extends the average maturities of our debt,
o enables us to repay our debt without penalty or premium, and
o increases our ability to repurchase common stock, make acquisitions and
pursue strategic initiatives.
We recorded an extraordinary charge of $13 million, net of tax, in connection
with our debt recapitalization. The charge includes the redemption premium on
the Subordinated Notes, bank, legal, accounting, filing and other fees and
expenses, and write-off of deferred debt issuance costs.
LITIGATION MATTERS
In February 2000, we commenced a lawsuit against our former parents, Mitsubishi
Corporation ("MITSUBISHI") and Union Carbide Corporation ("UNION CARBIDE"). In
the lawsuit, we allege, among other things, that certain payments made to our
former parents were unlawful, that our former parents were unjustly enriched by
receipts from their investments in us and that our former parents aided and
abetted breaches of fiduciary duties owed to us by our former senior management
in connection with illegal graphite electrode price fixing activities. We are
seeking to recover more than $1.5 billion in damages, including interest. We
expect to incur $10 million to $20 million in legal expenses to pursue this
lawsuit through trial.
Since 1997, we have been served with subpoenas, search warrants and information
requests by antitrust authorities in the U.S., 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 and carbon electrodes in the U.S. and elsewhere. We
recorded a charge against results of operations for 1997 in the amount of $340
million as a reserve for estimated potential liabilities and expenses in
connection with antitrust investigations and related lawsuits and claims. In
April 1998, UCAR pled guilty to a one count charge of violating U.S. federal
antitrust 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
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settlement or plea agreements in connection with antitrust investigations or
related lawsuits or claims contain restrictions on future prices of our graphite
electrodes. Actual liabilities and expenses could be materially higher than such
reserve. The guilty pleas make it more difficult to defend against other
investigations, lawsuits and claims.
GLOBAL ECONOMIC CONDITIONS
We are a global company and serve every geographic market worldwide.
Accordingly, we are 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 steel and other metals,
semiconductors and certain other products made by our customers. This adversely
affected demand and pricing for graphite electrodes and most of our other
products. These circumstances negatively impacted our results of operations in
1998 and 1999.
As a result of the continued strength of the U.S. and European economies and the
beginning of recovery in other areas of the global economy, we believe that, in
the 1999 second quarter, worldwide electric arc furnace steel production began
to gradually recover. We also believe that, in 1999, worldwide production by
customers for many of our other products began to gradually recover.
We are benefiting from that recovery. Our volume of graphite electrodes sold in
our home markets has gradually increased. By the 1999 third quarter, volume had
returned to the 1998 second quarter level. 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 declined 19% since the 1998 second quarter. We believe,
however, that industry fundamentals support our long term strategy.
Demand for most of our other products is relatively 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 graphite
specialties, particularly from certain segments of the semiconductor industry,
and for certain products sold to the silicon metals industry, has remained weak.
Pricing for most products in our graphite and carbon products business segment
has not yet strengthened.
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PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
HIGHLIGHTS OF 2000 FIRST QUARTER AS COMPARED TO 1999 FOURTH QUARTER
Graphite electrode net sales declined to $129 million in the 2000 first quarter
from $145 million in the 1999 fourth quarter, primarily due to lower shipments,
lower selling prices and the impact of changes in currency exchange rate. The
average sales revenue per metric ton of graphite electrodes in the 2000 first
quarter was $2,485 as compared to the average in the 1999 fourth quarter of
$2,607. About 60% of the decline in the average was due to lower selling prices
and changes in product mix, and 40% was due to changes in currency exchange
rates. Volume of graphite electrodes sold during the 2000 first quarter was
51,200 metric tons, down from 54,600 metric tons in the 1999 fourth quarter.
Graphite electrode gross profit in the 2000 first quarter was $40 million (31.0%
of net sales), down from gross profit in the 1999 fourth quarter of $47 million
(32.4% of net sales). The decrease in gross margin was largely due to lower
average sales revenue per metric ton and, and to a lesser extent, lower
shipments, partially offset by improvements in cost of sales. Despite higher
fixed costs per metric ton associated with lower shipping and production levels
during the 2000 first quarter, we benefited from our cost savings and a
favorable impact of changes in currency exchange rates on cost of sales. This
resulted in a $55 lower average cost of sales per metric ton for the 2000 first
quarter as compared to the 1999 fourth quarter.
Graphite and carbon product net sales increased to $66 million in the 2000 first
quarter from $63 million in the 1999 fourth quarter, primarily due to $2 million
of higher volume of flexible graphite sold. Graphite specialties sales volume
remained stable, while sales volume for cathodes and carbon electrodes improved.
Graphite and carbon product gross profit in the 2000 first quarter was $17
million (25.8 % of net sales), up from gross profit in the 1999 fourth quarter
of $13 million (20.6 % of net sales) excluding inventory write down of $8
million. The increase in gross margin was mainly due to $3 million of
improvements in gross profit in our flexible graphite business.
Selling, administrative and other expense was $24 million in the 2000 first
quarter, an increase of $3 million from $21 million in the 1999 fourth quarter.
This expected increase was due to increased administrative costs including about
$1 million related to the POWER OF ONE initiative.
Interest expense was $21 million in the 2000 first quarter, $1 million higher
than in the 1999 fourth quarter due to higher average total debt levels due to
the notice period required for redemption of the Subordinated Notes.
Excluding the impact of the restructuring of the graphite specialties business,
provision for income taxes was $2 million for the 2000 first quarter as compared
to $5 million for the 1999 fourth quarter. For the 2000 first quarter, the
effective income tax rate was 25%, before the impact of the restructuring of the
graphite specialties business.
Cash flow from operations was a positive $20 million in the 2000 first quarter,
before antitrust fines and net settlement payments of $3 million and
restructuring payments of $3 million. Net working capital increased by $10
million in the 2000 first quarter, before antitrust fines and net settlement
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payments and restructuring payments. Working capital was adversely affected by a
reduction in accounts payable due to the final installment of interest on the
Subordinated Notes, supplier payment timing differences and certain employee
expenses which more than offset a favorable reduction in accounts receivable and
inventory.
Net debt (total debt less cash, cash equivalents and short-term investments) was
$721 million at March 31, 2000 as compared to $702 million at December 31, 1999.
The increase in net debt was primarily due to $25 million in expenses associated
with our debt recapitalization.
OUTLOOK
During 1997 through 1999, we estimate that an aggregate of about 53 million
metric tons of net new electric arc furnace steelmaking capacity was added
worldwide. We estimate that about 18 million metric tons of that net new
capacity was added in 1999. Further, we believe that a portion of the net new
capacity added in the last three years has not yet become fully operational. We
are aware of about 44 million metric tons of announced net new electric arc
furnace steelmaking production capacity that is scheduled to be added in 2000
through 2002.
We believe that the graphite electrode manufacturing capacity utilization rate
in the free trading markets was about 91% in 1997, about 85% in 1998 and about
87% in 1999. Since September 1998, we have reduced our annual graphite electrode
manufacturing capacity by about 30,000 metric tons. We believe that this
reduction represented about 4% of estimated graphite electrode manufacturing
capacity in the free trading markets. Since September 1998, two of our
competitors have reduced their annual graphite electrode manufacturing capacity.
Their announced reductions total more than 28,000 metric tons. As a result of
these reductions, we believe that, if graphite electrode demand returned to 1997
levels, the current graphite electrode manufacturing capacity utilization rate
in the free trading markets would be at least 95%.
We believe that worldwide production of steel in electric arc furnaces will
continue to show steady recovery and growth. We continue to see strong order
demand for graphite electrodes. We believe that graphite electrode manufacturing
capacity utilization rates in the free trading markets are approaching the 95%
level. We also believe that these high operating rates are beginning to cause
shipment/scheduling difficulties for some of the other producers. As a result,
we have announced a price increase of $150 per metric ton for graphite
electrodes sold in Western Europe, Middle East, North Africa and Asia Pacific
(excluding Japan), effective for all orders booked on or after April 3, 2000.
With the majority of our 2000 business already having been booked we would
expect that this price increase should have a slight positive effect on net
sales this year. The strength of the dollar as compared to the euro and other
currencies in which we sell our products, as well as competitive pressures,
could continue to adversely affect our graphite electrode prices. This could
adversely affect our earnings in future quarters.
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We believe that on the whole demand and prices for most of our graphite and
carbon products will remain relatively steady or improve slightly in 2000,
except for graphite specialties. We expect gross margin of the graphite and
carbon product business segment to return to early 1999 levels by the end of
2000. Following completion of the restructuring of our graphite specialties
business, we expect gross margin to exceed those levels in 2001.
As previously announced, we have been studying a number of financial options for
delivering more value to our stockholders from our flexible graphite business
over the near term. UCAR Graph-Tech is our wholly owned operating subsidiary in
the flexible graphite business. After reviewing many alternative, UCAR's Board
of Directors has determined to proceed with an initial public offering of common
stock of a new holding company for UCAR Graph-Tech, subject to market
conditions. This alternative will allow greater flexibility for UCAR Graph-Tech
to pursue new markets, compete for personnel and pursue potential acquisitions.
For example, UCAR Graph-Tech and Mazaran Mining Corporation recently signed a
memorandum of understanding relating to an arrangement to develop and
commercialize a natural graphite flake deposit located in Quebec Canada.
On April 18, 2000, GRAFTECH INC., the newly formed wholly owned holding company
for UCAR Graph-Tech, filed a registration statement on Form S-1 with the SEC
related to the proposed offering. A portion of the common stock to be sold would
consist of newly issued shares to be sold by GRAFTECH INC. and the balance would
consist of outstanding shares to be sold by our other subsidiaries. No more than
an aggregate of 20% of the common stock outstanding after the offering would be
sold and the net proceeds received by GRAFTECH INC. would be retained by it for
use in its business. After completion of the offering, for as long as we
continue to own a substantial portion of the outstanding common stock of
GRAFTECH INC., the market price of common stock of UCAR could experience
volatility based on changes in the market price of common stock of GRAFTECH INC.
Costs associated with the offering, including underwriting, discounting, legal,
accounting and filing fees and incremental business realignment and separation
costs, are expected to be paid from the gross proceeds of the offering.
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 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
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PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 1999 and 2000 first quarter, many of the currencies in which we
manufacture and sell our products weakened against the dollar. The most
significant consisted of the weakening of the euro, which devalued about 18%
against the dollar in 1999 and about 5% in the 2000 first quarter, the weakening
of the Brazilian currency, which devalued about 49% against the dollar during
1999 and strengthened about 3% in the 2000 first quarter, and the weakening of
the South African currency, which devalued about 6% in 2000 first quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
Net sales of $195 million in the 2000 first quarter represented a $7 million, or
3%, decrease from net sales of $202 million in the 1999 first quarter. Gross
profit of $57 million in the 2000 first quarter represented a $6 million, or
10%, decrease from gross profit of $63 million in the 1999 first quarter. Gross
profit margin was 29.2% in the 2000 first quarter as compared to 31.2% in the
1999 first quarter.
The decrease in net sales and gross profit was primarily due to lower average
sales revenue per metric ton (in dollars and net of changes in currency exchange
rates). The impact of this factor was partially offset by higher sales volumes.
Lower average sales revenue per metric ton (in dollars and net of changes in
currency exchange rates) was due primarily to changes in global economic
conditions that affected prices of many of our products, particularly graphite
electrodes. Lower cost of sales was primarily due to cost savings, partially
offset by higher sales volume. 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, some of which are essentially fixed.
GRAPHITE ELECTRODE BUSINESS SEGMENT. Net sales of graphite electrodes decreased
2%, or $3 million, to $129 million in the 2000 first quarter from $132 million
in the 1999 first quarter. The decrease was primarily attributable to a
reduction in average sales revenue per metric ton (in dollars and net of changes
in currency exchange rates), partially offset by higher sales volume. The
average sales revenue per metric ton (in dollars and net of changes in currency
exchange rates) of our graphite electrodes was $2,485 in the 2000 first quarter
as compared to $2,757 in the 1999 first quarter. This represented a reduction in
net sales of about 14 million. Changes in currency exchange rates accounted for
about $7 million of the $14 million. The balance of the $14 million was largely
attributable to lower graphite electrode selling prices both in home and export
markets and changes in product mix.
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Volume of graphite electrodes sold increased 4,600 metric tons, or 10%, to
51,200 metric tons in the 2000 first quarter from 46,600 metric tons in the 1999
first quarter. The increased volume of graphite electrodes sold represented an
increase in net sales of about $11 million.
Cost of sales for graphite electrodes increased 1%, or $1 million, to $89
million in the 2000 first quarter from $88 million in the 1999 first quarter.
Gross profit declined 9%, or $4 million, to $40 million in the 2000 first
quarter from $44 million in the 1999 first quarter. Gross profit margin for
graphite electrodes decreased to 31.0% in the 2000 first quarter from 33.3% in
the 1999 first quarter.
The increase in cost of sales was primarily due to higher production levels,
partially offset by lower average graphite electrode cost per ton resulting from
cost savings. Our average cost of sales per metric ton was $165 lower in the
2000 first quarter than in the 1999 first quarter. The decrease in gross profit
margin was due to the fact that there was a decrease in net sales and an
increase in cost of sales.
GRAPHITE AND CARBON PRODUCTS BUSINESS SEGMENT. Net sales of graphite and carbon
products decreased 6%, or $4 million, to $66 million in the 2000 first quarter
from $70 million in the 1999 first 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 4%, or $2 million, to
$49 million in the 2000 first quarter from $51 million in the 1999 first
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. Gross profit declined 11%, or $2 million,
to $17 million in the 2000 first quarter from $19 million in the 1999 first
quarter. Gross profit margin decreased to 25.8% in the 2000 first quarter from
27.1% in the 1999 first quarter. The decrease in gross profit margin was due to
the fact that the percentage decrease in net sales exceeded the percentage
decrease in cost of sales.
OPERATING PROFIT FOR US AS A WHOLE. Operating profit in the 2000 first quarter
was $24 million, or 12.3% of net sales, as compared to operating profit in the
1999 first quarter of $42 million, or 20.7% of net sales. Operating profit in
the 2000 first quarter includes a restructuring charge of $6 million for our
graphite specialties business. Excluding the restructuring charge, operating
profit in the 2000 first quarter would have been 15.4%, which was lower than in
the 1999 first quarter primarily due to lower gross profit, higher selling,
administrative and other expense and an increase in other expense.
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Selling, administrative and other expense increased to $24 million in the 2000
first quarter from $22 million in the 1999 first quarter primarily due to higher
administrative costs including additional costs related to the POWER OF ONE
initiative.
Other (income) expense, net, was nil in the 2000 first quarter as compared to
income of $3 million in the 1999 first quarter. The change was primarily due to
a $2 million impact of changes in the currency exchange rates and the balance
was due to expenses incurred in connection with the lawsuit initiated by us
against our former parents, consulting fees relating to the POWER OF ONE
initiative and lower interest income due to a decrease in short term
investments.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense decreased to $21 million
in the 2000 first quarter from $22 million in the 1999 first quarter. The
decrease resulted primarily from lower average annual interest rates, partially
offset by higher average total debt outstanding. Average outstanding total debt
was $841 million in the 2000 first quarter as compared to $834 million in the
1999 first quarter. Average outstanding total debt for the 2000 first quarter
would have been $775 million but for the fact that the Subordinated Notes
continued to be outstanding for 30 days after our debt recapitalization due to
the notice period required for redemption. The average annual interest rate was
9.48% in the 2000 first quarter as compared to 9.99% in the 1999 first quarter.
These average annual interest rates exclude imputed interest on the DOJ fine.
The decrease in the average annual interest rate was due primarily to a change
in the index for determining market interests (from LIBOR to Euro LIBOR) and a
decrease in the margin over market interest rates on which our interest rates
are determined as result of our debt recapitalization in February 2000,
partially offset by an increase in market interest rates.
Provision for income taxes was nil in the 2000 first quarter as compared to $5
million in the 1999 first quarter. The effective tax rate for the 2000 first
quarter, excluding the impact of the tax benefit relating to the restructuring
of our graphite specialties business, was 25%, which was lower than the U.S.
federal statutory income tax rate of 35%. The lower rate in the 2000 first
quarter was primarily a result of tax planning strategies, earnings repatriation
plans and earnings from consolidated entities with lower effective tax rates.
The effective tax rate for the 1999 first quarter was 27%. This rate for the
1999 first quarter was lower than the U.S. federal statutory income tax rate
primarily as a result of earnings from consolidated entities with lower
effective tax rates.
In connection with our debt recapitalization, we recorded a extraordinary charge
of $13 million, net of tax.
As a result of the changes described above, net loss for the 2000 first quarter
was $11 million as compared to net income for the 1999 first quarter of $14
million.
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PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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
investigations, lawsuits and claims.
We are highly leveraged and have substantial obligations in connection with
investigations, lawsuits and claims. We had total debt of $736 million and
stockholders' deficit of $312 million at March 31, 2000, as compared to total
debt of $722 million and stockholders' deficit of $293 million at December 31,
1999. Cash and cash equivalents and short-term investments were $15 million at
March 31, 2000 as compared to $20 million at December 31, 1999. Debt (net of
cash, cash equivalents and short-term investment) was $721 million at March 31,
2000 as compared to $702 million at December 31, 1999.
CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES
Cash flow provided by operating activities was $14 million in the 2000 first
quarter as compared to cash flow used in operating activities of $13 million in
the 1999 first quarter. The increased generation of cash flow of $27 million
resulted primarily from decreased use of cash flow from working capital of $34
million. The improvement was due primarily to a reduction in the use of cash for
notes and accounts receivable of $35 million and a reduction in the use of cash
for fines and net settlement payments and expenses of $15 million, partially
offset by an increase in use of cash for accounts payable and accruals of $23
million.
CASH FLOW USED IN INVESTING ACTIVITIES
We used $7 million of cash flow for investing activities during the 2000 first
quarter as compared to $9 million during the 1999 first quarter. This reduction
of $2 million was primarily due to a reduction in cash flow used for capital
expenditures.
CASH FLOW PROVIDED BY FINANCING ACTIVITIES
Cash flow used in financing activities was $9 million for the 2000 first quarter
as compared to cash provided by financing activities of $37 million in the 1999
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
first quarter. During the 2000 first quarter, we incurred $28 million of costs
in connection with our debt recapitalization in February 2000, of which we paid
$25 million through March 31, 2000.
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, as amended by SFAS 137, "Deferral of
the Effective Date of FASB Statement No. 133," is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. This statement
establishes accounting and reporting standards for derivative instruments. This
statement requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. We are currently evaluating the impact of SFAS 133 on our
financial position, results of operations and cash flows.
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 transactions that have been authorized according to
documented policies and procedures. We do not use derivatives for trading or
speculative purposes or to generate income, and we never use leveraged
derivatives.
Our exposure to changes in interest rates results primarily from floating rate
long-term debt tied to LIBOR or euro LIBOR. We enter into agreements with
financial institutions which are intended to limit, or cap, our exposure to
incurrence of additional interest expense due to increases in variable interest
rates. During 1997, we purchased interest rate caps on up to $250 million of
debt, limiting the floating interest rate factor on this debt to a
weighted-average rate of 8.2% for the period commencing February 1998 and
continuing through various dates ending February 2001. In February 1999, we
purchased interest rate caps on $470 million of debt, limiting the floating
interest rate factor on this debt to 5.1% through 1999. In the 2000 first
quarter, we purchased interest rate caps on $346 million of debt and entered
into interest rate swaps for $100 million of debt, limiting the floating
interest rate factor on this debt to 6.5% through various dates ending in
February 2001. Fees related to these agreements are charged to interest expense
over the term of the agreements.
Our exposure to changes in currency exchange rates results primarily from:
o investments in our foreign subsidiaries and in our share of the
earnings of those subsidiaries, which are denominated in local
currencies,
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 attempt 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
against these risks with an aggregate notional amount of about $192 million at
March 31, 2000 and $233 million at December 31, 1999. All of our contracts
mature within one year. All of our contracts are marked-to-market and,
accordingly, transaction gains and losses are reflected in the statement of
operations. Unrealized gains and losses on our outstanding contracts were not
material at December 31, 1999 or March 31, 2000.
We used a sensitivity analysis to assess the potential effect of changes in
currency exchange rates and interest rates on reported earnings at March 31,
2000. Based on this analysis, a hypothetical 10% weakening or strengthening in
the U.S. dollar would have resulted in a change in our annual earnings of about
$3 million to $6 million. A hypothetical increase in interest rates of 100 basis
points across all maturities would increase our annual interest expense by about
$7 million.
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PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
ANTITRUST MATTERS
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 had been
any violation of U.S. federal antitrust law by producers of graphite electrodes.
Concurrently, representatives of Directorate General-Competition of the
Commission of the European Communities, the antitrust enforcement authority of
the European Union (the "EU COMPETITION 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 Community 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 the power and authority of UCAR's Board of
Directors in connection with antitrust investigations and related lawsuits and
claims.
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 U.S. resulting in agreements
to fix prices and allocate market shares in the U.S. 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 fine is payable in six annual installments of $20 million, $15
million, $15 million, $18 million, $21 million and $21 million, commencing 1998.
The plea agreement was approved by the 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 U.S. federal antitrust law occurring prior to
April 1998. The payments due in 1998, 1999 and 2000 were timely made.
In January 2000, pursuant to a plea agreement with the DOJ, Robert P. Krass,
former Chairman of the Board, President and Chief Executive Officer, who retired
and resigned from all positions
40
<PAGE>
PART II (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
with us in March 1998, 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 a term of incarceration and payment of a fine. In February 2000,
pursuant to a plea agreement with the DOJ, Robert J. Hart, former Senior Vice
President and Chief Operating Officer, who retired and resigned from all
positions with us in March 1998, pled guilty to a similar charge and was
sentenced to a term of incarceration and payment of a fine. In January 2000,
George S. Schwegler, former Director, Export Sales Europe, was indicted by the
DOJ on a similar charge. We do not intend to reimburse Messrs. Krass and Hart
for their fines or Mr. Schwegler for any costs or fines he may incur as a result
of such indictment.
In January 2000, Mitsubishi Corporation, one of our former parents, was indicted
by the DOJ on a one count charge of aiding and abetting violations of U.S.
federal antitrust law in connection with the sale of graphite electrodes.
In April 1998, the Canadian Competition Bureau (the "COMPETITION BUREAU")
commenced a criminal investigation as to whether there had 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 court approved the plea
agreement and, as a result, under the plea agreement, 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.
We became aware, in June 1998, that the Japanese antitrust enforcement authority
had commenced an investigation as to whether there had been any violation of
Japanese antitrust law by producers and distributors of graphite electrodes. In
addition, we became aware, in October 1999, that the Korean antitrust authority
had commenced an investigation as to whether there had been any violation of
Korean antitrust law by producers and distributors of graphite electrodes. We
have no facilities or employees in Japan or Korea. We believe that, among other
things, we have good defenses to any claim that we are subject to the
jurisdiction of either such authority. In March 1999, the Japanese antitrust
authority issued a warning letter to the four Japanese graphite electrode
producers. While the Japanese antitrust authority did not issue a similar
warning to us, the warning letter issued to the Japanese producers did reference
us as a member of an alleged cartel.
In January 2000, the EU Competition Authority issued a statement of objections
initiating proceedings against us and other producers of graphite electrodes.
The statement alleges that we and other producers violated antitrust laws of the
European Community and the European Economic Area in connection with the sale of
graphite electrodes. The statement does not set forth any proposed fines or the
impact which cooperation by us or other producers would have on the respective
41
<PAGE>
PART II. (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
fines, if any. The maximum fine for such a violation is ten percent of a
company's revenue during the year preceding the year in which the fine is
assessed. We believe that we have provided substantial cooperation to the EU
Competition Authority and are, therefore, entitled to a reduction in the amount
of any fine which would otherwise be assessed. We believe that proceedings of
this nature typically continue for about nine to twelve months before any fine
is assessed. Any such assessment would be subject to appeal before the Court of
First Instance in Luxembourg, although the fine or collateral security therefor
would be payable three months after such assessment.
We are continuing to cooperate with the DOJ and the Competition Bureau in their
continuing investigations of other producers and distributors of graphite
electrodes. We are also cooperating with the EU Competition Authority in its
on-going investigation. In connection therewith, we have produced and are
producing documents and witnesses. It is possible that antitrust investigations
seeking, among other things, to impose fines and penalties 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. 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.
ANTITRUST LAWSUITS
In 1997, we and other producers of graphite electrodes were served with
complaints commencing various antitrust class action lawsuits. Subsequently, the
complaints were either withdrawn without prejudice to refile or consolidated
into a single complaint in the District Court (the "ANTITRUST CLASS ACTION
LAWSUIT"). In the consolidated complaint, the plaintiffs allege that the
defendants violated U.S. federal antitrust law in connection with the sale of
graphite electrodes. In August 1998, the District Court certified a class of
plaintiffs consisting of all persons who purchased graphite electrodes in the
U.S. (the "CLASS") directly from the defendants during the period from July 1,
1992 through June 30, 1997 (the "CLASS period").
In 1998 and 1999, we and other producers of graphite electrodes were served by
steelmakers in the United States and Canada with complaints and petitions
commencing nine separate civil antitrust lawsuits in various courts (the "OTHER
INITIAL LAWSUITS"). In the complaints and petitions, the plaintiffs allege that
the defendants violated U.S. federal, Texas or Canadian antitrust laws and
Canadian conspiracy law in connection with the sale of graphite electrodes.
In 1999, we and other producers of graphite electrodes were served two
complaints commencing two separate civil antitrust lawsuits in the District
Court. The first complaint entitled FERROMIN INTERNATIONAL TRADE
CORPORATION, ET AL. V. UCAR INTERNATIONAL INC., ET AL. was filed by 26
42
<PAGE>
PART II. (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
steelmakers and related parties, all but one of whom are located outside the
U.S., and the second complaint entitled BHP NEW ZEALAND LTD. ET AL. V. UCAR
INTERNATIONAL INC., ET AL. was filed by 4 steelmakers, all of whom are
located outside the U.S. 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 U.S. and those sold and sourced
outside the U.S. The plaintiffs seek, among other things, an award of treble
damages resulting from such alleged antitrust violations. We believe that we
have strong defenses against claims alleging that purchases of graphite
electrodes outside the U.S. are actionable under U.S. federal antitrust law.
All antitrust lawsuits against one producer of graphite electrodes, SGL Carbon
Corporation, the U.S. subsidiary of SGL Carbon AG, had 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 in
a proceeding under Chapter 11 of the U.S. Bankruptcy Code. In December 1999, the
Third Circuit Court of Appeals ruled that the proceeding should be dismissed
because it was not filed in good faith. The proceeding was dismissed in March
2000.
In December 1999 and January 2000, we were served with two complaints commencing
two civil antitrust lawsuits. The first complaint, filed in the District Court,
is entitled GLOBE METALLURGICAL, INC. V. UCAR INTERNATIONAL INC., ET AL., and
the second complaint, filed in United States Bankruptcy Court for the North
District of Ohio, is entitled IN RE SIMETCO, INC. (together with the first
complaint, the "CARBON ELECTRODE LAWSUITS"). SGL Carbon AG is also named as a
defendant in the first complaint. In the complaints, the plaintiffs allege that
the defendants violated U.S. federal antitrust law in connection with the sale
of carbon electrodes and seek, among other things, an award of treble damages
resulting from such alleged violations. The guilty pleas described above do not
relate to carbon electrodes.
Certain customers who purchased graphite electrodes, carbon electrodes or other
products from us have threatened to commence antitrust lawsuits against us in
the U.S. or in other jurisdictions with respect to the subject matter of the
investigations and lawsuits described above. We are aware that Messrs. Krass and
Hart have been named as defendants in certain civil antitrust lawsuits. We do
not intend to reimburse them for any of their liabilities or expenses in
connection therewith.
Through May 11, 2000, except as described in the next paragraph, we have settled
all of the lawsuits described above, certain of the threatened civil antitrust
lawsuits and certain possible antitrust claims by certain other customers who
negotiated directly with us. The settlements cover virtually all of the actual
and potential claims against us by customers in the U.S. 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. Although each
settlement is unique, in the aggregate they consist primarily of current and
deferred cash payments with some product credits and discounts. All payments due
thereunder have been timely made. Amounts due under the settlement of the
43
<PAGE>
PART II. (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
antitrust class action will increase if additional claims are filed by members
of the class (which includes purchasers of graphite electrodes who are located
outside the U.S. but who purchased graphite electrodes from our U.S.
subsidiaries).
The foreign customer lawsuits and the carbon electrode lawsuits have not been
settled and are still in their early stages. We have been vigorously defending
against these lawsuits as well as all threatened lawsuits and possible
unasserted claims, including those mentioned above. We may at any time, however,
settle these lawsuits as well as any threatened lawsuits and possible claims.
It is possible that additional civil antitrust lawsuits seeking, among other
things, to recover damages could be commenced against us in the U.S. and in
other jurisdictions.
1997 ANTITRUST 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, among other things, imputed interest on
installment payments of the DOJ fine. Actual aggregate liabilities and expenses
(including settled investigations, lawsuits and claims as well as the on-going
investigation by the EU Competition Authority and unsettled pending, threatened
and possible lawsuits and claims mentioned above) could be materially higher
than $340 million. To the extent that aggregate liabilities and expenses, net,
are known or reasonably estimable, at May 12, 2000, such amount continues to
represent our estimate of such liabilities and expenses. In the aggregate, the
fines and settlements described above and related expenses, net, are within the
amounts we used to evaluate the $340 million charge.
Through March 31, 2000, we have paid an aggregate of $212 million of fines and
net settlement and expense payments and $7 million of imputed interest. At March
31, 2000, $128 million remains in the reserve and, based on information known to
us at May 12, 2000, the aggregate amount of remaining committed payments for
fines and settlements at March 31, 2000 was about $76 million. The aggregate
amount of remaining committed payments for imputed interest at March 31, 2000
was about $13 million. About $23 million of the committed payments for fines and
settlements are due on or before March 31, 2001.
STOCKHOLDER DERIVATIVE AND SECURITIES CLASS ACTION LAWSUITS
In March 1998, UCAR was served with a complaint commencing a stockholder
derivative lawsuit in the Connecticut Superior Court (Judicial District of
Danbury). Certain former and current officers and directors were named as
defendants. UCAR was named as a nominal defendant. In October 1999, UCAR and the
individual defendants entered into an agreement settling the lawsuit. The
44
<PAGE>
PART II. (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
settlement received court approval in December 1999, and the appeal period
expired in January 2000.
SECURITIES CLASS ACTION LAWSUIT
In April and May 1998, UCAR was served with complaints commencing securities
class actions in the U.S. District Court for the District of Connecticut. The
complaints were consolidated into a single complaint and the Florida State Board
of Administration was designated lead plaintiff. UCAR and certain former and
current officers and directors were named as defendants. The class of plaintiffs
consists of all persons (other than the defendants) who purchased common stock
during the period from August 1995 through March 1998. In October 1999, UCAR and
the individual defendants entered into an agreement settling the lawsuit. The
settlement received court approval in January 2000, and the appeal period
expired in February 2000.
Under the settlements, a total of $40.5 million was contributed to escrow
accounts for the benefit of former and current stockholders who are members of
the class of plaintiffs for whom the securities class action was brought as well
as plaintiffs' attorney's fees. We contributed $11.0 million and the insurers
under our directors and officers' insurance policies at the time the lawsuits
were filed contributed the balance of $29.5 million. In addition, Mary B.
Cranston, a new outside director acceptable to both UCAR and the Florida State
Board of Administration, the eighth largest state employees' pension fund, was
added to UCAR's Board of Directors. We have incurred about $2.0 million of
unreimbursed expenses related to the lawsuits. These expenses, together with the
$11.0 million, were recorded as a one time charge to operations of $13.0 million
in the 1999 third quarter.
OTHER PROCEEDINGS AGAINST US
We are involved in various other investigations, lawsuits, claims and other
legal proceedings incidental to the conduct of our business. While it is not
possible to determine the ultimate disposition of each of them, we do not
believe that their ultimate disposition will have a material adverse effect on
us.
LAWSUIT INITIATED BY US AGAINST OUR FORMER PARENTS
In February 2000, at the direction of the special committee of UCAR's Board of
Directors, we commenced a lawsuit in the U.S. District Court for the Southern
District of New York against our former parents, Mitsubishi and Union Carbide.
The other defendants named in the lawsuit are Mitsubishi International
Corporation, a U.S. subsidiary of Mitsubishi Corporation, and two of the
respective representatives of Mitsubishi and Union Carbide who served on UCAR's
Board of Directors at the time of our leveraged equity recapitalization in 1995,
Hiroshi Kawamura and Robert D. Kennedy. Mr. Kennedy, who was a director of UCAR
at the time the lawsuit was commenced, resigned as such on March 14, 2000.
45
<PAGE>
PART II. (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
In the lawsuit we allege, among other things, that, in January 1995, Mitsubishi
and Union Carbide had knowledge of facts indicating that UCAR had engaged in
illegal graphite electrode price fixing activities and that any determination of
UCAR's statutory capital surplus would be overstated as a result of those
activities. We also allege that certain of their representatives knew or should
have known about those activities. Mitsubishi was indicted by the DOJ in January
2000 for aiding and abetting those activities and has been named as a defendant
in several civil antitrust lawsuits commenced by electric arc furnace steel
producers with respect to its alleged participation in those activities. In
addition, we allege that, in January 1995, UCAR did not have the statutory
capital surplus required to lawfully authorize the payments that UCAR made to
its former parents. We also allege that Mitsubishi and Union Carbide were
unjustly enriched by receipts from their investments in UCAR and that they
knowingly induced or actively and substantially assisted former senior
management of UCAR to engage in illegal graphite electrode price fixing
activities in breach of their fiduciary duties to UCAR.
Based on the allegations summarized above, we believe that Mitsubishi and Union
Carbide are liable for more than $1.5 billion in damages, including interest.
Some of our claims provide for joint and several liability; however, damages
from our various claims would not generally be additive to each other.
Litigation such as this lawsuit is complex. We believe that our claims are
strong, and are confident about the ultimate outcome. Accordingly, we afforded
the defendants the opportunity to settle this lawsuit in advance of filing the
complaint in the interest of achieving a fair and expeditious resolution. We
currently intend to vigorously pursue this lawsuit to trial.
Complex litigation can be lengthy and expensive. We expect to incur between $10
million and $20 million for legal expenses to pursue this lawsuit through trial.
These expenses will be accounted as operating expenses and will be expensed as
incurred. Through March 31, 2000, we had incurred $1 million of such legal
expenses. This lawsuit is in its earliest stages, and the ultimate outcome of
litigation such as this lawsuit is subject to many uncertainties, both
substantive and procedural, including motions to dismiss, motions to disqualify
counsel, statute of limitation and other defenses, and claims for
indemnification and other counterclaims. We may at any time settle this lawsuit.
46
<PAGE>
PART II. (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The exhibits listed in the following table have been filed as part of this
Quarterly Report on Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
No Report on Form 8-K was filed during the quarter for which this
Quarterly Report on Form 10-Q is filed.
47
<PAGE>
UCAR INTERNATIONAL INC.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UCAR INTERNATIONAL INC.
Date: May 12, 2000 By: /s/ Corrado F. DeGasperis
_______________________
Corrado F. DeGasperis
VICE PRESIDENT AND
CHIEF INFORMATION OFFICER
(PRINCIPAL ACCOUNTING
OFFICER)
48
<PAGE>
UCAR INTERNATIONAL INC.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
27.1 Financial Data Schedule E-2
E-1
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF UCAR INTERNATIONAL INC. INCLUDED IN ITS
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 15
<SECURITIES> 0
<RECEIVABLES> 120
<ALLOWANCES> 5
<INVENTORY> 199
<CURRENT-ASSETS> 387
<PP&E> 1,053
<DEPRECIATION> 664
<TOTAL-ASSETS> 892
<CURRENT-LIABILITIES> 217
<BONDS> 716
0
0
<COMMON> 0
<OTHER-SE> (312)
<TOTAL-LIABILITY-AND-EQUITY> 892
<SALES> 195
<TOTAL-REVENUES> 195
<CGS> 138
<TOTAL-COSTS> 138
<OTHER-EXPENSES> 9
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 3
<INCOME-TAX> 0
<INCOME-CONTINUING> 3
<DISCONTINUED> 0
<EXTRAORDINARY> 13
<CHANGES> 0
<NET-INCOME> (11)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.24)
</TABLE>
