<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 June 30, 2000, 45,138,344 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 June 30, 2000............................................ Page 3
Consolidated Statements of Operations for the Three Months
ended June 30, 1999 and 2000 and for the Six Months
ended June 30, 1999 and 2000................................. Page 4
Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1999 and 2000................................. Page 5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Six Months ended June 30, 2000............................... Page 7
Notes to Consolidated Financial Statements..................... Page 8
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1............... Page 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... Page 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Page 43
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS........................................... Page 45
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... Page 52
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ Page 52
SIGNATURE.............................................................. Page 53
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, JUNE 30,
ASSETS 1999 2000
---- ----
CURRENT ASSETS: (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents.............................. $ 17 $ 11
Short-term investments................................. 3 -
Notes and accounts receivable.......................... 171 147
Inventories:
Raw materials and supplies........................... 49 52
Work in process...................................... 113 117
Finished goods....................................... 42 36
---- -----
204 205
Prepaid expenses....................................... 25 35
---- -----
Total current assets........................... 420 398
---- -----
Property, plant and equipment............................. 1,071 1,061
Less: accumulated depreciation............................ 673 671
---- -----
Net fixed assets............................... 398 390
Other assets.............................................. 115 110
---- -----
Total assets................................... $ 933 $ 898
==== =====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................................... $ 80 $ 80
Short-term debt........................................ - 2
Payments due within one year on long-term debt......... 82 19
Accrued income and other taxes......................... 39 18
Other accrued liabilities.............................. 114 126
---- -----
Total current liabilities...................... 315 245
---- -----
Long-term debt............................................ 640 718
Other long-term obligations............................... 224 188
Deferred income taxes..................................... 33 40
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 June 30, 2000... - -
Additional paid-in capital............................. 523 524
Accumulated other comprehensive income (loss).......... (205) (220)
Retained earnings (deficit)............................ (525) (526)
Less: cost of common stock held in treasury, 2,338,038
shares at December 31, 1999, 2,319,482 shares at
June 30, 2000....................................... (86) (85)
---- ----
Total stockholders' equity (deficit)............. (293) (307)
---- ----
Total liabilities and stockholders' equity
(deficit)....................................... $ 933 $ 898
==== =====
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ -------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales............................. $ 211 $ 199 $ 413 $ 394
Cost of sales......................... 138 143 277 281
-------- -------- -------- -------
Gross profit...................... 73 56 136 113
Research and development.............. 2 2 4 5
Selling, administrative and other
expenses........................... 23 23 45 47
Restructuring graphite specialties
business.............................. - - - 6
Securities class action and stockholder
derivative lawsuits................ - (1) - (1)
Other (income) expense (net).......... (3) (1) (6) (1)
-------- -------- -------- -------
Operating profit.................. 51 33 93 57
Interest expense...................... 22 18 44 39
-------- --------- --------- -------
Income before provision for income
taxes............................ 29 15 49 18
Provision for income taxes............ 8 4 13 4
-------- --------- --------- -------
Income of consolidated entities... 21 11 36 14
Less: Minority stockholders' share of
income............................. 1 - 2 1
---------- --------- --------- -------
Income before extraordinary item.. 20 11 34 13
Extraordinary item, net of tax........ - - - 13
---------- --------- --------- -------
Net income........................ $ 20 $ 11 $ 34 $ -
========== ========= ========= =======
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary item.. $ 0.45 $ 0. 24 $ 0.76 $ 0.28
Extraordinary item, net of tax.... - - - (0.28)
---------- --------- --------- -------
Net income per share............ $ 0.45 $ 0.24 $ 0.76 $ 0.00
Weighted average common shares
outstanding (in thousands)..... 45,083 45,138 45,138 45,127
========== ========= ========= ========
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary item. $ 0.44 $ 0.24 $ 0.74 $ 0.28
Extraordinary item, net of tax.. - - - (0.28)
---------- ---------- ----------- -------
Net income per share............ $ 0.44 $ 0.24 $ 0.74 $ 0.00
Weighted average common and common
equivalent shares outstanding (in
thousands).......................... 46,507 45,734 46,504 45,959
========== ========= =========== =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
--------------
CASH FLOW FROM OPERATING ACTIVITIES: 1999 2000
---- ----
Net income (loss) ..................................... $ 34 $ -
Extraordinary item, net of tax......................... - 13
Non-cash charges to net income:
Depreciation and amortization........................ 23 22
Deferred income taxes................................ 6 9
Restructuring graphite specialties business ......... - 6
Other non-cash charges............................... 14 8
Working capital*....................................... (36) (33)
Long-term assets and liabilities....................... (2) -
---- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 39 25
---- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures................................... (27) (23)
Purchases of short-term investments.................... (17) -
Maturity of short-term investments..................... 21 2
Purchase of investment ................................ - (1)
Sale of assets......................................... 3 -
---- -----
NET CASH USED IN INVESTING ACTIVITIES............. (20) (22)
---- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt borrowings (reductions), net........... (16) 1
Revolving credit facility borrowings, net.............. - 63
Long-term debt borrowings.............................. 59 641
Long-term debt reductions.............................. (98) (688)
Dividends paid to minority shareholder................. (1) -
Financing costs........................................ - (26)
---- -----
NET CASH USED IN FINANCING ACTIVITIES............. (56) (9)
---- -----
Net increase (decrease) in cash and cash equivalents...... (37) (6)
Effect of exchange rate changes on cash and cash equivalents (3) -
Cash and cash equivalents at beginning of period.......... 58 17
---- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 18 $ 11
==== =====
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
--------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 1999 2000
----- ----
Net cash paid during the period for:
Interest expense..................................... $ 40 $ 50
Income taxes......................................... 18 1
* Net change in working capital due to the following components:
(Increase) decrease in current assets:
Notes and accounts receivable........................ $ 4 $ 14
Inventories.......................................... 6 (8)
Prepaid expenses and other current assets............ - (1)
Increase (decrease) in accounts payable and accruals...... 3 (18)
Antitrust investigations and related lawsuits and claims.. (35) (16)
Restructuring payments................................. (14) (4)
---- -----
WORKING CAPITAL................................... $ (36) $ (33)
==== =====
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
PART I (CONT'D)
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:
Net income........................ - - - - - -
Foreign currency translation
adjustments.................... - - (15) - - (15)
----- ---- ----- ----- ------ -------
Total comprehensive loss............ - - (15) - - (15)
Sale of common stock - stock options - 1 - - - 1
Sale of common stock - treasury stock - - - (1) 1 -
------ ---- ----- ----- ------ -------
BALANCE AT JUNE 30, 2000......... $ - $524 $(220) $(526) $ (85) $(307)
====== -=== ===== ===== ===== =====
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<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 six months ended June 30, 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" refers 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 June 30, 2000, 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,
8
<PAGE>
PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(1) INTERIM FINANCIAL PRESENTATION (CONT'D)
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 (loss) on the Consolidated Balance Sheets until such
time as the operations are sold or substantially or completely liquidated.
Translation gains and losses relating to operations where high inflation has
existed or which predominately use the U.S.dollar for their purchases and
sales are included in other (income) expense (net) in the Consolidated
Statements 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, since January 1, 1999,
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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("Statement") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," It requires that an entity
recognize all derivative instruments as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This Statement, as amended by Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," and Statement No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an
amendment 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 Statement No. 133 on our financial position and results of
operations in the period of adoption.
In 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," which
summarizes the staff's views regarding the application of generally
9
<PAGE>
PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
accepted accounting principles to selected revenue recognition issues. We
are evaluating whether SAB 101 will cause any change in our revenue
recognition policies and procedures.
(2) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
share data:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for basic calculation 45,082,530 45,137,732 45,137,550 45,126,619
Add: Effect of stock options....... 1,424,260 596,407 1,366,351 832,177
---------- --------- ---------- ----------
Weighted average common shares
outstanding, adjusted for diluted
calculation....................... 46,506,790 45,734,139 46,503,901 45,958,796
========== ========== ========== ==========
</TABLE>
The calculation of weighted average common shares outstanding for the
diluted calculation excludes the consideration of stock options covering
1,853,030 and 4,337,647 shares in each of the three months ended June 30,
1999 and 2000, respectively, and 1,987,904 and 3,074,499 shares in each of
the six months ended June 30, 1999 and 2000, respectively, because the
exercise of these options would not have been dilutive for 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 products segment produces and markets carbon
electrodes, natural, acid-treated and 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.
10
<PAGE>
PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(3) SEGMENT REPORTING (CONT'D)
The following tables summarize financial information concerning our
reportable segments.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- ---------------
1999 2000 1999 2000
---- ---- ---- ----
(DOLLARS IN (DOLLARS IN
MILLIONS) MILLIONS)
Net sales to external customers:
Graphite electrodes............. $ 141 $ 137 $ 273 $ 266
Graphite and carbon products.... 70 62 140 128
----- ----- ----- -----
Consolidated net sales......... $ 211 $ 199 $ 413 $ 394
===== ===== ===== =====
Gross profit:
Graphite electrodes............. $ 54 $ 41 $ 98 $ 81
Graphite and carbon products.... 19 15 38 32
----- ----- ----- -----
Consolidated gross profit...... $ 73 $ 56 $ 136 $ 113
===== ===== ===== =====
(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. During the six months ended June
30, 2000, we paid $0.3 million in severance payments.
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 through June
30, 2000.
11
<PAGE>
PART I (CONT'D)
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 restructuring charges.
<TABLE>
<CAPTION>
BALANCE AT CHARGE FOR ADJUSTMENTS BALANCE AT
DECEMBER 31, GRAPHITE AND CURRENCY JUNE 30
1999 SPECIALITIES PAYMENTS CHANGE 2000
---- ------------ -------- ------------ ----
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Severance and related costs......... $ 13 $ 2 $ (3) $ - $ 12
Plant shut down and related costs... 10 3 (1) (1) 11
Postmonitoring and environmental.... 5 1 - - 6
----- ---- ----- ------ ----
$ 28 $ 6 $ (4) $ (1) $ 29
===== ==== ==== ===== ====
</TABLE>
Cash payments of $4 million were made in the six months ended June 30, 2000.
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.
12
<PAGE>
PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) CONTINGENCIES (CONT'D)
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 charges 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 January 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.
13
<PAGE>
PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) CONTINGENCIES (CONT'D)
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
therefore 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.
14
<PAGE>
PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) CONTINGENCIES (CONT'D)
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 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, January 2000 and July 2000, we were served with complaints
commencing three civil antitrust lawsuits related to the sale of carbon
electrodes (the "carbon electrode lawsuits"). Another producer of carbon
electrodes is also a defendant in two 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.
15
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PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) CONTINGENCIES (CONT'D)
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 August 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 thereunder have been timely
paid. Amounts due under the settlement of the antitrust class action will
increase to the extent additional undisputed 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.
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 June 30, 2000, $340 million continues to represent our estimate of such
liabilities and expenses. In the aggregate,
16
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PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) CONTINGENCIES (CONT'D)
the fines and settlements described above and related expenses, net, are
within the amounts used by us to evaluate the $340 million charge.
Through June 30, 2000, we have paid an aggregate of $225 million of fines
and net settlement and expense payments and $12 million of imputed interest.
At June 30, 2000, $115 million remains in the accrual and, based on
information known to us at August 11, 2000, the aggregate amount of
remaining committed payments for fines and settlements at June 30, 2000 was
about $63 million. The aggregate amount of remaining committed payments for
imputed interest at June 30, 2000 was about $8 million. About $30 million of
the committed payments for fines and settlements are due on or before June
30, 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 to 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
17
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PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(6) NEW LONG-TERM DEBT (CONT'D)
aggregate amount of payments (excluding certain imputed interest)
and additional reserves created in connection with antitrust,
securities and stockholder derivative 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 have 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.
18
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PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(6) NEW LONG-TERM DEBT (CONT'D)
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 our leverage ratio) or the alternate base rate plus a margin
ranging from 0.00% to 1.50% (depending on our 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%
(depending on our leverage ratio). 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 our 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 our subsidiary, Graftech Inc. (formerly
known as UCAR Graph-Tech Inc.), and may also distribute the capital stock of
Graftech Inc. to UCAR. UCAR may sell and or UCAR may distribute to UCAR's
stockholders the capital stock of Graftech Inc. 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 and limits
on annual capital expenditures.
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
19
<PAGE>
PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(6) NEW LONG-TERM DEBT (CONT'D)
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.
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 write-off of $7
million of deferred debt issuance costs.
(7) FINANCIAL INSTRUMENTS
Certain of our subsidiaries sold receivables of $52 million in the 2000
first half and $34 million in the 1999 first half. Receivables sold and
remaining on the Consolidated Balance Sheets were nil at June 30, 2000 and
December 31, 1999.
(8) 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. Through June 30, 2000, we incurred $2 million of such legal expenses.
20
<PAGE>
PART I (CONT'D)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(9) PUBLIC OFFERING OF COMMON STOCK OF GRAFTECH INC.
On July 3, 2000, Graftech Inc. (formerly known as UCAR Graph-Tech Inc.), our
wholly owned operating subsidiary engaged in the natural, acid-treated and
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 was
expected to consist of newly issued shares to be sold by Graftech Inc. and
the balance was expected to consist of outstanding shares to be sold by our
other subsidiary. Costs associated with the offering, including underwriting
discounts, legal, accounting, printing and filing fees and incremental
business realignment and separation costs, are expected to be paid from the
gross proceeds of the offering.
On August 1, 2000, the registration statement filed by Graftech Inc. was
declared effective.
On August 3, we postponed the initial public offering due to market
conditions.
21
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PART I (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").
"GRAFTECH" refers to Graftech Inc. only. Graftech (formally know as UCAR
Graph-Tech Inc.) is our wholly owned operating subsidiary engaged in the
development, manufacture and sale of natural, acid-treated and flexible
graphite.
"CARBONE SAVOIE" refers to Carbone Savoie S.A.S. only. Carbone Savoie is a 70%
owned subsidiary engaged, along with two of our wholly owned subsidiaries, in
the development, manufacture and sale of graphite and carbon cathodes.
"SUBSIDIARIES" refers 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 June 30, 2000, 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,
o Carbone Savoie, which was acquired in early 1997 and has
been 70% owned since then, and
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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" refers:
o in the case of the graphite electrode, natural, acid-treated
and flexible graphite and graphite specialties industries,
the entire world, excluding China, and
o in the case of the carbon electrode, graphite and carbon
cathode and carbon specialties industries, the entire world,
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,"
"restructuring graphite specialties business," "write-down of graphite
specialties inventory" or "securities class action and stockholder derivative
lawsuits," the impact of accounting changes, refinancing costs or expenses
incurred in connection with lawsuits initiated by us.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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. Although we believe
that this data is reliable, we cannot guarantee the accuracy or completeness of
this data and have not independently verified it. None of the sources mentioned
above has consented to the disclosure and use of data in this Report.
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 for Graftech; 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 (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
widespread commercialization of proton exchange membrane
("PEM") fuel cells which use flexible graphite-based flow
field plates and the possibility that manufacturers of PEM
fuel cells using those plates may obtain those plates or the
flexible graphite used in them from other sources,
o the possibility that we may incur unanticipated health,
safety or environmental compliance, remediation or other
costs or experience unanticipated labor difficulties and the
possibility that we may not be able to protect our
intellectual property or that intellectual property used by
us infringes the rights of others,
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 (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
o the possibility that expected cost savings from our enhanced
global restructuring and rationalization plan, our POWER OF
ONE initiative, the restructuring of our graphite
specialties business and other cost reduction efforts will
not be fully realized,
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 Graftech or our need
for funds that may result in 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,
development by others of substitutes for some of our
products and other 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 an 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, and includes Graftech, our
wholly owned operating subsidiary engaged in the development, manufacture and
sale of natural and acid-treated as well as flexible graphite.
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, as well as heat shielding 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, acid-treated and flexible graphite products and solutions
for customers for applications in fuel cells, thermal management in computers
and other electronic devices, fire protection in construction and building
materials, energy management in devices such as batteries and supercapacitors,
and heat management in high temperature use industrial furnaces. 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,
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
o our successful global restructuring, reengineering,
rationalization and integration projects and programs that
have generated cost savings, improved operating efficiencies
and reduced our 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 (about $40 million higher than
at the end of 1999), $135 million by the end of 2001 and $165 million by the end
of 2002 and thereafter. We achieved actual cost savings of $73 million in 1999,
exceeding our original target of $64 million. We achieved actual cost savings
(including an annualized reduction in interest expense as a result of our debt
recapitalization completed in February 2000) of $45 million in the 2000 first
half.,
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
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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
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 additional cost savings at an annualized run rate of $30 million
by the end of 2002.
Cost savings are having a favorable impact on gross margin. 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
are being addressed by our POWER OF ONE initiative and 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, further delays in completing or failure to complete
an initial public offering of common stock of Graftech 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
an investment of approximately $5 million in 2000 and an additional $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.
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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.
The debt recapitalization:
o lowers our average interest rate (at market interest rate
levels prevailing at the time of the debt recapitalization)
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 debt levels prevailing at
the time of the debt recapitalization),
o extends the average maturities of our debt,
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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.
DEVELOPMENTS RELATING TO GRAFTECH
In February 2000, we announced that we were studying a number of financial
alternatives to create more value for our stockholders from Graftech's business.
Subsequently, we announced that we intended to proceed with an initial public
offering of common stock of Graftech. In connection therewith, Graftech filed a
registration statement with the SEC. We also announced that Graftech had entered
into a memorandum of understanding with Mazarin Mining Corporation relating to
possible development of a natural graphite flake deposit in Canada as a source
of high quality, low cost raw material for Graftech.
In June 2000, pursuant to the memorandum of understanding, we purchased from
Mazarin common stock representing about 4% of its outstanding common stock and
warrants to purchase common stock representing about another 4% of its common
stock, for an aggregate of $1 million.
In August 2000, we announced that we were postponing the offering because, under
then current market conditions, we did not believe that the pricing in the
offering would reflect the true enterprise value of Graftech. Accordingly, we
did not believe it was in the long term best interest of UCAR stockholders to
complete the offering at that time. We may record a charge in the 2000 second
half for costs incurred in connection with the offering if we don't proceed with
the offering.
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.
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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
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 and, in the 2000 second quarter, have
exceeded 1998 and 1999 levels. In addition, we successfully implemented graphite
electrode price increases in April, June and July 2000. However, our volume in
the export markets is still depressed. Further, our average graphite electrode
prices have declined 13% since the 1999 second quarter. We believe, however,
that industry fundamentals support our long term strategy.
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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 strengthened.
HIGHLIGHTS OF SECOND QUARTER OPERATING RESULTS
Net sales increased by $4 million, operating profit increased by $9 million,
interest expense decreased by $3 million and net income before extraordinary
item increased $9 million in the 2000 second quarter from 2000 first quarter,
primarily as a result of strong demand for our graphite electrodes and our cost
reduction programs and initiatives. Of the $9 million increase in operating
profit, $7 million of the net income increase was due to not having a $6 million
graphite specialties restructuring charge in the second quarter and the $1
million reversal of accrued litigation expenses in the second quarter. Earnings
for the 2000 second quarter were $0.24 per diluted share, a 118% increase from
the 2000 first quarter earnings of $0.11 per diluted share excluding
restructuring charge and extraordinary item.
Graphite electrode net sales increased to $137 million in the 2000 second
quarter from $129 million in the 2000 first quarter, primarily due to strong
demand partially offset by lower average prices in dollars. The average sales
revenue per metric ton in dollars of graphite electrodes in the 2000 second
quarter was $2,374 as compared to the average in the 2000 first quarter of
$2,485 per metric ton. About 40% of the decline in the average was due to lower
selling prices and, to a limited extent, changes in product mix, and about 60%
was due to changes in currency exchange rates. Volume of graphite electrodes
sold during the 2000 second quarter was 56,800 metric tons, an increase of 5,600
metric tons, or 11%, from 51,200 metric tons in the 2000 first quarter.
Graphite electrode gross profit in the 2000 second quarter was $41 million
(29.9% of net sales) as compared to gross profit in the 2000 first quarter of
$40 million (31.0% of net sales). Cost of sales increased to $96 million in the
2000 second quarter from $89 million in the 2000 first quarter primarily due to
higher volumes. While gross profit increased, gross profit margin decreased
because the percentage increase in cost of sales was higher than the percentage
increase in net sales. Cost of sales per metric ton declined by 3%, or $45 per
metric ton, in the 2000 second quarter from the 2000 first quarter. Cost of
sales per metric ton benefited from higher production levels, which reduced
fixed cost per metric ton, and changes in currency exchange rates, which reduced
costs incurred in local currencies when translated into dollars.
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Graphite and carbon product net sales decreased to $62 million in the 2000
second quarter from $66 million in the 2000 first quarter, primarily due to a
decrease of $3 million in net sales of refractories and $1 million in net sales
of flexible graphite products. Net sales of refractories declined primarily
because steel customers postponed blast furnace relines to avoid reducing
production needed to meet demand for their products by their customers. Graphite
and carbon product gross profit in the 2000 second quarter was $15 million
(24.2% of net sales) as compared to gross profit in the 2000 first quarter of
$17 million (25.8% of net sales). Cost of sales declined to $47 million in the
2000 second quarter from $49 million in the 2000 first quarter primarily due to
lower volumes, partially offset by and increased costs due to a temporary
production outage in our cathode business and production inefficiencies
resulting from high demand for our cathodes. Gross profit margin declined
because the percentage decrease in net sales was greater than the percentage
decrease in cost of sales.
Selling, administrative and other expense was stable at $23 million in the 2000
second quarter as compared to $24 million in the 2000 first quarter. Operating
profit in the 2000 second quarter benefited from a reversal of $1 million of the
accrual associated with the securities class action and stockholder derivative
lawsuit because actual costs were lower than anticipated. Other income was $1
million higher in the 2000 second quarter than in the 2000 first quarter
primarily due to non-recurring insurance benefits, partially offset by
continuing legal expenses related to our lawsuit against our former parents and
consulting expenses related to the POWER OF ONE initiative. Operating profit
increased by 10% to $33 million (17% of net sales) in the 2000 second quarter
from $30 million in the 2000 first quarter excluding restructuring charge.
Interest expense was $18 million in the 2000 second quarter, $3 million lower
than at the time of commencement of our original cost savings program due to
lower average interest rates due to our debt recapitalization in February 2000.
Cash flow from operations was a positive $25 million in the 2000 second quarter,
before antitrust fines and net settlement payments of $13 million and
restructuring payments of $1 million. Net working capital increased $3 million
in the 2000 second quarter, before antitrust fines and net settlement payments
and restructuring payments. Cash flow from working capital was adversely
affected by an increase in inventories, primarily inventories of raw materials.
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.
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PART I (CONT'D)
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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.
We believe that worldwide production of steel in electric arc furnaces will
continue to show growth over the long-term. We continue to see strong order
demand for graphite electrodes in the majority of our geographical markets. In
the 2000 second quarter, our volume of graphite electrodes sold was 11% more
than in the 1999 second quarter and the highest volume since the 1997 fourth
quarter. In the 2000 second quarter, we operated our graphite electrode
manufacturing facilities at their effective capacity. We expect to continue to
so operate to meet demand for the 2000 second half.
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 utilization rates are beginning to cause shipment/scheduling
difficulties for the graphite electrode industry. As a result, we announced a
price increase of /$150 per metric ton in April 2000 and a second price
increase in July 2000, which together bring the base price up to /$2,850
per metric ton for graphite electrodes sold in Western Europe and up to $2,850
pER metric ton in Eastern Europe, Middle East, North Africa and Asia Pacific
(excluding Japan). In June 2000, we announced a $150 per metric ton price
increase for graphite electrodes sold in the U.S. and Canada, bringing the base
price up to $2,975 per metric ton. With the majority of our 2000 business
already having been booked, we expect that these price increases will have only
limited positive impact on 2000 second half net sales. These price increases
should, however, set a positive stage for price negotiations with customers for
2001 business. These negotiations typically start in the second half of the
preceding 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 prices of our graphite electrodes as
translated into dollars. This could adversely affect our earnings in future
quarters.
We believe, that on the whole, demand for most of our graphite and carbon
products will remain relatively steady in 2000, except for refractories. We have
initiated price increases for our cathodes and graphite specialties. We are also
putting in place measures to eliminate temporary production inefficiencies to
better enable us to meet strong demand for our cathodes. We expect 2000 second
half results to be similar to 2000 first half results and believe that the gross
profit margin for this segment should improve going into 2001. Following
completion of the restructuring of our graphite specialties business, we expect
its gross profit margin to return to or exceed the early 1999 level by the end
of 2001.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 use various off-balance sheet financial instruments to attempt to hedge these
exposures. 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
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 half, 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 4% in the 2000 first half, the weakening of the
Brazilian currency, which devalued about 49% against the dollar during 1999 and
declined about 1% in the 2000 first half, and the weakening of the South African
currency, which devalued about 9% in 2000 first half.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net sales of $199 million in the 2000 second quarter represented a $12 million,
or 6%, decrease from $211 million in the 1999 second quarter. Gross profit of
$56 million in the 2000 second quarter represented a $17 million, or 23%,
decrease from $73 million in the 1999 second quarter. Gross profit margin was
28.1% in the 2000 second quarter as compared to 34.6% in the 1999 second
quarter.
The decrease in net sales and gross profit was primarily due to lower average
sales revenue per metric ton in dollars, partially offset by higher volume sold.
Gross profit also benefited from continued cost savings. Cost savings programs
generated actual savings of $45 million in the 2000 first half. This equates to
$9 million of actual incremental savings from the 1999 actual savings
(annualized), and we are on pace to achieve the $20 million of incremental
savings targeted for this year.
GRAPHITE ELECTRODE BUSINESS SEGMENT. Net sales of graphite electrodes decreased
3%, or $4 million, to $137 million in the 2000 second quarter from $141 million
in the 1999 second quarter. The decrease was primarily attributable to a
reduction in the average sales revenue per metric ton in dollars. The average
sales revenue per metric ton (in U.S. dollars and net of changes in currency
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
exchange rates) of our graphite electrodes was $2,374 in the 2000 second quarter
as compared to $2,691 in the 1999 second quarter. The lower average sales
revenue per metric ton represented a decrease in net sales of about $18 million.
$7 million of the reduction in average sales revenue per metric ton was related
to changes in currency exchange rates and the balance was primarily due to lower
selling prices and to a limited extent changes in product mix. The volume of
graphite electrodes sold increased by 5,500 metric tons, or 11%, to 56,800
metric tons in the 2000 second quarter from 51,300 metric tons in the 1999
second quarter. The increased volume of graphite electrodes sold represented an
increase in net sales of about $14 million.
Cost of sales for graphite electrodes increased 10%, or $9 million, to $96
million in the 2000 second quarter from $87 million in the 1999 second quarter.
Graphite electrode gross profit in the 2000 second quarter was $41 million
(29.9% of net sales) as compared to gross profit in the 1999 second quarter of
$54 million (38.3% of net sales). The increase in cost of sales was primarily
due to increased volume sold, partially offset by cost savings. In addition,
changes in currency exchange rates had a favorable impact on cost of sales as
translated into dollars. Cost of sales per metric ton benefited from higher
volume sold since the higher volume resulted in lower fixed cost per metric ton.
As a result of higher volume sold as well as cost savings and changes in
currency exchange rates, average cost of sales per metric ton in dollars for the
2000 second quarter was 10% lower than in the 1999 second quarter. The decrease
in both gross profit and gross profit margin was due to the decrease in net
sales and the increase in cost of sales.
GRAPHITE AND CARBON PRODUCTS BUSINESS SEGMENT. Net sales of graphite and carbon
products decreased 11%, or $8 million, to $62 million in the 2000 second quarter
from $70 million in the 1999 second quarter. While net sales of each of our
major product lines declined, most of the decrease was attributable to a decline
in net sales of graphite specialties and refractories. Net sales of graphite
specialties declined as we eliminated product lines in connection with the
restructuring of our graphite specialties business. Net sales of refractories
declined primarily because our steel customers postponed blast furnace relines
to avoid reducing production of their products needed to meet demand of their
customers. While our cathode business continues to experience strong demand,
particularly with a continued shift in product mix towards graphite cathodes,
the impact of the devaluation of the euro as compared to the dollar on net sales
more than offset the impact of the increase in volume sold. The impact of
changes in currency exchange rates on sales revenue in dollars accounted for
about $2 million of the decrease in net sales.
Cost of sales for graphite and carbon products decreased 8%, or $4 million, to
$47 million in the 2000 second quarter from $51 million in the 1999 second
quarter. Graphite and carbon product gross profit in the 2000 second quarter was
$15 million (24.2 % of net sales) as compared to gross profit in the 1999 second
quarter of $19 million (27.1 % of net sales). The decline in cost of sales was
primarily due to elimination of certain product lines in connection with the
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
restructuring of our graphite specialties business, lower volume of refractories
sold and cost savings. The impact of these factors was partially offset by an
increase in costs due to a temporary production outage in our cathode business
and production inefficiencies incurred to meet high demand for our cathodes. The
decrease in both gross profit and gross profit margin was primarily due to the
fact that the decrease in net sales was greater than the decrease in cost of
sales, both in terms of amounts of dollars and percentage change.
OPERATING PROFIT FOR US AS A WHOLE. Operating profit in the 2000 second quarter
was $33 million, or 16.6% of net sales, as compared to $51 million, or 24.2% of
net sales, in the 1999 second quarter. The decrease in operating profit was
primarily due to lower gross profit.
Selling, administrative and other expense was stable at $23 million in both the
2000 second quarter and 1999 second quarter. Increased costs related to the
POWER OF ONE initiative were offset by cost savings.
Other (income) expense (net) was income of $1 million in the 2000 second quarter
as compared to income of $3 million in the 1999 second quarter. Other (income)
expense (net) in the 2000 second quarter, was favorably impacted by nonrecurring
insurance benefits and favorable net currency and translation gains, offset by
legal expenses related to the lawsuit against our former parents, consulting
expenses related to the POWER OF ONE initiative, and lower interest income and
lower miscellaneous asset sales.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense decreased to $18 million
in the 2000 second quarter from $22 million in the 1999 second quarter. The
decrease was due to lower average interest rates due to our debt
recapitalization in February 2000 and lower total debt outstanding. Average
outstanding total debt was $760 million in the 2000 second quarter as compared
to $817 million in the 1999 second quarter. The average annual interest rate was
8.6% in the 2000 second quarter as compared to 9.9% in the 1999 second quarter.
These average annual interest rates exclude imputed interest on the DOJ fine.
Provision for income taxes was $4 million in the 2000 second quarter as compared
to $8 million in the 1999 second quarter. During the 2000 second quarter, the
provision for income taxes reflected a 25% effective rate, which is lower than
the U.S. federal income tax rate of 35%, primarily due to higher earnings from
consolidated entities with lower effective rates. During the 1999 second
quarter, the provision for income taxes reflected a 27% effective rate.
As a result of the changes described above, net income was $11 million in the
2000 second quarter, a decrease of 45% from net income of $20 million in the
1999 second quarter.
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PART I (CONT'D)
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SIX MONTHS ENDED JUNE 30, 2000 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net sales of $394 million in the 2000 first half represented a $19 million, or
5%, decrease from $413 million in the 1999 first half. Gross profit of $113
million in the 2000 first half represented a $23 million, or 17%, decrease from
$136 million in the 1999 first half. Gross profit margin was 28.7% in the 2000
first half as compared to 32.9% in the 1999 first half.
The decrease in net sales and gross profit was primarily due to lower average
sales revenue per metric ton in dollars, partially offset by higher volume sold.
Gross profit also benefited from continued cost savings. Cost savings programs
generated actual savings of $45 million in the 2000 first half. This equates to
$9 million of actual incremental savings from the 1999 actual savings
(annualized), and we are on pace to achieve the $20 million of incremental
savings targeted for this year.
GRAPHITE ELECTRODE BUSINESS SEGMENT. Net sales of graphite electrodes decreased
3%, or $7 million, to $266 million in the 2000 first half from $273 million in
the 1999 first half. The decrease was primarily attributable to a reduction in
the average sales revenue per metric ton in dollars. The average sales revenue
per metric ton (in U.S. dollars and net of changes in currency exchange rates)
of our graphite electrodes was $2,426 in the 2000 first half as compared to
$2,723 in the 1999 first half. The lower average sales revenue per metric ton
represented a decrease in net sales of about $29 million. $12 million of the
reduction in average sales revenue per metric ton was related to changes in
currency exchange rates and the balance was primarily due to lower selling
prices and, to a limited extent changes in product mix. The volume of graphite
electrodes sold increased by 10,100 metric tons, or 10%, to 108,000 metric tons
in the 2000 first half from 97,900 metric tons in the 1999 first half. The
increased volume of graphite electrodes sold represented an increase of about
$25 million in net sales.
Cost of sales for graphite electrodes increased 6%, or $10 million, to $185
million in the 2000 first half from $175 million in the 1999 first half.
Graphite electrode gross profit in the 2000 first half was $81 million (30.5% of
net sales) as compared to gross profit in the 1999 first half of $98 million
(35.9% of net sales). The increase in cost of sales was primarily due to
increased volume sold, partially offset by cost savings. In addition, changes in
currency exchange rates had a favorable impact on cost of sales as translated
into dollars. Cost of sales per metric ton benefited from higher volume sold
since the higher volume resulted in lower fixed cost per metric ton. As a result
of higher volume sold as well as cost savings and changes in currency exchange
rates, average cost of sales per metric ton in dollars for the 2000 first half
was 4% lower than in the 1999 first half. The decrease in both gross profit and
gross profit margin was due to the decrease in net sales and the increase in
cost of sales.
GRAPHITE AND CARBON PRODUCTS BUSINESS SEGMENT. Net sales of graphite and carbon
products decreased 9%, or $12 million, to $128 million in the 2000 first half
from $140 million in the 1999 first half. While net sales of each of our major
product lines declined, most of the decrease was attributable to a decline in
net sales of graphite specialties. Net sales of graphite specialties declined as
we eliminated product lines in connection with the restructuring of our graphite
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
specialties business. While our cathode business continues to experience strong
demand, particularly with a continued shift in product mix towards graphite
cathodes, the impact of the devaluation of the euro as compared to the dollar on
net sales more than offset the impact of the increase in volume sold. The impact
of changes in currency exchange rates on sales revenue in dollars accounted for
about $5 million of the decrease in net sales.
Cost of sales for graphite and carbon products decreased 7%, or $6 million, to
$96 million in the 2000 first half from $102 million in the 1999 first half.
Graphite and carbon product gross profit in the 2000 first half was $32 million
(25.0 % of net sales) as compared to gross profit in the 1999 first half of $38
million (27.1 % of net sales). The decline in cost of sales was primarily due to
elimination of certain product lines in connection with the restructuring of our
graphite specialties business and cost savings. The impact of these factors was
partially offset by an increase in costs due to a temporary production outage in
our cathode business and production inefficiencies incurred to meet high demand
for our cathodes. The decrease in both gross profit and gross profit margin was
primarily due to the fact that the decrease in net sales was greater than the
decrease in cost of sales, both in terms of amounts of dollars and percentage
change.
OPERATING PROFIT FOR US AS A WHOLE. Operating profit was $57 million, or 14.5%
of net sales, in the 2000 first half as compared to $93 million, or 22.5% of net
sales, in the 1999 first half. The decrease in operating profit was primarily
due to lower gross profit.
Selling, administrative and other expense was $47 million in the 2000 first
half, an increase of $2 million, or 4%, from $45 million in the 1999 first half.
The increase in costs related to the POWER OF ONE initiative and an increase in
the number of administrative employees, partially offset by cost savings.
Other (income) expense (net) was income of $1 million in the 2000 first half as
compared to income of $6 million in the 1999 first half. Other income in the
1999 first half included a gain of $2 million from the sale of our spray cooled
systems business. Other income in the 2000 first half included $1 million in
legal expenses related to the lawsuit against our former parents, nonrecurring
insurance benefits and favorable net currency and translation gains. Decreased
interest income and lower miscellaneous asset sales offset these benefits.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense decreased to $39 million
in the 2000 first half from $44 million in the 1999 first half. The decrease was
due to lower average interest rates due to our debt recapitalization in February
2000 and lower total debt outstanding. Average outstanding total debt was $767
million in the 2000 first half as compared to $825 million in the 1999 first
half. The average annual interest rate was 9.4% in the 2000 first half as
compared to 9.9% in the 1999 first half. These average annual interest rates
exclude imputed interest on the DOJ fine.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Provision for income taxes was $4 million in the 2000 first half as compared to
$13 million in the 1999 first half. During the 2000 first half, the provision
for income taxes reflected a 25% effective rate, which is lower than the U.S.
federal income tax rate of 35%, primarily due to higher earnings from
consolidated entities with lower effective rates. During the 1999 first half,
the provision for income taxes reflected a 27% effective rate.
As a result of the changes described above, net income before extraordinary item
was $13 million in the 2000 first half, a decrease of 62%, from net income of
$34 million in the 1999 first half.
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 $739 million and
stockholders' deficit of $307 million at June 30, 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 $11 million at
June 30, 2000 as compared to $20 million at December 31, 1999. At June 30, 2000,
there was an aggregate of $739 million of borrowings outstanding, and an
aggregate of about $145 million available for future borrowing, under our
revolving credit facility. Net debt (total debt net of cash, cash equivalents
and short-term investment) was $728 million at June 30, 2000 as compared to $702
million at December 31, 1999. The increase in net debt was primarily due to the
scheduled third installment of $15 million of the DOJ fine paid in April 2000.
Our liquidity and financial position continue to be impacted by obligations
arising out of antitrust investigations, lawsuits and claims as well as our
financial performance.
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
Cash flow provided by operating activities was $25 million in the 2000 first
half as compared to $39 million in the 1999 first half. The $14 million decrease
in cash flow was due primarily to lower net income before restructuring charge
and extraordinary item. Cash flow used in working capital was relatively stable
at $33 million in the 2000 second quarter as compared to $36 million in the 1999
second quarter. The benefits of a decrease in notes and accounts receivable and
reductions in payments for antitrust investigations and related lawsuits and
claims, net, and in restructuring payments was offset by increases in
inventories, primarily inventories of raw materials, and reductions in accounts
payable and accruals.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CASH FLOW USED IN INVESTING ACTIVITIES
Cash flow used in investing activities was relatively stable at $22 million for
the 2000 first half as compared to $20 million for the 1999 first half. Most of
the cash flow used in investing activities in both periods was used for capital
expenditures. Capital expenditures in the 2000 first half were $4 million lower
than in the 1999 first half. In the 2000 first half, we used $1 million to
purchase common stock and warrants for the purchase of common stock of Mazarin
Mining Corporation. In the 1999 first half, we received $3 million from the sale
of our spray-cool systems business.
CASH FLOW USED IN FINANCING ACTIVITIES
Cash flow used in financing activities was $9 million for the 2000 first half as
compared to $56 million in the 1999 first half. In the 1999 first half, we
reduced our total debt from the beginning of the period to the end of the period
by $55 million. In the 2000 first half, we increased our total debt by $17
million. The increase in cash flow from the increase in total debt was more than
offset by $26 million of costs incurred in connection with our debt
recapitalization in February 2000.
ACCOUNTING MATTERS
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("Statement") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," It requires that an entity recognize all
derivative instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This Statement,
as amended by Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
and Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an amendment 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 Statement No. 133 on our financial
position and results of operations in the period of adoption.
In 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition in Financial Statements," which summarizes the
staff's views regarding the application of generally accepted accounting
principles to selected revenue recognition issues. We are evaluating whether SAB
101 will cause any change in our revenue recognition policies and procedures.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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,
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 $542 million at
June 30, 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 Consolidated Statements of
Operations. Unrealized gains and losses on our outstanding contracts were $7
million unrealized gain at December 31, 1999 and $3 million unrealized gain at
June 30, 2000.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
We used a sensitivity analysis to assess the potential effect of changes in
currency exchange rates and interest rates on reported earnings for the 2000
first half (annualized), assuming such changes had occurred on June 30, 2000.
Based on this analysis, a hypothetical 10% weakening or strengthening in the
U.S. dollar would have resulted in a change in our annualized earnings of about
$3 million to $6 million. A hypothetical increase in interest rates of 100 basis
points across all maturities would have increased 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 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.
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
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PART II (CONT'D)
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 relevant Canadian 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 letter 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
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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 therefore
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 with 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 steelmakers and related
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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.
In December 1999, January 2000 and July 2000, we were served with three
complaints commencing three 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 Northern District of Ohio, is entitled IN RE SIMETCO,
INC. The third complaint, filed in the United States District Court for the
Southern District of West Virginia, is entitled ELKEM METALS COMPANY INC and
ELKEM METALS COMPANY ALLOY LLP V. UCAR CARBON COMPANY INC., ET AL. (together
with the first and second complaints, the "CARBON ELECTRODE LAWSUITS"). SGL
Carbon AG is also named as a defendant in the first complaint and SGL Carbon
Corporation is also named as a defendant in the third 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 August 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 antitrust class action will increase to the extent that
additional undisputed 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).
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND 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 August 11, 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 June 30, 2000, we have paid an aggregate of $225 million of fines and
net settlement and expense payments and $12 million of imputed interest. At June
30, 2000, $115 million remains in the reserve and, based on information known to
us at August 11, 2000, the aggregate amount of remaining committed payments for
fines and settlements at June 30, 2000 was about $63 million. The aggregate
amount of remaining committed payments for imputed interest at June 30, 2000 was
about $8 million. About $30 million of the committed payments for fines and
settlements are due on or before June 30, 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
settlement became final in January 2000.
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 became final 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 incurred about $2.0 million of
unreimbursed expenses related to the lawsuits. These expenses, together with the
$11.0 million, were recorded as a charge to operations of $13.0 million in the
1999 third quarter. In the 2000 second quarter, we reversed $1 million of this
charge because actual expenses were lower than anticipated.
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 a special committee of independent
directors 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.
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
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 was 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.
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 intend to vigorously pursue this lawsuit to
trial.
The defendants have filed motions to dismiss the lawsuit and motions to
disqualify certain of our counsel from representing us in the lawsuit. We are
vigorously opposing those motions.
Litigation such as this lawsuit is complex. 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 June 30, 2000,
we incurred $2 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 statute of
limitation and other defenses, claims for indemnification and other
counterclaims as well as those motions to dismiss and motions to disqualify. We
may at any time settle this lawsuit.
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 9, 2000, UCAR held its annual meeting of stockholders in Nashville,
Tennessee. The stockholders elected the following directors with corresponding
votes for and withheld:
NUMBER OF NUMBER OF
NAME OF DIRECTOR SHARES VOTED FOR SHARES WITHHELD
---------------- ---------------- ---------------
R. Eugene Cartledge.............. 39,525,802 275,116
Mary B. Cranston................. 39,529,871 271,047
Alec Flamm....................... 39,511,343 289,575
John R. Hall..................... 39,521,271 279,647
Thomas Marshall.................. 39,510,275 290,643
Michael C. Nahl.................. 39,531,361 269,557
Gilbert E. Playford.............. 39,489,872 311,046
Total shares voted............... 39,800,918
Total shares eligible............ 45,119,788
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.
52
<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: August 11, 2000 By: /s/ Corrado F. DeGasperis
______________________________
Corrado F. DeGasperis
VICE PRESIDENT AND
CHIEF INFORMATION OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
<PAGE>
UCAR INTERNATIONAL INC.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule
E-1
