________________________________________________________________________________
________________________________________________________________________________
FORM 10-Q
---------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 19971998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ...................................
to ...................................
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Commission file number: (1-13888)
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UCAR INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1385548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
---------------
39 Old Ridgebury Road 06817-0001
Danbury, Connecticut (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 207-7700
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X][ X ] No [ ]
As of March 31, 1997, 46,856,5211998, 44,956,725 shares of common stock, par value $.01 per
share, were outstanding.
________________________________________________________________________________
________________________________________________________________________________
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
-------------------------------------------------------------
Consolidated Balance Sheets as of March 31, 19971998
and December 31, 1996..........................................1997........................................ Page 3
Consolidated Statements of Operations for the Three Months
ended March 31, 19971998 and 1996..................................1997................................ Page 4
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 19971998 and 1996..................................1997................................ Page 5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Three Months ended March 31, 1997..............................1998............................ Page 6
Notes to Consolidated Financial Statements.......................Statements..................... Page 7
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------------------------------------------------------------------------------------
and Results of Operations................................Operations............................... Page 1116
-------------------------
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings........................................ Page 21
-------------------------
Item 6. Exhibits and Reports on Form 8-K......................... Page 16
------------------------------------------
SIGNATURE............................................................22
----------------------------------------
SIGNATURE.......................................................... Page 1723
INDEX TO EXHIBITS....................................................EXHIBITS.................................................. Page E-1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
March 31, December 31,
ASSETS 1998 1997 1996
---- ----
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents...........................equivalents....................... $ 7751 $ 9558
Short-term investments.......................... 34 20
Notes and accounts receivable....................... 203 185receivable................... 228 242
Inventories:
Raw materials and supplies........................ 39 39supplies................... 56 50
Work in process................................... 120 100process.............................. 140 125
Finished goods.................................... 41 37
-------goods............................... 31 31
------ 200 176------
227 206
Prepaid expenses.................................... 25 27
-------expenses................................ 35 40
------ ------
Total current assets....................... 505 483
-------assets................... 575 566
------ ------
Property, plant and equipment......................... 1,190 1,087equipment..................... 1,287 1,289
Less: accumulated depreciation........................ 694 653
-------depreciation.................... 730 724
------ ------
Net fixed assets........................... 496 434
-------assets....................... 557 565
Other assets...................................... 98 102
------
Company carried at equity............................. 20 18
Other assets.......................................... 45 53
------- ------
Total assets...............................assets........................... $ 1,0661,230 $ 988
=======1,233
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................................payable................................ $ 6361 $ 6776
Short-term debt..................................... 64 53debt................................. 80 76
Payments due within one year on long-term debt...... 6 1debt.. 53 52
Accrued income and other taxes...................... 29 37taxes.................. 30 36
Other accrued liabilities........................... 80 91
-------liabilities....................... 231 262
------ ------
Total current liabilities.................. 242 249
-------liabilities.............. 455 502
------ ------
Long-term debt........................................ 599 581debt.................................... 623 604
Other long-term obligations.......................... 143 138obligations....................... 313 313
Deferred income taxes................................. 33 16taxes............................. 46 47
Minority stockholders' equity in consolidated
entities 14 6
------- ------entities........................................ 13 13
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $.01, 10,000,000 shares
authorized, none issued...........................issued....................... - -
Common stock, par value $.01, 100,000,000 shares
authorized, 46,856,52147,359,152 shares issued at
March 31, 1997, 46,614,7241998, 47,330,570 shares issued at
December 31, 1996 ................................1997............................. - -
Additional paid-in capital.......................... 502 498
Cumulative foreign currency translation adjustment.. (120) (116)capital...................... 520 520
Accumulated other comprehensive income (loss)... (139) (130)
Retained earnings (deficit)......................... (347) (384)
-------..................... (509) (544)
------ ------
(128) (154)
Less: cost of common stock held in treasury,
2,402,427 shares.............................. (92) (92)
------ ------
Total stockholders' equity (deficit)....... 35 (2)
-------... (220) (246)
------ ------
Total liabilities and stockholders'
equity (deficit).. ................................................... $ 1,0661,230 $ 988
=======1,233
====== ======
See accompanying Notes to Consolidated Financial Statements.
3
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
Three Months
Ended March 31,
---------------
1998 1997 1996
---- ----
Net sales ...................................................sales................................................... $ 244 $ 238
$ 243
Cost of sales ............................................... 150sales............................................... 151 150
------ ------
Gross profit ................................................profit......................................... 93 88 93
Research and development ....................................development.................................... 2 2
Selling, administrative and other expenses ..................expenses.................. 26 23 22
Other (income) expense (net)................................ 14 1
------ ------
Operating profit .....................................profit..................................... 61 62
68
Interest expense ............................................expense............................................ 16 15 16
------ ------
Income before provision for income taxes .............taxes............. 45 47 52
Provision for income taxes ..................................taxes.................................. 10 12 19
------ ------
Income of consolidated entities ......................entities...................... 35 3335
Less: minority stockholders' share of income ................income................ - -
Plus: UCAR share of net income from company
carried at equity ......................................... 2equity......................................... - 2
------ ------
Income before cumulative effect of
change in accounting principle .................... 37Net income........................................... $ 35
Cumulative effect on prior years of change in accounting
for inventories ........................................... - 7
------ ------
Net income ........................................... $ 37
$ 42
====== ======
PRIMARY NET INCOMEBASIC EARNINGS PER COMMON SHARE:
Income before cumulative effect of change in
accounting principle .................................... $ 0.76 $ 0.73
Cumulative effect on prior years of change in
accounting for inventories .............................. - 0.15
------- -------
PrimaryBasic net income per share ........................share............................. $ 0.760.77 $ 0.88
====== ======0.79
Weighted average common shares outstanding
(in thousands) ............................................................................. 44,940 46,736
====== ======
DILUTED EARNINGS PER COMMON SHARE:
Diluted net income per share........................... $ 0.74 $ 0.76
Weighted average common shares outstanding
(in thousands)........................... 46,670 48,788 48,191
====== ======
See accompanying Notes to Consolidated Financial Statements.
4
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase in Cash and Cash Equivalents
(Dollars in millions)
(Unaudited)
Three Months
Ended March 31,
---------------
1998 1997 1996
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ................................................. $ 3735 $ 42
Cumulative effect on prior years of change in
accounting for inventories .............................. - (7)37
Non-cash charges to net income:
Depreciation ............................................and amortization............................. 14 11 10
Deferred income taxes ...................................taxes..................................... 1 5 11
Other non-cash charges ..................................charges.................................... 7 1
3
Working capital * ..........................................capital*............................................ (65) (49) (45)
Long-term assets and liabilities ...........................liabilities............................ 3 (6)3
---- ----
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ... 8ACTIVITIES..... (5) 8
---- ----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ....................................... (11)expenditures........................................ (13) (11)
Purchase of subsidiaries, ...................................net of cash acquired.............. - (55)
(2)Purchases of short-term investments......................... (19) -
Maturity of short-term investments.......................... 4 -
Redemption/sale of assets ..................................assets................................... - 4 1
---- ----
NET CASH USED IN(USED IN) INVESTING ACTIVITIES .................ACTIVITIES................. (28) (62) (12)
---- ----
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt ............................................ 11 (2)borrowings.................................. 19 26
Short-term debt reductions.................................. (14) (15)
Long-term debt borrowings ..................................borrowings................................... 45 49 -
Long-term debt reductions ..................................reductions................................... (24) (26) -
Sale of common stock .......................................stock........................................ - 3
Financing costs............................................. - Financing costs ............................................ (2) -
Tax benefit arising from exercise of employee stock options 1- 1
---- ----
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ...ACTIVITIES............... 26 36 (1)
---- ----
Net decrease(decrease) in cash and cash equivalents ...................equivalents................... (7) (18) (5)
Cash and cash equivalents at beginning of period ............period.............. 58 95 53
---- ----
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................PERIOD.................... $ 7751 $ 4877
==== ====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the periods for:
Interest expense .........................................expense.......................................... $ 2120 $ 21
Income taxes .............................................taxes.............................................. 13 12 4
*Net change in working capital by component (excluding
cash and cash equivalents, short-term investments,
deferred income taxes and short-term debt)debt, and net
of effects of purchases of subsidiaries):
(Increase) decrease in current assets:
Notes and accounts receivable:
SaleImpact of receivables ................................accelerated collection from the sale of
receivables......................................... $ 5(1) $ 5
Other changes ......................................changes......................................... 7 -
(21)
Inventories ............................................Inventories.............................................. (25) (5)
(15)
Prepaid expenses and other current assets ..............expenses......................................... 1 (4) 6
Decrease in payables and accruals .........................accruals........................... (47) (45) (20)
---- ----
WORKING CAPITAL ....................................CAPITAL......................................... $ (49)(65) $ (45)(49)
==== ====
See accompanying Notes to Consolidated Financial Statements.
5
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in millions)
(Unaudited)
Cumulative
ForeignAccumulated
Other
Additional CurrencyComprehensive Retained Total
Common Paid-in TranslationIncome Earnings Treasury Stockholders'
Stock Capital Adjustment(Loss) (Deficit) Stock Equity (Deficit)
----- ------- ---------------- --------- ----- ----------------
BALANCE AT DECEMBER 31, 1996...............1997.............. $ - $ 498520 $ (116)(130) $ (384)(544) $ (2)
Exercise of employee stock options......... - 3 - - 3
Tax benefit arising from exercise
of employee stock options............... - 1 - - 1
Translation adjustments.................... - - (4) - (4)(92) $ (246)
Net income.................................income................................ - - - 37 37
------ ------ ------ ------ ------35 - 35
Other comprehensive income (loss):
Foreign currency translation adjustment. - - (9) - - (9)
- - - -
Comprehensive income...................... - - - - - 26
---- ---- ----- ----- ---- -----
BALANCE AT MARCH 31, 1997..................1998................. $ - $ 502520 $ (120)(139) $ (347)(509) $ 35
====== ====== ====== ====== ======(92) $ (220)
==== ==== ===== ===== ==== =====
See accompanying Notes to Consolidated Financial Statements.
6
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
(1) INTERIM FINANCIAL PRESENTATION
The interim Consolidated Financial Statements are unaudited; however, in
the opinion of management, they have been prepared in accordance with
Rule 10-01 of Regulation S-X adopted by the Securities and Exchange
Commission ("Commission"(the "Commission") and reflect all adjustments (all of which
are of a normal, recurring nature) which are necessary for a fair
statementpresentation of the financial condition,position, results of operations and cash flows and changes
in stockholders' equity (deficit)
for the periods presented. Results of operations for the three months
ended March 31, 19971998 are not necessarily indicative of the results of
operations that may be expected for the entire year ending December 31,
1997.1998.
As used in these Notes, references to "UCAR" mean UCAR International
Inc., to "Global" mean UCAR Global Enterprises Inc., a direct, wholly-ownedwholly
owned subsidiary of UCAR, and to the "Company" mean UCAR and its
subsidiaries (including Global), collectively. Separate financial
statements of Global are not presented because they would not be material
to holders of senior subordinated notes.
Foreign Currency Translation
Effective January 1, 1997, because of significant increases in the rate
of inflation in Mexico, the Company changed its functional currency in
Mexico to the U.S. dollar. Accordingly, translation gains and losses are
included in the Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997, respectively.
Effective January 1, 1998, Brazil is no longer considered to be a highly
inflationary economy. Accordingly, unrealized gains and losses resulting
from translating assets and liabilities of the Brazilian operations into
U.S. dollars are accumulated in an equity account in the balance sheet
until such time as the Brazilian operations are sold or substantially or
completed liquidated.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company'sCompany has adopted SFAS 130 in the three
months ended March 31, 1998 and earlier periods have been restated to
conform with SFAS 130. Comprehensive income of the Company consists of
net income and foreign currency translation adjustments. Comprehensive
income for the three months ended March 31, 1998 and 1997 was $26 million
and $33 million, respectively. The Company does not provide for U.S.
income taxes on foreign currency translation adjustments since it does
not provide for such taxes on undistributed earnings of foreign
subsidiaries.
7
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
Acquisitions
On November 10, 1996, the Company purchased 90% of the equity of UCAR
Grafit OAO ("UCAR Grafit"), which operated a graphite electrode business
in Vyazma, Russia, through a tender offer to its major shareholders,
which included its directors and employees. The aggregate investment was
$50 million. Thereafter, the Company increased its ownership to 96% (at
December 31, 1997) of such equity for an additional investment of $7
million.
On January 2, 1997, the Company acquired 70% of the outstanding shares of
Carbone Savoie, a wholly owned subsidiary of Pechiney S.A., for a
purchase price of $33 million. Carbone Savoie is the leading manufacturer
of carbon cathode blocks, which are consumed in the production of
aluminum.
On February 1, 1997, the Company, through its newly formed 70%-owned
subsidiary, UCAR Elektroden GmbH ("UCAR Elektroden"), purchased the
graphite electrode business of Elektrokohle Lichtenberg AG ("EKL") in
Berlin, Germany. The 30% minority interest in UCAR Elektroden is held by
a private German company. UCAR Elektroden and UCAR Grafit work in tandem,
with UCAR Elektroden manufacturing newly formed green electrodes and UCAR
Grafit baking, pitch impregnating, rebaking and graphitizing those
electrodes. The aggregate purchase price paid by UCAR Electroden for EKL
was $15 million.
On April 22, 1997, the Company purchased the shares of its then 50%-owned
joint venture affiliate, EMSA (Pty.)(Pty) Ltd. ("EMSA"), held by the Company's
joint venture partner. EMSA operates a 50%-owned company, is carried ongraphite electrode manufacturing
facility and sales office in South Africa. The purchase price was $75
million.
These acquisitions were accounted for as purchases and, accordingly, the
equity basispurchase prices have been allocated to the assets purchased and
its proportional shareliabilities assumed based upon the fair values at the dates of purchase.
The Company recorded $20 million and $6 million of goodwill in connection
with the net incomeacquisitions of EMSA is reported underand UCAR Grafit, respectively. The
Consolidated Financial Statements have not been restated to reflect the
caption "UCAR shareincreased ownership of net income from company carriedEMSA at equity". At
March 31, 1997, retained earnings (deficit) included $41 million
representing UCAR's shareany date or for any period prior to the
date of the undistributed earnings (prior to foreign
currency translation adjustment) of EMSA.purchase.
(2) UCAR GLOBAL ENTERPRISES INC.
UCAR has no material assets, liabilities or operations other than those
that result from its ownership of 100% of the outstanding common stock of
Global.
The following is a summary of the consolidated assets and liabilities of
Global and its subsidiaries and their consolidated results of operations:
March 31, December 31,
1997 1996
---- ----
(Dollars in millions)
Assets:
Current assets.......................... $ 505 $ 483
Non-current assets...................... 561 505
------ ------
Total assets......................... $ 1,066 $ 988
====== ======
Liabilities:
Current liabilities...................... $ 242 $ 249
Non-current liabilities.................. 775 735
------ ------
Total liabilities.................... $ 1,017 $ 984
====== ======
Minority stockholders' equity in
consolidated entities.................. $ 14 $ 6
====== ======
7
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
Three Months
Ended March 31,
---------------
1997 1996
---- ----
(Dollars in millions)
Net sales..................................... $ 238 $ 243
Gross profit.................................. 88 93
Income before cumulative effect of
change in accounting principles........... 37 35
Net income .................................. 37 42
(3) CHANGE IN ACCOUNTING FOR INVENTORIES
Effective January 1, 1996, the Company changed its method of determining
LIFO inventories. The new methodology provides specifically identified
parameters for defining new items within the LIFO pool which the Company
believes improves the accuracy of costing those items.
The Company recorded income of $7 million (after related income taxes of
$4 million) as the cumulative effect on prior years of this change in
accounting for inventories. The Company believes this change will not
materially impact the Company's ongoing results of operations.
(4) ACQUISITION OF SUBSIDIARIES
On January 2, 1997, the Company acquired 70% of the outstanding shares of
Carbone Savoie S.A.S. ("Carbone Savoie"), a wholly-owned subsidiary of a
competitor, for a purchase price of $33 million. Carbone Savoie is the
leading worldwide manufacturer of carbon cathodes which are consumed in
the production of aluminum.
On February 1, 1997, the Company, through a newly-formed 70%-owned
subsidiary, UCAR Elektroden GmbH ("UCAR Elektroden"), purchased the
graphite electrode business of Elektrokohle Lichtenberg AG ("EKL") in
Berlin, Germany. The 30% minority interest in UCAR Elektroden is held by
a private German company. The aggregate purchase price paid by UCAR
Elektroden for the EKL assets was $15 million, consisting of $3 million
for equipment and $12 million for working capital.
The acquisitions were accounted for as purchases. Accordingly, the
purchase price has been allocated to the assets purchased and the
liabilities assumed based upon the fair values at the date of
acquisition.
8
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(Unaudited)
(5)(UNAUDITED)
March 31, December 31,
1998 1997
---- ----
(Dollars in millions)
Assets:
Current assets...................... $ 575 $ 566
Non-current assets.................. 655 667
------ ------
Total assets.................... $ 1,230 $ 1,233
====== ======
Liabilities:
Current liabilities................. $ 455 $ 502
Non-current liabilities............. 982 964
------ ------
Total liabilities............... $ 1,437 $ 1,466
====== ======
Minority stockholders' equity in
consolidated entities.................. $ 13 $ 13
====== ======
Three Months
Ended March 31,
1998 1997
---- ----
(Dollars in millions)
Net sales................................ $ 244 $ 238
Gross profit............................. $ 93 $ 88
Net income .............................. $ 35 $ 37
(3) AMENDMENTS TO CREDIT FACILITIES
On March 19, 1997, theThe Company's senior secured bank credit facilities (the "Senior Bank
Facilities") were amendedand the indenture (the "Subordinated Note Indenture")
relating to reduce the interest rates
on amounts outstanding underCompany's senior subordinated notes (the "Subordinated
Notes") contain a number of significant financial and restrictive
covenants and other provisions which have been impacted as a result of
the charge of $340 million ($310 million after tax) against results of
operations for 1997 for potential liabilities and expenses in connection
with antitrust investigations and related lawsuits and claims. In April
1998, the Company obtained a limited waiver of certain covenants of the
Senior Bank Facilities to increaseand, in connection therewith, borrowed $35 million
under the
amount available under its revolving credit facility to $250 million from
$100 million and to change the covenants to allow more flexibility in
uses of free cash flow for acquisitions, capital expenditures and stock
repurchases. The rates applicable to the Senior Bank Facilities were
reduced from an adjusted LIBOR plus a margin ranging from 1.00% - 2.00%
to an adjusted LIBOR plus a margin ranging from 0.75% - 1.50% .
(6) STOCK REPURCHASE PROGRAM
On February 10, 1997, UCAR's Board of Directors authorized a program to
repurchase up to $100 million of common stock at prevailing prices from
time to time in the open market or otherwise depending on market
conditions and other factors, without any established minimum or maximum
time period or number of shares.
(7) OTHER (INCOME) EXPENSE - NET
The following is an analysis of other (income) expense (net):
Three Months
Ended March 31,
---------------
1997 1996
---- ----
(Dollars in millions)
Foreign currency adjustments.... $ 2 $April 13, 1998. From January 1,
Interest income................. (2) (2)
Other........................... 1 2
----- -----
$ 1 $ 1
===== =====
(8) INCOME TAXES
In the three months ended March 31, 1997 and 1996,1998 through April 12, 1998, the Company paid $12increased its net borrowings
under the revolving credit facility by $26 million. As of April 13, 1998,
after giving effect to outstanding letters of credit and the $35 million
and $4borrowed under the revolving credit facility on that date, $76 million
respectively,was available for borrowing under the revolving credit facility. In order
to various taxing authorities and
recognized $12 million and $19 million, respectively, in tax expense. Inmake additional borrowings thereunder, the three months ended March 31, 1997, income tax expense was lower than
the amount computed by applying the United States Federal income tax rate
primarily dueCompany would need to,
tax credits in the United States from research and
development expenses and tax benefits recognized in Italy and Spain
associated with capital expenditures and fixed asset revaluations,
respectively.among other things, make certain representations,
9
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NotesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
including representations as to Consolidated Financial Statements (Cont.the absence of material adverse changes
in the business, financial condition or results of operations of the
Company and the absence of material legal proceedings. In light of the
antitrust investigations and related lawsuits and claims, no assurance
can be given that the Company will be able to make those representations
or make additional borrowings thereunder. In addition, even if the
Company is able to make additional borrowings thereunder, such ability
may be limited by certain covenants contained in the Subordinated Note
Indenture. Under the Subordinated Note Indenture, subject to certain
exceptions, the Company may not incur additional indebtedness if its
consolidated coverage ratio (as defined) is less than certain specified
ratios. As a result of the $340 million charge, the Company's
consolidated coverage ratio (as defined) is less than those specified
ratios. As a result, under the Subordinated Note Indenture, the Company
cannot incur additional indebtedness except under the exceptions referred
to above. The waiver does not restrict the lenders under the Senior Bank
Facilities from declaring that there has been a breach, after giving
effect to the $340 million charge, of material adverse change
representations made in the past.
Any or a combination of these and other circumstances described in UCAR's
Annual Report on Form 10-K for the year ended December 31, 1997 (the
"Annual Report") (Unaudited)
(9) EARNINGS PER SHARE
Primary net income per sharecould result in the occurrence of an event of default
under the Senior Bank Facilities. The occurrence of an event of default,
which is computednot waived, would permit the lenders under the Senior Bank
Facilities to, among other things, accelerate all indebtedness
outstanding thereunder by dividing net income by the
weighted average number of common shares outstanding during the period.
The weighted average number of common shares outstanding includes common
stock equivalents calculated in accordance with the "treasury stock
method," wherein the net proceeds from the exercise thereof are assumeddeclaring all amounts borrowed thereunder to be
usedimmediately due and payable, together with accrued and unpaid interest.
In addition, the lenders could foreclose upon collateral pledged to
repurchasesecure repayment of such indebtedness and the commitments of the lenders
to make further extensions of credit under the Senior Bank Facilities
would be terminated. Under the cross-acceleration provisions of the
Subordinated Note Indenture, the holders of Subordinated Notes would
thereupon likewise be able to accelerate all indebtedness outstanding
under the Subordinated Notes.
(4) STOCK REPURCHASE PROGRAM
In 1997, UCAR repurchased 2,402,427 shares of common stock at the
average market price for the period. Fully diluted earnings per share is
not significantly different than primary net income per share and,
therefore, has not been presented.
(10) SUBSEQUENT EVENTS
On April 8, 1997, 6,411,227 sharesan
aggregate of $92 million of common stock of UCARunder its stock repurchase
program. There were sold by
Blackstone Capital Partners II Merchant Banking Fund L.P. and its
affiliates (collectively, "Blackstone") in a secondary public offering
(the "1997 Secondary Offering"). Concurrently therewith, UCAR repurchased
1,300,000no repurchases of shares of common stock in the 1998
first quarter.
(5) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of UCAR from Blackstone (the
"Blackstone Share Repurchase") for $48 million, which constituted part of
its previously announced stock repurchase program. AfterSFAS 128, adopted in 1997, using the 1997
Secondary Offering and the Blackstone Share Repurchase, Blackstone owned
approximately 3% of the outstanding shares of common stock. UCAR did not
sell any shares in, or receive any proceeds from, the 1997 Secondary
Offering.
On April 22, 1997, the Company purchased the shares of EMSA held by
Samancor Limited, the Company's joint venture partner in this 50%-owned
affiliate. The purchase price was approximately $75 million, plus
expenses. The acquisition will be accounted for as a purchase.following data:
10
PART I (CONT.)
UCAR INTERNATIONAL INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OFSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL CONDITIONSTATEMENTS (CONT.)
(UNAUDITED)
Three Months
Ended March 31,
---------------
1998 1997
---- ----
Weighted average common shares outstanding
for basic calculation........................ 44,939,545 46,736,178
Add: Effect of stock options.................. 1,730,726 2,051,582
---------- ----------
Weighted average common shares outstanding,
adjusted for diluted calculation............ 46,670,271 48,787,760
========== ==========
The calculation of weighted average common shares outstanding for the
diluted calculation excludes the consideration of stock options for
774,240 and 762,117 shares in each of the three months ended March 31,
1998 and 1997, respectively, because the exercise of these options would
not have been dilutive for either period.
(6) CONTINGENCIES
Antitrust Proceedings
On June 5, 1997, the Company was served with subpoenas issued by the
United States District Court for the Eastern District of Pennsylvania
(the "District Court") to produce documents to a grand jury convened by
attorneys for the Antitrust Division of the United States Department of
Justice (the "DOJ") and a related search warrant in connection with an
investigation as to whether there has been any violation of federal
antitrust laws by producers of graphite electrodes. Concurrently,
representatives of Directorate General IV of the European Union, the
antitrust enforcement authorities of the European Union (the "EU
authorities"), visited offices of the Company's French subsidiary for
purposes of gathering information to determine whether there has been any
violation of Article 85-1 of the Treaty of Rome, the antitrust law of the
European Union. In addition, on June 5, 1997, one of the Company's
competitors in the graphite electrode industry, The Carbide/Graphite
Group, Inc. ("C/G"), announced that the DOJ had granted it the
opportunity to participate in the DOJ's Corporate Leniency Program and
that it was cooperating with the government. Subsequently, the Company
was served with subpoenas in the United States to produce documents
relating to, among other things, its carbon electrode and bulk graphite
businesses. In December 1997, UCAR's Board of Directors appointed a
special committee of outside directors, consisting of John R. Hall and R.
Eugene Cartledge, to exercise the power and authority of UCAR's Board of
Directors in connection with antitrust investigations and related
lawsuits and claims. On February 23, 1998, the DOJ announced that it had
charged Showa Denko Carbon, Inc. ("SDC"), a U.S. subsidiary of Showa
Financing K.K., a Japanese firm, and unnamed co-conspirators with
participating from 1993 until January 1997 in an international conspiracy
involving meetings and conversations in the Far East, Europe and the
United States resulting in agreements to fix prices and allocate market
shares worldwide, to restrict co-conspirators' capacity
11
PART I (CONT.)
UCAR INTERNATIONAL INC. AND RESULTS
OF OPERATIONSSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
and to restrict non-conspiring producers' access to manufacturing
technology for graphite electrodes. The DOJ further announced that SDC
has agreed to plead guilty, pay a fine of $29 million and cooperate in
its investigation and that other cases were likely to be filed.
On April 24, 1998, pursuant to an agreement with the DOJ, UCAR pled
guilty in the District Court to a one-count charge of violating federal
antitrust laws in connection with the sale of graphite electrodes and was
sentenced to pay a non-interest-bearing fine in the aggregate amount of
$110 million, payable in six annual installments. The Company will be
required to make annual payments of $20 million, $15 million, $15
million, $18 million, $21 million and $21 million, respectively,
commencing July 23, 1998. Under the agreement approved by the District
Court, the Company will not be subject to prosecution by the DOJ with
respect to any other antitrust violations occurring prior to April 24,
1998. The fine is within the amounts used by the Company for purposes of
determining the $340 million charge described below. The plea makes it
more difficult to defend against civil antitrust lawsuits.
The Company has become aware that the Canadian Competition Bureau has
commenced a criminal investigation as to whether there has been any
violation of the Canadian Competition Act (the "Canadian Act") by
producers of graphite electrodes. Under Section 45 of the Canadian Act,
the maximum fine is Can$10 million. It is possible that Section 46 of the
Canadian Act may be implicated in the investigation. Under Section 46,
the amount of the fine is discretionary, and there is no maximum. The
Company, through its counsel, is cooperating with the DOJ, the EU
authorities and the Canadian Competition Bureau in their continuing
investigations. It is possible that antitrust investigations could be
initiated by authorities in other jurisdictions.
On June 17, 1997, UCAR was served with a complaint commencing a putative
class action lawsuit in the United States District Court for the Western
District of Pennsylvania. Subsequently, the Company was served with four
additional complaints commencing similar lawsuits in the District Court.
UCAR, SGL Carbon Corporation ("SGL Carbon"), a U.S. subsidiary of SGL
Carbon AG ("SGL"), a German corporation, and C/G, are named as defendants
in each complaint. SGL is also named as a defendant in each of the four
subsequently served complaints. In each complaint, the plaintiffs alleged
that the defendants violated federal antitrust laws. Each complaint
sought, among other things, an award of treble damages resulting from
such alleged violations. On August 5, 1997, the four complaints filed in
the District Court were consolidated into a single complaint in the
District Court entitled IN RE: GRAPHITE ELECTRODES ANTITRUST LITIGATION.
In the consolidated litigation, the proposed class consists of all
persons who purchased graphite electrodes in the United States directly
from the defendants during the period from January 1, 1992 through August
15, 1997. On August 21, 1997, the first served complaint was withdrawn
without prejudice to refile. UCAR filed a motion to dismiss the
consolidated complaint, which was denied in November 1997 with leave to
renew such motion after discovery is completed. In December 1997, UCAR
filed an answer to the complaint denying liability to the plaintiffs.
Discovery and depositions relating to class certification have begun. The
District Court, however, has ordered a stay of
12
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
non-class depositions and certain other discovery until July 1998.
Accordingly, the consolidated lawsuit is still in its early stages. UCAR
intends to vigorously defend against the consolidated lawsuit. UCAR may
at any time, however, settle the lawsuit and any related possible
unasserted claims. UCAR has had discussions in this regard with
plaintiffs' counsel, with those members of the proposed class who have
indicated that they intend to opt out of any class which is certified, as
well as with other potential plaintiffs.
On each of March 30, 1998 and April 3, 1998, UCAR was served with
complaints commencing civil lawsuits in the District Court. UCAR, C/G,
SGL Carbon, SGL and SDC are named as defendants in each complaint.
Additionally, Showa Denko K.K., UCAR Global Enterprises Inc., UCAR Carbon
Company Inc., Union Carbide and Mitsubishi are named as defendants in the
complaint served on April 13, 1998. On April 17, 1998, Republic
Engineered Steels, Inc. filed a complaint commencing a civil lawsuit in
the United States District Court for the Northern District of Ohio. UCAR,
SDC, Showa Denko K.K., C/G, SGL Carbon and SGL are named as defendants.
In each complaint, the plaintiffs allege that the defendants violated
federal antitrust laws. Additionally, in the complaint served on April 3,
1998, the plaintiffs allege that Union Carbide and Mitsubishi violated
applicable state fraudulent transfer laws. Each complaint seeks, among
other things, an award of treble damages resulting from such alleged
antitrust violations. The complaint served on April 3, 1998 also seeks to
have payments made by UCAR to Union Carbide and Mitsubishi in connection
with the recapitalization declared to be fraudulent conveyances and
returned to UCAR for purposes of enabling UCAR to satisfy any judgments
resulting from such alleged antitrust violations. The Company has not
responded to any of these lawsuits and intends to vigorously defend
against these lawsuits. These lawsuits are in their earliest stages. The
Company may at any time, however, settle such lawsuits and any related
possible unasserted claims. The Company has had discussions in this
regard with certain of the plaintiffs and their counsel.
The Company anticipates that additional antitrust lawsuits seeking, among
other things, to recover damages, could be commenced against the Company
in the United States and in other jurisdictions.
Shareholder Derivative Lawsuit
On March 4, 1998, UCAR was served with a complaint commencing a
shareholder derivative lawsuit in the Connecticut Superior Court
(Judicial District of Danbury). Certain current and former directors and
officers are named as defendants. UCAR is named as a nominal defendant.
The complaint alleges that the defendants breached their fiduciary duties
in connection with alleged non-compliance by the Company and its
employees with antitrust laws. The complaint also alleges that certain of
the defendants sold common stock while in possession of materially
adverse non-public information relating to such non-compliance with
antitrust laws. The complaint seeks recovery for UCAR of damages to UCAR
resulting from such alleged breaches
13
PART I (CONT.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
and sales. The complaint does not contain specific allegations of the
factual basis underlying such allegations and appears to be based on the
existence of the previously announced grand jury investigation, the
related consolidated civil lawsuit and the Company's public announcements
and filings with the Commission. This lawsuit is in its earliest stages.
UCAR has not yet responded to the complaint. No evaluation of potential
liability has yet been made with respect to this lawsuit.
Securities Class Action Lawsuit
On each of April 1, 1998 and April 16, 1998, a complaint commencing a
securities class action lawsuit was filed in the United States District
Court for the District of Connecticut. UCAR and certain current and
former officers and directors are named as defendants. The proposed class
consists of all persons who purchased UCAR common stock during the period
from August 15, 1995 through March 13, 1998, in the case of the first
commenced lawsuit, or March 31, 1998, in the case of the second commenced
lawsuit. Each complaint alleges that during such period the defendants
violated securities laws in connection with purchases and sales of common
stock by failing to disclose alleged violations of antitrust laws. The
complaint seeks, among other things, to recover damages resulting from
such alleged violations. UCAR has not yet responded to either complaint.
These lawsuits are in their earliest stages. No evaluation of potential
liability has yet been made with respect to these lawsuits.
Other
The Company is involved in various other legal proceedings incidental to
the conduct of its business. While it is not possible to determine the
ultimate disposition of each of these other proceedings, the Company
believes that the ultimate disposition of such other proceedings will not
have a material adverse effect on the Company.
Earnings Charge
The Company recorded a charge of $340 million ($310 million after tax)
against results of operations for 1997 for potential liabilities and
expenses in connection with antitrust investigations and related lawsuits
and claims. Actual liabilities and expenses could be materially higher or
lower than such amount. In addition, due to the fact such lawsuits are in
their earliest stages and no evaluation of liability can yet be made, no
amounts have been accrued with respect to the shareholder derivative and
securities class action lawsuits.
14
PART I (Cont.)
UCAR INTERNATIONAL INC.
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1
Unless otherwise indicated or the context otherwise requires, all references to
"UCAR" mean UCAR International Inc. and to the "Company" mean UCAR, its wholly
and majority owned subsidiaries (including UCAR Global Enterprises Inc.
("Global") and EMSA (Pty.) Ltd. ("EMSA")) and its and their predecessors
(insofar as a predecessor's activities related to the carbon and graphite
products business), collectively, except that such references do not include
UCAR Grafit OAO ("UCAR Grafit"), Carbone Savoie S.A.S. ("Carbone Savoie") or
UCAR Elektroden GmbH ("UCAR Elektroden" and, together with UCAR Grafit, Carbone
Savoie and EMSA, the "Acquired Companies") with respect to time periods prior to
their respective acquisitions. Unless otherwise indicated, all financial
information refers to that of the Company (including the Acquired Companies
(other than EMSA) since their respective acquisitions and EMSA since the
acquisition in April 1997 of the 50% of its equity not previously owned by the
Company) on a consolidated basis (using the equity method for financial
information only for EMSA prior to the acquisition of such equity).
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended.amended (the "Exchange Act"). These statements include statements about such
matters as electric arc furnace ("EAF") steel production, prices, sales and
demand for graphite electrodes and other products, future operational and
financial performance of pre-existing and acquired businesses, legal fees and
related costs, consulting fees and related projects, costs, margins and earnings
growth. Except as otherwise required to be disclosed in periodic reports
required to be filed by companies registered under the Exchange Act by the rules
of the Securities and Exchange Commission (the "Commission"), the Company has no
duty to update such statements. Actual results,future events and circumstances
(including future performance, results and trends) could differ materially from
those set forth in such statements due to various factors. Such factors include
the possibility that announced additions to electric arc furnaceEAF steel production capacity may
not occur or that increased electric arc furnaceEAF steel production may not occur or result in increased
demand or higher prices for graphite electrodes, the occurrence of unanticipated events
or circumstances relating to investigations by antitrust authorities or related
antitrust class action, shareholder derivative or securities class action
lawsuits, the assertion of other claims relating to such investigations or
lawsuits or the subject matter thereof, the occurrence of unanticipated events
or circumstances relating to acquired manufacturing capacity may not be fully utilized, technological advances
expected bybusinesses, the Company (as defined herein) may not be achieved, changingoccurrence of
unanticipated events or circumstances relating to global integration and other
projects, changes in currency exchange rates, changes in economic and
competitive conditions, other technological developments, and other risks and
uncertainties, including those set forth herein and in UCAR's Annual Report on
Form 10-K for the year ended December 31, 1997 (the "Annual Report").
This Quarterly Report on Form 10-Q contains descriptions of developments in
various matters described in the Company's other
filingsAnnual Report. These matters include antitrust
investigations and related lawsuits and claims, a charge of $340 million against
results of operations for 1997 for potential liabilities and expenses associated
therewith, shareholder derivative and securities class action lawsuits, a plea
agreement with the SecuritiesAntitrust Division of the U.S. Department of Justice (the
"DOJ"), and Exchange Commission.
As used herein, references to "UCAR" mean UCAR International Inc., to "Global"
mean UCAR Global Enterprises Inc., a direct, wholly-owned subsidiarywaiver of UCAR,breaches, if any, of certain covenants under and
amendments to the "Company" meanCompany's senior bank credit facilities (the "Senior Bank
Facilities") and future financing requirements and cash management plans as well
as actual and potential impacts of such matters. Reference is made to the Annual
Report for a description of these matters and impacts and certain risks and
uncertainties associated therewith. Neither the statements contained in this
Quarterly Report on Form 10-Q nor any charge taken by the Company relating to
any legal proceedings shall be deemed to constitute an admission as to any
wrongdoing or liability in connection with the subject matter of such
proceedings.
15
PART I (Cont.)
UCAR and its subsidiaries (including Global),
collectively.
All references to "Home Markets" mean North America, Western Europe, Brazil,
Mexico and South Africa and to "Free World" mean worldwide, excluding China, the
former Soviet Union, India and Eastern Europe (other than the former East
Germany).INTERNATIONAL INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In 1995, the Company consummated (i) a leveraged recapitalization as a result of
which Blackstone Capital Partners II Merchant Banking Fund L.P. and its
affiliates (collectively, "Blackstone") became the owners of approximately 69%
of the then outstanding shares of common stock (the
"Recapitalization"), (ii) an initial public offering of common stock (the "Initial
Offering"), (iii) and a redemption (the "Redemption") of $175 million principal amounta portion of the senior
subordinated notes (the "Subordinated Notes") at a redemption price equal to 110% of the aggregate
principal amount thereof, plus accrued interest of approximately $4 million
thereon (the "Redemption"), (iv) a refinancing of its then existing credit
facilities (the "Recapitalization Bank Facilities") with new credit facilities
(the "Senior Bank Facilities") at more favorable interest rates and with more
favorable covenants and (v) the acquisition of substantially all of the shares
of its Brazilian subsidiary owned by public shareholdersissued in Brazil for an
aggregate purchase price was $52 million, plus expenses of $3 million.
Subsequent to 1995, the Company acquired additional shares from such Brazilian
shareholders for $3 million. The acquisitions were accounted for as purchases.
In March 1996, Blackstone and certain other stockholders sold certain shares of
common stock in a secondary public offering (the "1996 Secondary Offering").
After the 1996 Secondary Offering, Blackstone owned approximately 20% of the
then outstanding shares of common stock. UCAR did not sell any shares in, or
received any proceeds from, the 1996 Secondary Offering. Approximately 193,000
of the shares sold consisted of shares issued upon the exercise of employee
stock options concurrentlyconnection with the
1996 Secondary Offering, and UCAR received
proceeds of approximately $1.5 million from the exercise of such options.
11
Recapitalization.
In November 1996, the Company acquired 90% of the equity of UCAR Grafit OAO
("UCAR Grafit"). The aggregate investment was $50 million.in
Vyazma, Russia. Thereafter, the Company increased its ownership to 96% of such
equity. In the three months
ended March 31, 1997, the Company acquired 70% of the equity of Carbone Savoie S.A.S. ("Carbone Savoie") for a purchase price of $33 millionin
Notre Dame and Venniseux, France and, through a newly-formednewly formed 70%-owned owned
subsidiary, UCAR Elektroden, GmbH ("UCAR Elektroden"), acquired the graphite electrode business of
Elektrokohle Lichtenberg AG ("EKL") in Berlin, Germany, for an aggregate purchase price of $15 million. In addition,
theGermany. The Company increased its investment in UCAR Grafit by $6 million. Subsequent to
March 31, 1997, the Companyalso
acquired the outstanding shares of EMSA (Pty.) Ltd.,
its 50%-owned affiliate ("EMSA"),in South Africa, held by the Company's
former 50% joint venture partner in South Africa. TheseEMSA. The acquisitions which were financed from existing cash
balances, cash flow from operations, short-term borrowingsof UCAR Grafit,
Carbone Savoie, EMSA and borrowings under
its revolving credit facility,the graphite electrode business of EKL (collectively,
the "Acquired Companies") were accounted for as purchases. On February 10, 1997, UCAR's Board of Directors authorized a programThe Company has no
plans to repurchase up to $100 million of common stock at prevailing prices from time to
timemake any further material acquisitions in the opennear term.
The Company is a global company and serves every geographic market worldwide.
Accordingly, it is always impacted in varying degrees, both positively and
negatively, as country or otherwise depending onregional market conditions fluctuate. In 1997, Western
Europe began to recover from the economic downturn that commenced in 1996. In
addition, an economic downturn in the Asia Pacific region began in 1997 which is
still continuing.
The Company recorded a charge of $340 million ($310 million after tax) against
results of operations for 1997 for potential liabilities and expenses in
connection with antitrust investigations and related civil class action and
other factors, withoutlawsuits and claims. Actual liabilities and expenses could be materially
higher or lower than such amount. In April 1998, pursuant to an agreement with
the DOJ, UCAR pled guilty to a one-count charge of violating antitrust laws in
the sale of graphite electrodes and was sentenced to pay a non-interest-bearing
fine in the aggregate amount of $110 million, payable in six annual installments
of $20 million, $15 million, $15 million, $18 million, $21 million and $21
million, respectively, commencing July 23, 1998. Under the agreement, UCAR will
not be subject to prosecution by the DOJ with respect to any established minimum or maximum time period or number of
shares. Onother antitrust
violations occurring prior to April 8, 1997, Blackstone sold certain shares of common stock24, 1998, the date on which the agreement
received court approval. UCAR has also been named as a defendant in a
secondary public offering (the "1997 Secondary Offering"). Concurrentlyshareholder derivative lawsuit and two securities class action lawsuits, each of
which is based, in part, on the subject matter of such antitrust investigations.
Due to the fact that such lawsuits are in their earliest stages and no
evaluation of liability can yet be made, no amounts have been accrued with
the
1997 Secondary Offering,respect to shareholder derivative and securities class action lawsuits. In
addition, the Company repurchased 1,300,000 sharesobtained a limited waiver of common
stock from Blackstone for $48breaches, if any, of certain
covenants under the Senior Bank Facilities (the "Waiver"). In connection
therewith, the Company borrowed an additional $35 million which repurchase constituted part ofunder the
previously announced stock repurchase program (the "Blackstone Share
Repurchase"). After the 1997 Secondary Offering and the Blackstone Share
Repurchase, Blackstone owned approximately 3% of the outstanding shares of
common stock, which shares were retained for distribution to or for sale for the
account of Blackstone partners. UCAR did not sell any shares in, or received any
proceeds from, the 1997 Secondary Offering. UCAR financed and intends to finance
such repurchases from existing cash balances, cash flow from operations,
short-term borrowings and borrowings under its revolving
credit facility.facility and
16
PART I (Cont.)
UCAR INTERNATIONAL INC.
agreed to grant a security interest in substantially all of its assets to the
lenders under the Senior Bank Facilities.
RESULTS OF OPERATIONS
Three Months endedEnded March 31, 1997 as31,1998 As Compared toTo Three Months endedEnded March 31,
199631,1997
Net sales of $244 million in the 1998 first quarter represented a 3% increase
over net sales of $238 million in the 1997 first quarter of 1997 ("1997 First Quarter")
represent a 2% decrease from net sales of $243 million in the first quarter of
1996 ("1996 First Quarter").quarter. The decreaseincrease in net
sales was largelyprimarily attributable to the acquired graphite electrode businesses
in South Africa, Russia and Germany, which added net sales of $24 million in the
1998 first quarter as compared to $2 million in the 1997 first quarter.
Net sales of graphite electrodes increased 3% to $167 million in the 1998 first
quarter from $162 million in the 1997 first quarter. The increase in net sales
of graphite electrodes was attributable to an 11% decreaseincrease of 3,600 metric tons, or
7%, in the volume of graphite electrodes sold due to continued
softness52,600 metric tons in electric arc furnace steel productionthe 1998
first quarter from 49,000 metric tons in Western Europe,
specifically Italy, Spain and France.the 1997 first quarter. The restacquired
graphite electrode businesses had $24 million of the world generally showed
continued strength in demand fornet sales on volume of
approximately 8,600 metric tons of graphite electrodes.electrodes sold. Net sales of
graphite electrodes in the 1998 first quarter, excluding the acquired graphite
electrode businesses, declined $17 million, or 11%, from the 1997 first quarter.
Excluding the acquired graphite electrode businesses, the volume of graphite
electrodes sold decreased 12%by 9% to $162 million44,000 metric tons. The continuing economic
turmoil in the Asia Pacific region, which is affecting steelmakers in that
region as well as in Eastern Europe, resulted in a lower volume of graphite
electrodes sold to those regions. Although North America also experienced lower
volumes of graphite electrodes sold in the 1998 first quarter as compared to the
1997 first quarter, this decline was measured against higher-than-normal volume
in the 1997 First Quarter as comparedfirst quarter, mainly due to $184 millioncustomer buy-ins in advance of
announced price increases, which became effective in the 1996 First Quarter.1997 first quarter. The
lower volumes in the Asia Pacific region, Eastern Europe and North America were
partially offset by higher volume in Western Europe as this region continues its
economic recovery. The Company currently expects its volume of graphite
electrodes sold for all of 1998 to rebound to approximately year-ago levels.
The average selling price of graphite
electrodesper metric ton (in U.S. dollars and net of changes in
currency exchangesexchange rates) increased
1.2%for the Company's graphite electrodes was $3,058 in the
1998 first quarter as compared to $3,186 in the 1997 First Quarterfirst quarter. This average
selling price per metric ton of the Company's graphite electrodes was lower in
the 1998 first quarter than in the 1997 first quarter primarily as a result of
the continued strengthening of the U.S. dollar as compared to other currencies,
particularly Western European currencies, and the 1996 First Quarter.impact of the Acquired
Companies. The strengthening of the U.S. dollar resulted in lower U.S. dollar
equivalent sales of graphite electrodes of approximately $6 million which was
partially offset by price increases on graphite electrodes in certain countries
in Western Europe that added $4 million to net sales. The acquired graphite
electrode businesses currently have average selling prices below the companywide
average of the Company's pre-existing graphite electrode businesses primarily
because their product mix consists of lower grade graphite electrodes which sell
at lower prices.
17
PART I (Cont.)
UCAR INTERNATIONAL INC.
Net sales of aluminum industry products increased approximately $15remained steady at $22 million as a resultin each
of the acquisition of Carbone Savoie.1998 first quarter and the 1997 first quarter. Net sales of all other product groupscarbon
electrodes, carbon and graphite specialties and GRAFOIL(R) flexible graphite
were $55 million in the 1997 First Quarter were comparable1998 first quarter as compared to those in the 1996 First Quarter.
12
Gross profit for the 1997 First Quarter declined 5% to $88 million, or 37.0% of
net sales, from $93 million, or 38.3% of net sales, in the 1996 First Quarter.
The decline in gross profit was largely the result of the lower volume of
graphite electrodes sold as well as the dilutive effect of newly acquired
businesses, which presently have lower gross margins than the Company's other
businesses. Excluding the impact of the acquired businesses, the gross margin
for the 1997 First Quarter would have been approximately 38.6% of net sales.
Selling, administrative and other expenses was stable at $23$54 million in the
1997 First Quarterfirst quarter.
Cost of sales remained steady at $151 million in the 1998 first quarter as
compared to $22$150 million in the 1996 First Quarter.
Other (income) expense (net) was stable at $1 million of expense1997 first quarter, notwithstanding the increase
in each of the
1997 First Quarter and the 1996 First Quarter.
Operating profit in the 1997 First Quarter was $62 million (26.1% of net sales)
as compared to $68 million (28.0% of net sales) in the 1996 First Quarter. The
decrease was mainly due to the lower volume of graphite electrodes sold and the impact of the Acquired
Companies which have had, and continue to have, margins below the companywide
average of the Company's pre-existing businesses. This stability was due
primarily to the Company's ongoing efforts to improve operating efficiencies and
reduce costs of both the Acquired Companies and its pre-existing businesses as
well as an increase in capacity utilization, partially offset by increases in
the cost of raw materials.
As a result of the changes described above, the Company's gross profit margin
increased coststo 38.1% in the 1998 first quarter from 37.0% in the 1997 first
quarter. Excluding the acquired graphite electrode businesses, gross profit
margins would have been 39.7% for the 1998 first quarter.
Selling, administrative and other expenses increased to $26 million in the 1998
first quarter from $23 million in the 1997 first quarter primarily due to the
impact of the acquired graphite electrode businesses.
Other (income) expense (net) was $4 million of expense in the 1998 first quarter
as compared to $1 million of expense in the 1997 first quarter. This change was
primarily due to $2 million of consulting fees associated with projects that the
recent acquisitions.Company is undertaking to further improve operating efficiency, integrate
worldwide operations and generate earnings growth. The Company anticipates that
consulting fees will continue to be approximately $2 million through each
quarter of 1998.
Operating profit in the 1998 first quarter was $61 million, or 25.2% of net
sales, as compared to $62 million, or 26.1% of net sales, in the 1997 first
quarter. Excluding the acquired graphite electrode businesses, the operating
profit margin would have been 26.7% for the 1998 first quarter, an improvement
of 60 basis points.
Interest expense decreasedwas $16 million in the 1998 first quarter as compared to $15
million in the 1997 First Quarter from $16
million in the 1996 First Quarter.first quarter. The average outstanding total debt balance in
the 1997 First Quarter1998 first quarter was $653$747 million as compared to $669$653 million in the 1996
First Quarter,1997
first quarter, and theoutstanding total debt was $24 million higher at March 31,
1998 than at December 31, 1997. The average annual interest rate in the 1997 First Quarter1998
first quarter was 9.01%8.53% as compared to 9.63%9.01% in the 1996 First Quarter.1997 first quarter. The
provisiondecline in the average annual interest rate was primarily attributable to
decreases in interest rates resulting from the amendment of the Senior Bank
Facilities in March 1997. The Company believes that interest rates under the
Senior Bank Facilities will be higher in 1998 than they otherwise would have
been as a result of amendments thereto made in connection with the Waiver.
Income taxes were $2 million lower in the 1998 first quarter as compared to the
1997 first quarter. The effective tax rate for the 1998 first quarter was 22
percent as compared to 26 percent in the 1997 first
18
PART I (Cont.)
UCAR INTERNATIONAL INC.
quarter. The lower rate, when compared to the U.S. Federal Statutory Rate, was
primarily due to the Company's tax exemption in Brazil and certain one-time
foreign tax benefits and incentives of approximately $4 million and $3 million
in 1998 and 1997, respectively.
Primarily as a result of the changes described above, net income taxesfor the 1998
first quarter was $12$35 million, a decrease of 5% from net income of $37 million
in the 1997 First Quarter as
compared to $19 millionfirst quarter. The Acquired Companies accounted for an incremental
net loss of $691,000 in the 1996 First Quarter. In the 1997 First Quarter,
income tax expense was lower than the amount computed by applying the United
States Federal income tax rate1998 first quarter primarily due to tax creditsthe loss of $2.5
million for UCAR Grafit. The Company expects that increased revenues resulting
from new marketing efforts and ongoing cost improvements will begin to be
reflected in the United States
from research and development expenses and tax benefits recognizedpositive operating profits for UCAR Grafit in Italy and
Spain associated with capital expenditures and fixed asset revaluations,
respectively.1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds have consisted principally of invested capital,
operating cash flow from operations and debt financing from affiliates, banks and institutional
investors.financing. The Company's uses of those funds
(other than for operations) have consisted principally of debt reduction
(including the Redemption with proceeds from the Initial Offering), capital
expenditures, distributions to orstockholders (including repurchases of equity from stockholders (in connection with the
Recapitalization and the Blackstone Stock Repurchase)common
equity), acquisition of controlling interests in new companies or businesses and
acquisition of minority stockholders' shares of consolidated subsidiaries. AcquisitionsSince
the Recapitalization, acquisitions and repurchases under UCAR's stock purchaserepurchase
program have been and are expected to be financed from existing cash balances, cash flow from
operations, short-term borrowings and borrowings under itsthe Company's revolving
credit facility.
13
Debt Financing
The Company is highly leveraged. The Company's indebtedness is expected to
increase and Amendmentsits liquidity is expected to Credit Facilitiesdecrease in connection with, among
other matters, liabilities and expenses arising out of antitrust investigations
and related lawsuits and claims. At March 31, 1997,1998, the Company had total debt
of $669$756 million and a stockholders' equitydeficit of $35$220 million as compared to total
debt of $635$732 million and a stockholders' deficit of $2$246 million at December 31,
1996.1997. At March 31, 1997,1998, cash, and cash equivalents and short-term investments were
$77$85 million as compared to $95$78 million at December 31, 1996. On March 19, 1997,1997.
In April 1998, the Senior Bank Facilities were amended to
reduceCompany obtained the interest rates on amounts outstandingWaiver and, in connection therewith,
borrowed $35 million under the Senior Bank
Facilities,revolving credit facility. The Company believes
that the $35 million, together with cash flow from operations (after deducting
cash used for capital expenditures) will enable it to increasemeet its debt service,
trade and other obligations when due in the amount availableordinary course of business during
the second and third quarters of 1998, including the $20 million payment due to
the DOJ in July 1998 and other current obligations in connection with antitrust
investigations and related lawsuits and claims. There can be no assurance,
however, that such will be the case or that the Company will be able to borrow
additional funds under the revolving credit facility or otherwise if necessary
to $250 million from $100 millionmeet those or other obligations. In addition, although no assurance can be
given that such would be the case and subject to change the covenants to allow more
flexibilityrisks and uncertainties
described in uses of freethe Annual Report, the Company believes, based on its expected cash
flow
for acquisitions,19
PART I (Cont.)
UCAR INTERNATIONAL INC.
from operations and taking into account its efforts to maximize funds available
to meet its obligations and other plans and opportunities described in the
Annual Report, it will be able to restructure its capitalization and manage its
working capital expenditures and stock repurchases.cash flow to permit it to meet its other obligations as they
become due.
Inventory Levels, and Working Capital and Other Long-Term Obligations
During the 1998 first quarter, working capital increased by $56 million. Notes
and accounts receivable decreased $14 million mainly due to reduced net sales
from the 1997 fourth quarter and foreign currency translation adjustments
resulting from the continued strengthening of the U.S. dollar as compared to
other currencies. Accounts payable, accrued income taxes and other accrued
liabilities decreased by $52 million primarily as a result of decreases in tax
liabilities, accrued liabilities and accounts payable as well as foreign
currency translation adjustments. Short-term debt increased by $4 million. This
increase was the result of increased short-term borrowings by certain foreign
subsidiaries to meet local cash needs. Inventory levels increased by $21
million. Inventory levels at any specified date are affected by increases in
inventories of raw materials to meet anticipated increases in sales of finished
products, customer buy-ins and other factors affecting net sales from quarter to
quarter. Inventory levels increased to $200Cash, cash equivalents and short-term investments were $7 million
higher at March 31, 1997 from $176 million1998 than at December 31, 1996. This increase consisted mainly of inventory of recently
acquired businesses.
The Company's working capital increased to $263 million at March 31, 1997 from
$234 million at December 31, 1996, primarily as a result of the addition of $19
million of working capital of recently acquired businesses, an increase of $16
million in short-term borrowings and current portion of long-term debt and a
decrease of $31 million in accrued income taxes and other accrued liabilities,
mainly due to payments of income taxes and incentive programs. Cash and cash
equivalents at March 31, 1997 included $44 million in cash held by the Company's
Brazilian subsidiary.1997.
Capital Expenditures
Capital expenditures aggregated $13 million in the 1998 first quarter as
compared to $11 million in each of the 1997 First Quarter
and the 1996 First Quarter.first quarter. The Company expects capital
expenditures in 19971998 to total approximately $75$55 million, to $80 million (including approximately $11
million for the Company's previously announced focused factory project and
technology improvement projects and $15 million for capital improvements
relating to facilities held by recently acquired businesses). Except for the
focused factory project, most of the Company's capital expenditures have been,
andwhich are
expected to be made to maintain existing facilities and equipment,
achieve cost savingsequipment.
20
PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC.
ITEM 1. LEGAL PROCEEDINGS
Antitrust Proceedings
On April 24, 1998, pursuant to an agreement with the DOJ, UCAR pled guilty in
the United States District Court for the Eastern District of Pennsylvania (the
"District Court") to a one-count charge of violating federal antitrust laws in
connection with the sale of graphite electrodes and improve operating efficiencies.
Restrictions on Dividendswas sentenced to pay a
non-interest-bearing fine in the aggregate amount of $110 million, payable in
six annual installments. The Company will be required to make annual payments of
$20 million, $15 million, $15 million, $18 million, $21 million and Distributions$21 million,
respectively, commencing July 23, 1998. Under the Senior Bank Facilities as amended on March 19, 1997, Globalagreement approved by the
District Court, the Company will not be subject to prosecution by the DOJ with
respect to any other antitrust violations occurring prior to April 24, 1998. The
plea makes it more difficult to defend against civil antitrust lawsuits.
On April 17, 1998, Republic Engineered Steels, Inc. filed a complaint commencing
a civil lawsuit in the United States District Court for the Northern District of
Ohio. Showa Denko Carbon, Inc., Showa Denko K.K., The Carbide/Graphite Group,
Inc., SGL Carbon AG, SGL Carbon Corporation and UCAR are generally permittednamed as defendants.
The allegations made and remedies sought in the complaint are similar to pay dividendsthose
in the civil antitrust lawsuits described in the Annual Report. This lawsuit is
in its earliest stages. UCAR has not yet responded to their respective stockholdersthe complaint and repurchaseintends
to vigorously defend against this lawsuit. The Company may at any time, however,
settle this lawsuit and any possible unasserted claims.
Securities Class Action Lawsuit
On April 16, 1998, a complaint commencing a securities class action lawsuit was
filed in the United States District Court for the District of Connecticut. UCAR,
Robert P. Krass, former Chairman of the Board, President and Chief Executive
Officer, Robert J. Hart, former Senior Vice President and Chief Operating
Officer, William P. Wiemels, Vice President and Chief Operating Officer, Peter
B. Mancino, General Counsel, Vice President and Secretary, and Fred C. Wolf,
Vice President and Chief Financial Officer, are named as defendants. The
plaintiff named in the complaint is Alan Broadwin. The proposed class consists
of all persons who purchased common stock only in an aggregate cumulative amount subsequent to
March 19, 1997 equal to a percentage, ranging from 50% to 65% based on certain
financial tests, of cumulative adjusted consolidated net income subsequent to
December 31, 1996 (provided that (i) in any event, dividends and repurchases
aggregating up to $15 million are permitted in any twelve-month period and (ii)
dividends and repurchases that were permitted during the period from October 19,August 15, 1995
through DecemberMarch 31, 1996 but not paid or1998. The allegations made (not
14
exceeding $45,000,000) may be paid or made during 1997 in addition to dividends
and repurchases otherwise permitted in 1997). In addition, if certain financial
tests are not met, total dividends and repurchases in any year may not exceed
$65,000,000. In addition, Global is permitted to pay dividends to UCAR (i) in
respect of UCAR's administrative fees and expenses and (ii) for the specific
purpose of the purchase or redemption by UCAR of capital stock held by present
or former officers of the Company up to $5 million per year or $25 millionremedies sought in the
aggregate. In general, amounts whichcomplaint are permittedsimilar to be paid as dividendsthose in a year but arethe securities class action lawsuit described
in the Annual Report. UCAR has not so paid may be paidyet responded to this complaint. This lawsuit
is in subsequent years. The Subordinated
Note Indenture also limits the paymentits earliest stages. No evaluation of dividends by Globalpotential liability has yet been
made with respect to UCAR.
CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1996, the Company changed its method of determining LIFO
inventories. The new methodology provides specifically identified parameters for
defining new items within the LIFO pool which the Company believes improves the
accuracy of costing those items. The Company recorded income of $7 million
(after related income taxes of $4 million) as the cumulative effect on prior
years of this change in accounting for inventories. The Company believes this
change will not materially impact the Company's ongoing results of operations.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 128, "Earnings per Share" which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. SFAS 128 requires presentation of basic and diluted
per-share amounts for income from continuing operations and for net income. The
Company does not expect the adoption of this pronouncement to materially impact
earnings per share.
15lawsuit.
21
PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits listed in the following table have been filed as part of this
Quarterly Report on Form 10-Q.
Exhibit
Number Description of Exhibit
-EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
2.33 Stock Repurchase10.49 Plea Agreement among UCAR International Inc., Blackstone
Capital Partners II Merchant Banking Fund L.P., Blackstone Offshore
Capital Partners II L.P., Blackstone Family Investment Partnership II
L.P. and Chase Equity Associates, L.P.
10.1 Credit Agreement dated as of October 19, 1995 among UCAR International
Inc., UCAR Global Enterprises Inc., the other Credit Parties named
therein, the Lenders named therein, the Fronting Banks named therein
and The Chase Manhattan Bank, as Administrative Agent and Collateral
Agent, as amended and restated as of March 19, 1997
10.6 Effectiveness Agreement dated as of March 19, 1997 among UCAR
International Inc., UCAR Global Enterprises Inc., the Lenders listed
therein, the Fronting Banks listed therein and The Chase Manhattan
Bank, as Administrative Agent and Collateral Agent (except, as to
Exhibit A thereto, see Exhibit 10.1 to this Quarterly Report on Form
10-Qexecuted April 7, 1998
27.1 Financial Data Schedule for the quarter ended March 31, 1997)
10.9 Reaffirmation Agreement dated asFirst Quarter of March 19, 1997 among UCAR
International Inc., UCAR Global Enterprises Inc., the Subsidiary
Guarantors listed therein, the Foreign Subsidiaries referred to therein
and The Chase Manhattan Bank, as Administrative Agent and Collateral
Agent
11 Statement re: computation of per share earnings
271998 (for
Commission use only)
27.2 Restated Financial Data Schedule for the First Quarter of 1997
(for Commission use only)
(b) REPORTS ON FORM 8-K
No Report on Form 8-K was filed during the quarter for which this
Quarterly Report on Form 10-Q is filed.
1622
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: April 30, 1997May 14, 1998 By: /s/ William P. Wiemels
----------------------
William P. WiemelsFred C. Wolf
----------------
Fred C. Wolf
Vice President and Chief
Financial Officer
and Treasurer
(Principal Financial Officer)
1723
UCAR INTERNATIONAL INC.
INDEX TO EXHIBITS
Exhibit No. Description
2.33 Stock RepurchaseEXHIBIT NO. DESCRIPTION
10.49 Plea Agreement among UCAR International Inc., Blackstone
Capital Partners II Merchant Banking Fund L.P., Blackstone Offshore
Capital Partners II L.P., Blackstone Family Investment Partnership II
L.P. and Chase Equity Associates, L.P.
10.1 Credit Agreement dated as of October 19, 1995 among UCAR International
Inc., UCAR Global Enterprises Inc., the other Credit Parties named
therein, the Lenders named therein, the Fronting Banks named therein
and The Chase Manhattan Bank, as Administrative Agent and Collateral
Agent, as amended and restated as of March 19, 1997
10.6 Effectiveness Agreement dated as of March 19, 1997 among UCAR
International Inc., UCAR Global Enterprises Inc., the Lenders listed
therein, the Fronting Banks listed therein and The Chase Manhattan
Bank, as Administrative Agent and Collateral Agent (except, as to
Exhibit A thereto, see Exhibit 10.1 to this Quarterly Report on Form
10-Q for the quarter ended March 31, 1997)
10.9 Reaffirmation Agreement dated as of March 19, 1997 among UCAR
International Inc., UCAR Global Enterprises Inc., the Subsidiary
Guarantors listed therein, the Foreign Subsidiaries referred to
therein and The Chase Manhattan Bank, as Administrative Agent and
Collateral Agent
11 Statement re: computation of per share earnings
27executed April 7, 1998
27.1 Financial Data Schedule for the First Quarter of 1998 (for
Commission use only)
27.2 Restated Financial Data Schedule for the First Quarter of 1997 (for
Commission use only)
E-1