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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ........ TO ........
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COMMISSION FILE NUMBER: 1-13888
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UCAR INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1385548
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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3102 WEST END AVENUE
SUITE 1100 37203
NASHVILLE, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 760-8227
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 2001, 45,410,173 shares of common stock, par value $.01 per
share, were outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2000
and March 31, 2001............................................................. Page 2
Consolidated Statements of Operations for the Three Months
ended March 31, 2000 and 2001.................................................. Page 3
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2000 and 2001.................................................. Page 4
Consolidated Statement of Stockholders' Equity (Deficit) for the
Three Months ended March 31, 2001.............................................. Page 5
Notes to Consolidated Financial Statements....................................... Page 6
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1................................... Page 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................... Page 29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.................. Page 45
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS........................................................... Page 46
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................ Page 53
SIGNATURE................................................................................. Page 54
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
DECEMBER 31, MARCH 31,
ASSETS 2000 2001
---- ----
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 47 $ 56
Notes and accounts receivable............................................... 121 98
Inventories:
Raw materials and supplies............................................... 41 37
Work in process.......................................................... 103 109
Finished goods........................................................... 31 34
--------- ---------
175 180
Prepaid expenses and deferred income taxes.................................. 18 16
--------- ---------
Total current assets............................................ 361 350
--------- ---------
Property, plant and equipment................................................... 1,043 1,013
Less: accumulated depreciation.................................................. 652 644
--------- ---------
Net fixed assets................................................ 391 369
Other assets.................................................................... 156 160
--------- ---------
Total assets.................................................... $ 908 $ 879
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................................ $ 99 $ 90
Short-term debt............................................................. 3 2
Payments due within one year on long-term debt.............................. 27 34
Accrued income and other taxes.............................................. 41 43
Other accrued liabilities................................................... 90 84
--------- ---------
Total current liabilities....................................... 260 253
--------- ---------
Long-term debt.................................................................. 705 679
Other long-term obligations..................................................... 209 213
Deferred income taxes........................................................... 36 32
Minority stockholders' equity in consolidated entities.......................... 14 22
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, 47,491,009
shares issued at December 31, 2000, 48,156,055 shares issued at March
31, 2001................................................................. - -
Additional paid-in capital.................................................. 525 532
Accumulated other comprehensive income (loss)............................... (241) (249)
Retained earnings (deficit)................................................. (515) (512)
Treasury stock at cost, 2,319,482 shares at December 31, 2000 and
March 31, 2001........................................................... (85) (85)
Common stock held in employee benefits trust, 426,400 shares at
March 31, 2001........................................................... - (6)
--------- ---------
Total stockholders' equity (deficit)............................................ (316) (320)
--------- ---------
Total liabilities and stockholders' equity (deficit)............................ $ 908 $ 879
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
2000 2001
---- ----
Net sales................................................................... $ 195 $ 171
Cost of sales............................................................... 138 122
--------- ---------
57 49
Gross profit.........................................................
Research and development.................................................... 3 3
Selling, administrative and other expenses.................................. 24 21
Restructuring charge........................................................ 6 -
Other (income) expense, net................................................. - -
--------- ---------
Operating profit..................................................... 24 25
Interest expense............................................................ 21 19
--------- ---------
Income before provision for income taxes,
minority interest and extraordinary item............................ 3 6
Provision for income taxes.................................................. - 2
--------- ---------
Income before minority interest and extraordinary item............... 3 4
Less: minority stockholders' share of income................................ 1 1
--------- ---------
Income before extraordinary item..................................... 2 3
Extraordinary item, net of tax.............................................. 13 -
--------- ---------
Net income (loss)................................................ $ (11) $ 3
========= =========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income before extraordinary item....................................... $ 0.04 $ 0.07
Extraordinary item, net of tax......................................... (0.29) -
--------- ---------
Net income (loss) per share............................................ $ (0.25) 0.07
========= =========
Weighted average common shares outstanding (IN THOUSANDS).............. 45,116 45,222
========= =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income before extraordinary item....................................... $ 0.04 $ 0.07
Extraordinary item, net of tax......................................... (0.28) -
--------- ---------
Net income (loss) per share............................................ $ (0.24) $ 0.07
========= =========
Weighted average common shares outstanding (IN THOUSANDS).............. 46,183 46,033
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
2000 2001
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ (11) $ 3
Extraordinary item, net of tax............................................... 13 -
Non-cash charges to net income:
Depreciation and amortization............................................ 11 10
Deferred income taxes.................................................... 7 -
Restructuring charge..................................................... 6 -
Other non-cash charges................................................... 10 (5)
Working capital *............................................................ (16) 5
Long-term assets and liabilities............................................. (6) (2)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 14 11
-------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures......................................................... (9) (5)
Sale of assets............................................................... - 1
Maturity of short-term investments........................................... 2 -
-------- -------
NET CASH USED IN INVESTING ACTIVITIES............................... (7) (4)
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt borrowings (reductions), net................................. 5 (1)
Revolving credit facility borrowings, net.................................... 59 2
Long-term debt borrowings.................................................... 641 -
Long-term debt reductions.................................................... (689) (7)
Minority interest investment................................................. - 9
Sale of common stock - stock options......................................... - 1
Financing costs.............................................................. (25) -
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................. (9) 4
-------- -------
Net increase (decrease) in cash and cash equivalents.............................. (2) 11
Effect of exchange rate changes on cash and cash equivalents...................... - (2)
Cash and cash equivalents at beginning of period.................................. 17 47
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 15 $ 56
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Net cash paid during the
period for:
Interest expense......................................................... $ 33 $ 17
======== =======
Income taxes............................................................. $ - $ 6
======== =======
* Net change in working capital due to the following components: (Increase)
decrease in current assets:
Notes and accounts receivable............................................ $ 16 $ 22
Inventories.............................................................. 1 (11)
Prepaid expenses......................................................... (2) -
Increase (decrease) in accounts payable and accruals......................... (25) 6
Antitrust investigations and related lawsuits and claims..................... (3) (8)
Restructuring payments....................................................... (3) (4)
-------- -------
WORKING CAPITAL..................................................... $ (16) $ 5
======== =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN MILLIONS)
(UNAUDITED)
ACCUMULATED
OTHER COMMON STOCK TOTAL
ADDITIONAL COMPREHENSIVE RETAINED HELD IN STOCKHOLDER'S
COMMON PAID-IN INCOME EARNINGS TREASURY EMPLOYEE EQUITY
STOCK CAPITAL (LOSS) (DEFICIT) STOCK BENEFITS TRUST (DEFICIT)
----- ------- ----- --------- ------- -------------- ---------
BALANCE AT DECEMBER 31, 2000...... $ - $ 525 $ (241) $ (515) $ (85) $ - $ (316)
Comprehensive income (loss):
Net income................... - - - 3 - - 3
Foreign currency translation
adjustments................ - - (8) - - - (8)
---- ------- -------- ------ ---- -----
Total comprehensive loss. - - (8) 3 - - (5)
Common stock issued to employee
benefits trust................. - 6 - - - (6) -
Sale of common stock - stock
options........................ - 1 - - - - 1
---- ------- -------- ------ ---- ---- -----
BALANCE AT MARCH 31, 2001......... $ - $ 532 $ (249) $ (512) $ (85) $ (6) $ (320)
==== ======= ======== ====== ==== ==== =====
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PART I (CONT'D)
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 SEC and reflect all adjustments (all of which
are of a normal, recurring nature) which are necessary for a fair presentation
of financial position, results of operations and cash flows for the periods
presented. Results of operations for the three months ended March 31, 2001 are
not necessarily indicative of the results of operations that may be expected for
the entire year ending December 31, 2001.
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 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 bank credit facilities (as amended, the "NEW SENIOR
FACILITIES").
"GRAFTECH" refers to Graftech Inc. only. Graftech 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
our 70% owned subsidiary engaged in the development, manufacture and sale of
graphite and carbon cathodes.
"SUBSIDIARIES" refer to those companies which, at the relevant time, are
or were majority owned or wholly owned directly or indirectly by UCAR or by its
predecessors to the extent that those predecessors' activities related to the
carbon and graphite business. 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, 1998 through March 31, 2001, except for:
6
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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; and
o Carbone Savoie, which has been and is 70% owned.
Our 100% owned Brazilian cathode manufacturing operations were contributed to
Carbone Savoie, and as a result became 70% owned, on March 31, 2001.
"WE," "US" or "OUR" refer collectively to UCAR, its subsidiaries and
predecessors described above 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 used the dollar for their purchases and sales are
included in other (income) expense (net) in the Consolidated Statements of
Operations. Prior to August 1, 2000, our Swiss subsidiary used the dollar as its
functional currency. Beginning August 1, 2000, our Swiss subsidiary began using
the euro as its functional currency because its sales and purchases became
predominantly euro-denominated.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the FASB issued Statement of Financial Accounting
Standard ("SFAS") 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS 140"), a replacement of SFAS
125 which has the same title. SFAS 140 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings, and requires certain additional disclosures. SFAS 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001, and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. We
believe that SFAS 140 will not impact our results of operations, cash flows or
financial position.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 was later amended by
SFAS 137 and SFAS 138. SFAS 133, as amended, requires recognition of the fair
value of all derivative instruments, including certain derivative instruments
embedded in other contracts (collectively called
7
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
derivatives), on the balance sheet and establishes new accounting rules for
hedging activities. We were required to adopt SFAS 133, as amended, on January
1, 2001. The adoption did not impact our results of operations, cash flows or
financial position.
(2) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of SFAS 128, "Earnings per Share," using the following share data:
THREE MONTHS
ENDED MARCH 31,
2000 2001
---- ----
Weighted average common shares outstanding for
basic calculation........................................... 45,115,505 45,221,935
Add: Effect of stock options.................................... 1,061,949 811,362
---------- ----------
Weighted average common shares
outstanding, adjusted for diluted calculation............... 46,183,454 46,033,297
========== ==========
The calculation of weighted average common shares outstanding for the
diluted calculation excludes stock options for 1,811,351 and 4,318,247 shares in
the three months ended March 31, 2000 and 2001, respectively, because the
exercise of these options would not have been dilutive for either of those
periods due to the fact that the exercise prices were greater than the weighted
average market price of the common stock for each of those periods.
(3) SEGMENT REPORTING
Beginning in the 2001 first quarter, we have realigned our business into
two new reportable segments: Our Graphite Power Systems Division; and our
Advanced Energy Technology Division. Our Graphite Power Systems Division
includes our graphite and carbon electrode and cathode businesses serving
primarily the steel, aluminum and ferroalloy industries. Our Advanced Energy
Technology Division includes Graftech, our graphite specialties business, our
refractories business, and a new business unit called HT2 that markets technical
solutions. These two segments are managed separately because of the different
markets they serve and the different products and services they sell.
We evaluate the performance of our segments based on gross profit.
Intersegment sales and transfers are not material.
The following tables summarize financial information concerning our
reportable segments.
8
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
THREE MONTHS ENDED
FISCAL YEAR MARCH 31,
2000 2000 2001
---- ---- ----
(DOLLARS IN MILLIONS)
Net sales to external customers:
Graphite Power Systems Division................. $ 651 $ 161 $ 136
Advanced Energy Technology Division............. 125 34 35
--------- --------- --------
Consolidated net sales....................... $ 776 $ 195 $ 171
========= ========= ========
Gross profit:
Graphite Power Systems Division................. $ 184 $ 49 $ 38
Advanced Energy Technology Division............. 32 8 11
--------- --------- ---------
Consolidated gross profit.................... $ 216 $ 57 $ 49
========= ========= =========
(4) RESTRUCTURING CHARGES
In the 2000 fourth quarter, we recorded a charge of $4 million in
connection with a corporate restructuring, mainly for severance and related
benefits associated with a workforce reduction of 85 people. The functional
areas affected include finance, accounting, sales, marketing and administration.
In the 2000 first quarter, we recorded a restructuring charge of $6
million in connection with a restructuring of our graphite specialties business.
Key elements of the restructuring included elimination of certain product lines
and rationalization of operations to reduce costs and improve profitability of
remaining product lines. This rationalization included discontinuing certain
manufacturing processes at one of our facilities in the U.S. that will be
performed at our other facilities in the future. Based on subsequent
developments in the 2000 third quarter, we decided not to demolish certain
buildings. Therefore, we reversed the $4 million of the charge that related to
demolition and related environmental costs. The $2 million balance of the charge
included estimated severance costs for 65 employees. This restructuring was
completed in 2000.
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 eliminated 371
administrative and manufacturing positions. During 1999, we determined that
severance related costs and plant closure costs would be lower than originally
estimated. Therefore, we reversed the $6 million of the charge that related
thereto. Our German plant ceased production activities in 1998. Our Canadian
plant ceased production activities in April 1999. The relocation of our
corporate headquarters to Nashville, Tennessee was completed
9
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
during 1999. In 2001 first quarter, we paid $3 million related to pension
obligations of our Canadian subsidiary.
The following table summarizes activity relating to the accrued expense in
connection with the restructuring charges.
PLANT SHUTDOWN POST
SEVERANCE AND AND RELATED MONITORING AND
RELATED COSTS COSTS RELATED COSTS TOTAL
(DOLLARS IN MILLIONS)
Restructuring charges in 1998............ $ 30 $ 18 $ 9 $ 57
Payments in 1999......................... (16) (3) (4) (23)
Change in estimate and impact of exchange
rate changes in 1999................. (1) (5) - (6)
------ ------- -------- ---------
BALANCE AT DECEMBER 31, 1999............. 13 10 5 28
Restructuring charge in 2000............. 6 3 1 10
Payments in 2000......................... (5) (1) (1) (7)
Change in estimate and impact of exchange
rate changes in 2000................. (1) (3) (1) (5)
------- -------- --------- ---------
BALANCE AT DECEMBER 31, 2000............. 13 9 4 26
Payments in 2001......................... (4) - - (4)
------- -------- -------- ---------
BALANCE AT MARCH 31, 2001................ $ 9 $ 9 $ 4 $ 22
======= ======== ======== =========
The restructuring accrual is included in other accrued liabilities on the
Consolidated Balance Sheets.
10
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(5) LONG-TERM DEBT AND LIQUIDITY
The following table presents our long-term debt:
AT DECEMBER 31, AT MARCH31,
2000 2001
---- ----
(DOLLARS IN MILLIONS)
New Senior Facilities:
Tranche A euro facility............................ $ 239 $ 224
Tranche A USD facility............................. 54 48
Tranche B USD facility............................. 346 346
Revolving facility................................. 88 90
---------- --------
Total New Senior Facilities...................... 727 708
---------- --------
Swiss mortgage and other European debt.................. 5 5
---------- --------
Subtotal........................................... 732 713
Less: payments due within one year..................... 27 34
---------- --------
Total.............................................. $ 705 $ 679
========== ========
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. In October 2000, the New Senior
Facilities were amended to, among other things, increase the maximum leverage
ratio permitted thereunder through June 30, 2001. In connection therewith, we
paid an amendment fee of $2 million and increased the maximum margin which is
added to either euro LIBOR or the alternate base rate in order to determine the
interest rate payable thereunder by 25 basis points.
The New Senior Facilities, as amended, consist of:
o A Tranche A Facility providing for initial term loans of $137
million and of[euro]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 quarterly installments ranging from about [euro]2 million in
2000 to about [euro]17 million in 2005, with the final installment
payable on December 31, 2005. In October 2000, we converted $78
million of these term loans from dollar-denominated to
euro-denominated loans. The principal payments (based on euro to
dollar exchange rates at March 31, 2001) due in 2001 total $23
million.
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.
11
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
The principal payments (based on euro to dollar exchange rates at
March 31, 2001) due in 2001 total $4 million.
o A Revolving Facility providing for dollar and euro-denominated
revolving and swingline loans to, and the issuance of
dollar-denominated letters of credit for the account of, UCAR
Finance and certain of our other subsidiaries in an aggregate
principal and stated amount at any time not to exceed[euro]250
million. The Revolving Facility terminates on February 22, 2006. As
a condition to each borrowing under the Revolving Facility, we are
required to represent, among other things, that the aggregate amount
of payments (excluding certain imputed interest) and additional
reserves created in connection with antitrust, securities and
stockholder derivative 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 our leverage ratio, which is the
ratio of our adjusted net debt to our 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 UCAR equity securities issuances.
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 secured and guaranteed intercompany loans of the net
proceeds of borrowings under the New Senior Facilities to UCAR Global'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.
UCAR, UCAR Global and each of UCAR Global's subsidiaries has guaranteed,
with certain exceptions, the obligations of UCAR Global's subsidiaries under the
intercompany loans, except
12
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
that our foreign subsidiaries have not guaranteed intercompany loan obligations
of our U.S. 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 interest rates, as amended, applicable to the Tranche A and Revolving
Facilities are, at our option, either euro LIBOR plus a margin ranging from
1.00% to 2.75% (depending on our leverage ratio) or the alternate base rate plus
a margin ranging from 0.00% to 1.75% (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 3.00% (depending on our leverage
ratio) or the alternate base rate plus a margin ranging from 1.50% to 2.25%
(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.
At March 31, 2001, the interest rates on outstanding debt under the New
Senior Facilities was: Tranche A Euro Facility, 7.6%; Tranche A USD Facility,
9.5%; Tranche B Facility, 9.2%; and Revolving Facility, 8.6%. The weighted
average interest rate on the New Senior Facilities was 8.8% during the 2001
first quarter.
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 significant 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. In addition, we are required to
comply with specified minimum interest coverage and maximum leverage ratios,
which become more restrictive over time, beginning September 30, 2001.
Under the New Senior Facilities, UCAR is 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
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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. UCAR Global is permitted to pay dividends and make
loans to UCAR, and repurchase UCAR Global common stock from UCAR, for these
purposes. UCAR Global is also permitted to pay dividends to UCAR of up to $15
million for the purpose of making an investment in Graftech and may also
distribute the capital stock of Graftech to UCAR. In addition, UCAR may sell to
third parties or distribute to UCAR's stockholders the capital stock of
Graftech.
The aggregate principal payments (based on euro to dollar exchange rates
at March 31, 2001) due in the aggregate on the Tranche A and B Facilities are
$65 million in 2002 and 2003; $76 million in 2004 and 2005; and $165 million in
2006 and 2007.
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 applicable covenants; failure to pay when due, or other defaults permitting
acceleration of, other indebtedness exceeding $7.5 million; judgment defaults in
excess of $7.5 million to the extent not covered by insurance; certain events of
bankruptcy; and certain changes in control.
In the 2000 third quarter, pursuant to our debt recapitalization in
February 2000, our Italian subsidiary entered into a $15 million long-term debt
arrangement with a third party lender. We also placed on deposit with the third
party lender funds in the same amount which secure the debt. Since we have the
legal right to set-off, and the intent to do so, such amounts have been netted
and are not reflected separately in the Consolidated Balance Sheets.
We are highly leveraged and, as discussed in Note 7, have substantial
obligations in connection with antitrust investigations, lawsuits and claims. We
had total debt of $715 million and a stockholders' deficit of $320 million at
March 31, 2001. Our leverage and obligations, as well as changes in conditions
affecting our industry, changes in global and regional economic conditions and
other factors, have adversely impacted our recent results of operations.
We use, and are dependent on, funds available under our revolving credit
facility, including continued compliance with the financial covenants under the
New Senior Facilities, as well as monthly or quarterly cash flow from operations
as our primary sources of liquidity.
Our high leverage and substantial obligations in connection with antitrust
investigations, lawsuits and claims could have a material impact on our
liquidity. Cash flow from operations services payment of our debt and these
obligations, thereby reducing funds available to us for other purposes. Our
leverage and these obligations make us more vulnerable to economic downturns or
in the event that these obligations (including any fine to be assessed by the
antitrust authority of the European Union) are greater or timing of payment is
sooner than expected.
14
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Our ability to service our debt, as it comes due, including maintaining
compliance with the financial covenants under the New Senior Facilities, and to
meet these and other obligations as they come due is dependent on our future
financial and operating performance. This performance, in turn is subject to
various factors, including certain factors beyond our control, such as changes
in conditions affecting our industry, changes in global and regional economic
conditions, changes in interest and currency exchange rates, developments in
antitrust investigations, lawsuits and claims involving us and inflation in raw
material, energy and other costs. While there is no requirement as to when such
fines, if any, must be assessed, we believe that it is likely that fines to be
assessed by the antitrust authority of the European Union will be assessed
during 2001.
Even if we are able to meet our debt service and other obligations when
due, we may not be able to comply with the financial covenants under the New
Senior Facilities. A failure to so comply, unless waived by the lenders
thereunder, would be a default thereunder. This would permit the lenders to
accelerate the maturity of substantially all of our debt. It would also permit
them to terminate their commitments to extend credit under our revolving credit
facility. This would have an immediate material adverse effect on our liquidity.
If we were unable to repay our debt to the lenders, the lenders could proceed
against the collateral securing the New Senior Facilities and exercise all other
rights available to them.
The New Senior Facilities require us to, among other things, comply with
specified minimum interest coverage and maximum leverage ratios. In October
2000, we obtained an amendment to the New Senior Facilities. The amendment,
among other things, increased the maximum leverage ratio permitted thereunder
through June 30, 2001. Beginning September 30, 2001, the ratios become more
restrictive. At March 31, 2001, we were in compliance with those financial
covenants.
While our revolving credit facility provides for maximum borrowings of up
to[euro]250 million, our current ability to borrow under this facility is
effectively substantially less than the maximum due to the impact additional
borrowings under this facility would have on our compliance with the maximum
leverage ratio permitted under the New Senior Facilities.
While no assurances can be made, we believe we will comply with the
covenants under the New Senior Facilities through 2001. If we subsequently
believe that we will not continue to comply with such covenants, we will seek an
appropriate waiver or amendment from the lenders thereunder. There can be no
assurance that we will be able to obtain such waiver or amendment on acceptable
terms or at all.
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
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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.
(6) FINANCIAL INSTRUMENTS
Certain of our subsidiaries sold receivables totaling $61 million in the
2001 first quarter and $19 million in the 2000 first quarter. None of the
receivables sold were recorded on the Consolidated Balance Sheets at March 31,
2001 and December 31, 2000.
(7) CONTINGENCIES
In June 1997, we were served with subpoenas to produce documents to a
grand jury convened by the U.S. Department of Justice (the "DOJ") and a related
search warrant in connection with a criminal investigation as to whether there
had been any violation of U.S. federal antitrust law by producers of graphite
electrodes. Concurrently, the antitrust enforcement authority of the European
Union (the "EU COMPETITION AUTHORITY") visited the offices of one of our French
subsidiaries for purposes of gathering information in connection with an
investigation as to whether there had been any violation of the antitrust law of
the European Community by those producers. In October 1997, we were served with
subpoenas by the DOJ to produce documents relating to, among other things, our
carbon electrode and bulk graphite businesses.
In 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. In addition, in
April 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 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 plea 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 1998. The payments due in 1998, 1999
and 2000 were timely made. At our request, each of the remaining three payments
has been deferred by one year.
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, export sales Europe, was
16
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
indicted by the DOJ on similar charges. We do not intend to reimburse those
officers for their fines or that director, export sales Europe, 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.
Mitsubishi entered a plea of not guilty. In February 2001, a jury found
Mitsubishi guilty of the charge. Mitsubishi has entered into a sentencing
agreement with the DOJ, which is subject to approval of the court, pursuant to
which Mitsubishi has agreed to pay a fine of $134 million and not appeal its
conviction.
In April 1998, we became aware that the Canadian Competition Bureau (the
"COMPETITION BUREAU") had 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.
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 of producers and distributors of graphite
electrodes. We have no facilities or employees in Japan. We believe that, among
other things, we have good defenses to any claim that we are subject to the
jurisdiction of the Japanese antitrust 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 October 1999, we became aware that the Korean antitrust authority had
commenced an investigation as to whether there had been any violations of Korean
antitrust law by producers and distributors of graphite electrodes. We have no
facilities or employees in Korea. We have received requests for information from
the Korean antitrust authority.
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
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
17
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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. While there is no requirement as
to when fines, if any, must be assessed, we believe that it is likely that fines
will be assessed during 2001. 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 continue 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 and the
Korean antitrust authorities in their continuing investigations. 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 (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, 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") was certified.
In 1998 and 1999, we and other producers of graphite electrodes were
served with complaints and petitions by steelmakers in the U.S. and Canada
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 and Canadian antitrust laws and
Canadian conspiracy law in connection with the sale of graphite electrodes.
In 1999 and 2000, we and other producers of graphite electrodes were
served with three complaints commencing three 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. The second complaint was filed by 4 steelmakers, all of
18
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
whom are located outside the U.S. The third complaint was filed by a steelmaker
who is 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. We have filed motions
to dismiss the first and second complaints.
In 1999 and 2000, we were served with three complaints commencing three
civil antitrust lawsuits (the "CARBON ELECTRODE 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.
Certain customers in other countries 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.
Through April 30, 2001, 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. The settlement of the antitrust class action also covers the actual
and potential claims against us by certain foreign customers arising out of
alleged antitrust violations occurring prior to the date of the respective
settlements in connection with the sale of graphite electrodes sourced from the
U.S. Although each settlement is unique, in the aggregate they consist primarily
of current and deferred cash payments with some product credits and discounts.
All fines and settlement payments due have been timely paid.
Through March 31, 2001, we have paid an aggregate of $241 million of fines
and net settlement and expense payments and $11 million of imputed interest. At
March 31, 2001, $99 million remained in the reserve and, based on information
known to us at April 30, 2001, the aggregate amount of remaining committed
payments for fines and settlements at March 31, 2001 was about $55 million. The
aggregate amount of remaining committed payments for imputed interest at March
31, 2001 was about $12 million. About $6 million of the committed payments for
fines and settlements are due on or before March 31, 2002.
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
19
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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.
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 continuing
investigations 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 March 31, 2001, such amount continues to represent our estimate of
these 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.
STOCKHOLDER DERIVATIVE AND SECURITIES CLASS ACTION LAWSUITS
In March 1998, UCAR was served with a complaint commencing a stockholder
derivative lawsuit. 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.
In April and May 1998, UCAR was served with complaints commencing
securities class actions. 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 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 for 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, a new
outside director, acceptable to both UCAR and the Florida State Board of
Administration, the eighth largest state
20
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
employees' pension fund, was added to UCAR's Board of Directors. We expected to
incur 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 expected.
LAWSUIT INITIATED BY US AGAINST OUR FORMER PARENTS
In February 2000, we commenced a lawsuit against our former parents,
Mitsubishi Corporation and Union Carbide Corporation. The other defendants
include 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 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. The defendants have filed
motions to dismiss this lawsuit and motions to disqualify certain of our counsel
from representing us in this lawsuit. We are vigorously opposing those motions.
We expect to incur $10 million to $20 million for legal expenses to pursue this
lawsuit through trial.
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.
(8) OTHER TRANSACTIONS
During the 2001 first quarter, we contributed our Brazilian cathode
manufacturing operations with a net book value of $3 million to Carbone Savoie.
Pechiney, the 30% minority owner of Carbone Savoie, contributed approximately $9
million to Carbone Savoie as part of this transaction. Prior to these
contributions, all of Carbone Savoie's manufacturing operations were located in
France. The cash contribution will be used to upgrade manufacturing operations
in Brazil and France, which is expected to be completed in early 2002. Ownership
in Carbone Savoie remains 70% by us and 30% by Pechiney. Under our now broadened
alliance, Carbone Savoie holds our entire cathode manufacturing capacity, which
is about 40,000 metric tons of cathodes annually.
21
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
During the 2001 first quarter, we signed a ten year service contract with
CGI Group Inc. pursuant to which CGI became the delivery arm for our global
information technology services requirement, including the design and
implementation of our global information and advanced manufacturing and demand
planning processes, using J.D. Edwards software. Pursuant to the outsourcing
provisions of the contract, CGI will manage our data center services, networks,
desktops, telecommunications and legacy systems operations. Approximately 30 of
our U.S. based employees will be integrated into CGI's U.S. operations as part
of the initial phase of services under this contract. The contract is effective
April 16, 2001.
(9) EMPLOYEE BENEFITS TRUST
In March 2001, we issued 426,400 shares of common stock to the UCAR Carbon
Benefits Protection Trust. These shares, if later sold, could be used for
partial funding of our future obligations under certain of our compensation and
benefits plans. The shares held in trust are not considered outstanding for
purposes of calculating earnings per share until they are committed to be sold
or otherwise used for funding purposes.
22
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 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 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 bank credit facilities (as amended, the "NEW SENIOR
FACILITIES").
"GRAFTECH" refers to Graftech Inc. only. Graftech 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
our 70% owned subsidiary engaged in the development, manufacture and sale of
graphite and carbon cathodes.
"SUBSIDIARIES" refer to those companies which, at the relevant time, are
or were majority owned or wholly owned directly or indirectly by UCAR or by its
predecessors to the extent that those predecessors' activities related to the
carbon and graphite business. 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, 1998 through March 31, 2001, except for:
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, and
o Carbone Savoie, which has been and is 70% owned.
Our 100% owned Brazilian cathode manufacturing operations were contributed to
Carbone Savoie, and as a result became 70% owned, on March 31, 2001.
23
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
"WE," "US" or "OUR" refer collectively to UCAR, its subsidiaries and the
predecessors described above or, if the context so requires, UCAR, UCAR Global
or UCAR Finance, individually.
"HOME MARKETS" refer to North America, Western Europe, Brazil and South
Africa. We have major manufacturing facilities located in each of these markets,
and these are our largest markets. All other markets are called "EXPORT
MARKETS."
"FREE TRADING MARKETS" refer:
o in the case of the graphite electrode, natural, acid-treated and
flexible graphite and graphite specialties industries, to the entire
world excluding China, and
o in the case of the carbon electrode, graphite and carbon cathode and
carbon specialties industries, to 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."
Unless otherwise stated, when we refer to "EBITDA" we mean operating
profit (loss), plus depreciation, amortization, impairment losses on long-lived
assets, inventory write-downs and that portion of restructuring charges
(credits) applicable to non-cash asset write-offs. The amount of restructuring
charges (credits) applicable to non-cash asset write-offs was a charge of $29
million in 1998 and a credit of $6 million in 1999. We believe that EBITDA is
generally accepted as providing useful information regarding a company's ability
to incur and service debt. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from continuing operations or other
consolidated income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's profitability or
liquidity. Our method for calculating EBITDA may not be comparable to methods
used by other
24
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
companies and is not the same as the method for calculating EBITDA under the New
Senior Facilities.
References to cost in the context of our low-cost producer strategy do not
include the impact of special, non-recurring or unusual charges or credits, such
as those related to investigations, lawsuits or claims, restructurings,
impairment losses, inventory write-downs or expenses incurred in connection with
lawsuits initiated by us, or the impact of accounting changes.
Unless otherwise noted, all cost savings and reductions are estimates
based on a comparison to costs in 1998 or the 1998 fourth quarter (annualized)
and on the assumption that operating conditions have remained and will remain
the same in 1999, 2000, 2001, 2002 and thereafter as they were in 1998.
Neither any statement in this Report nor any charge taken by us relating
to any legal proceedings constitute an admission as to any wrongdoing or
liability. Nothing contained herein shall be deemed to constitute an offer to
sell or solicitation of an offer to buy any securities.
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 or 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, 2000 (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 forward-looking statements
orally or in writing. These include statements about such matters as: future
production of steel in electric arc furnaces; future production of aluminum;
growth in the computer and communication equipment industries; future prices and
sales of and demand for graphite electrodes and other products;
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
future operational and financial performance of various businesses; strategic
plans and programs; impacts of regional and global economic conditions;
restructuring, realignment, strategic alliance, supply chain, technology
development and collaboration, 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, sales and other actions regarding debt or equity securities
of our subsidiaries; and future costs, working capital, revenue, business
opportunities, values, debt levels, cash flow, cost savings and reductions,
margins, earnings and growth. The words "will," "may," "plan," "estimate,"
"project," "believe," "anticipate," "intend," "could," "should," "would,"
"expect" and similar expressions identify some of these statements.
Actual future events and circumstances (including future performance,
results and trends) could differ materially from those set forth in these
statements due to various factors. These factors include:
o the possibility that global or regional economic conditions
affecting the markets for our products 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 or reductions in graphite electrode manufacturing capacity
may not result in stable or increased demand for or stable or
increased prices or sales volume of graphite electrodes,
o the possibility that economic or technological developments may
adversely affect the growth in the use of graphite cathodes in lieu
of carbon cathodes in the aluminum smelting process,
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,
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
o the possibility of delays in or failure to achieve widespread
commercialization of PEM fuel cells which use natural graphite
materials or components and the possibility that manufacturers of
proton exchange membrane ("PEM") fuel cells using those materials or
components may obtain those materials or components or the natural
graphite used in them from other sources,
o 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 contractually
specified development objectives and the possible inability to fund
and successfully complete expansion of manufacturing capacity to
meet growth in demand for new or improved products, if any,
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 possibility that we may incur unanticipated health, safety or
environmental compliance, remediation or other costs or experience
unanticipated labor difficulties,
o the occurrence of unanticipated events or circumstances relating to
strategic plans or programs, including completion of financial
alternatives to create more value for our stockholders from
Graftech, or relating to restructuring, realignment, strategic
alliance, supply chain, technology development or collaboration,
investment, acquisition, joint venture, operating, integration, tax
planning, rationalization, financial or capital projects,
o changes in interest or currency exchange rates, 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,
o the possibility that changes in financial performance may affect our
compliance with financial covenants under the New Senior Facilities,
and
o other risks and uncertainties, including those described elsewhere
or incorporated by reference in this Report or the Annual Report.
No assurance can be given that any future transaction about which
forward-looking statements may be made will be completed or as to the timing or
terms of any such transaction.
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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.
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
We are one of the world's largest manufacturers and providers of high
quality natural and synthetic graphite and carbon based products and services,
offering energy solutions to industry-leading customers worldwide engaged in the
manufacture of steel, aluminum, silicon metal, automotive products and
electronics. 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.
Our industrial businesses (which consist principally of our graphite and
carbon electrode and cathode businesses) and our technology businesses (which
consist principally of our flexible graphite and graphite specialties
businesses) operate under different business environments and require different
management direction. As a result, in the 2001 first quarter, we began to
realign our operations into two new business segments called our Advanced Energy
Technology Division and our Graphite Power Systems Division. We expect that this
realignment will change our corporate vision from an industrial product driven
company to a customer energy solution company. We expect to complete this
realignment in 2001. This Report is our first periodic report filed with the SEC
that reports financial information using the new segments.
Our Advanced Energy Technology Division includes our flexible graphite and
graphite specialties businesses and a new business unit called HT2 focusing on
the sale of technology solutions and technical services. Graftech and our
refractories and composite tooling businesses are part of this division.
Flexible graphite is used in gasket and other sealing applications primarily for
internal combustion engines, pipe flanges, and chemical and petrochemical
industry process equipment. Flexible graphite is a natural graphite based
product, while most of our other products are petroleum coke-based products. We
are developing applications for high quality, highly engineered natural graphite
based products and solutions for customers for applications in the fuel cell,
computer and communication equipment, electrical device, thermal management,
building material, fire protection, energy management and industrial furnace
heat management industries.
The strategic goal of this division is to create and deliver stockholder
value through commercialization of proprietary technologies into high growth
markets. The primary drivers for achieving this strategic goal are expected to
be delivery of engineered solutions into high growth markets, acceleration of
technological development, performance to key milestones, component
manufacturing, and establishment of key strategic alliances.
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Our Graphite Power Systems Division includes our electrode and cathode
businesses. 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.
The strategic goal of this division is to generate strong cash flow
through delivery of superior quality products and premium customer technical
service, low cost production and increased globalization. The primary drivers
for achieving this strategic goal are expected to be number one market positions
worldwide, operational excellence, supply chain optimization, and establishment
of key strategic alliances.
We expect that this realignment will help us allocate our physical and
human capital efficiently to achieve our corporate goals. Among other things, we
intend to allocate capital to our higher growth businesses, our Advanced Energy
Technology Division, and to optimize the capital effectiveness of our Graphite
Power Systems Division through cost management and product strategies. We have
directed our management team to concentrate on the strategic drivers of their
particular businesses, and intend to motivate them to deliver on key milestones.
The milestones for 2001 for our Advanced Energy Technology Division are:
o revenue growth,
o intellectual property development and protection,
o expansion of strategic alliances,
o development of new prototype and next generation products, and
o start up of our first advanced flexible graphite production
line.
Accomplishments against these milestones through April 2001 were:
o selection to collaborate with leading chip manufacturers as a
research and development technology partner for the
development of thermal management solutions,
o announcement of additional prototype products for use in the
computer and communications industries, validating the
capability of our eGraf(TM) electronic
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
thermal management product line to reach beyond thermal
interface materials to include electronic thermal component
applications,
o filing of 6 U.S. and 15 foreign patent applications and
receipt of 8 patents,
o entry into a ten-year carbon fiber technology royalty
arrangement with Conoco,
o entry into a carbon fiber manufacturing tolling arrangement
with Conoco,
o completion of installation of our $9 million advanced flexible
graphite production line, with commissioning underway, and
o completion of the first phase of a study to evaluate the
technical and commercial feasibility of development of a
graphite flake deposit in Quebec, Canada, which deposit is
expected to be a major supplier of Graftech's raw material
needs, including those of our advanced flexible graphite
production line.
The milestones for 2001 for our Graphite Power Systems Division are:
o securing graphite electrode price increases,
o world class supply chain optimization,
o continued focus on quality,
o cost reductions,
o progress on key alliances, and
o continued tight working capital management.
Accomplishments against these milestones through April 2001 were:
o announcement that, effective for new orders placed after April
6, 2001, the base price for graphite electrodes in Western
Europe, Eastern Europe, Middle East, North Africa and
Commonwealth of Independent States increased euro 200 per
metric ton,
o completion of broadening of our strategic alliance with
Pechiney in the cathode business,
o entry into joint venture agreements with Jilin Carbon Co.
Ltd., to produce and sell graphite electrodes in China.
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Our divisional strategies build on our broad strengths. We believe that our
strengths include:
o our strong market position (we have the largest share of the free
trading markets in all of our major product lines),
o our global manufacturing base, which includes multiple, fully
integrated, state of the art facilities in diverse geographic
regions,
o our successful global restructuring, reengineering,
rationalization and integration projects and programs that have
generated cost savings and operating efficiencies and reduced our
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 existing technology and our product innovation and process
improvement capabilities.
Our overall corporate strategy is to use our divisional strategies and our
strengths to create stockholder value by generating revenue growth, reducing
leverage, maximizing free cash flow and improving gross margins. In support of
these strategies, we are implementing a global business transformation
initiative entitled POWER OF ONE.
STRATEGIC ALLIANCES. We are pursuing strategic alliances that enhance
or complement our existing or related businesses. Strategic alliances may be in
the form of joint venture, licensing, supply or other arrangements.
In March 2001, we contributed our Brazilian cathode manufacturing
operations with a book value of $3 million to Carbone Savoie. Pechiney, the 30%
minority owner of Carbone Savoie, contributed approximately $9 million to
Carbone Savoie as part of this transaction. Prior to these contributions, all of
Carbone Savoie's manufacturing operations were located in France. The cash
contribution will be used to upgrade manufacturing operations in Brazil and
France, which is expected to be completed in early 2002. Ownership in Carbone
Savoie remains 70% by us and 30% by Pechiney. Under our now broadened alliance,
Carbone Savoie holds our entire cathode manufacturing capacity, which is about
40,000 metric tons of cathodes annually.
In April 2001, we entered into production and marketing joint venture
agreements with Jilin Carbon Co., Ltd. ("JILIN") to produce and sell ultra-high
power graphite electrodes in China.
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China is believed to be the largest graphite electrode market in the world.
Jilin is the largest producer of graphite electrodes and other graphite and
carbon products in China. It produces about 50,000 metric tons of graphite
electrodes annually, and the production joint venture is expected to replace
about 50% of that production with higher quality and better performing
ultra-high power graphite electrodes.
The production joint venture is expected to have capacity to manufacture
about 20,000 metric tons of graphite electrodes annually and to be configured so
as to be expandable to about 30,000 metric tons. The production joint venture is
expected to utilize renovated capacity at Jilin's main facility in Jilin City
and to complete additions at another site in Changchun that were begun by Jilin.
The first phase of renovations is expected to be completed by 2002. We will
provide cash and technical assistance for a 25% ownership interest in the
production joint venture. The parties formed a separate equally owned joint
venture to market and sell the graphite electrodes produced by the production
joint venture.
We have also developed a strategic relationship with Conoco, which builds
upon our historical relationship with Conoco as one of our key suppliers. Conoco
is a major producer of petroleum coke, the principal raw material used by our
Graphite Power Systems Division.
In one of the first steps in broadening this relationship, in December
2000, we entered into a license and technical services agreement with Conoco to
license our proprietary technology for use at the carbon fiber manufacturing
facility that Conoco is building in Ponca City, Oklahoma. In addition, we will
continue to provide a wide variety of technical services to Conoco. Under a
separate tolling agreement, which was entered into in February 2001, we will
utilize proprietary manufacturing technology of our graphite specialties
business to provide manufacturing services at our Clarksburg, West Virginia
facility for carbon fibers to be subsequently produced at Conoco's new facility.
Conoco's new carbon fiber technology could be used in portable power
applications, such as personal computers and cell phones, as well as a wide
range of other electronic devices and automotive applications. This technology
could also be used in building and construction applications, such as roads,
bridges, concrete panels and other construction materials.
We are working with Conoco to expand our strategic relationship in supply
chain and other areas.
COST SAVINGS. UCAR's Board of Directors adopted a global restructuring and
rationalization plan in September 1998 and we launched additional initiatives to
enhance the plan in October 1999. We believe that the plan is the most
aggressive major cost savings plan currently being implemented in the graphite
and carbon industry. These savings are permanent on-going cost savings.
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In connection with the plan, we identified plant cost reduction projects
and evaluated every aspect of our supply chain. We improved performance through
realignment and standardization of critical business processes, standardization
of enterprise wide systems, and improvement of information technology
infrastructure and interfaces with trading partners. Our targets include
decreasing inventories, as measured against inventory levels and based on
production levels for the 1999 first nine months (annualized), by over 20%, or
to about $180 million, and reducing our cash cycle time, by the end of 2002, by
about one-third as compared to 1998. We have already achieved our inventory
level target.
Further, we completed a global benchmarking study during 1999 that
identified opportunities for performance improvement and cost savings in certain
key global administrative and transaction processing functions. Based on the
study, work processes are being redesigned to seek to improve shared services
for better global efficiencies and standardize enterprise wide resource and
supply chain planning systems. In the 2000 fourth quarter, we announced a
corporate restructuring involving a workforce reduction of about 85 employees.
The functional areas affected include finance, accounting, sales, marketing and
administration.
In March 2001, we entered into a ten year service contract with CGI Group
Inc. ("CGI") pursuant to which CGI became the delivery arm for our global
information technology service requirements, including the design and
implementation of our global information and advanced manufacturing and demand
planning processes, using J.D. Edwards software. Through this contract, we
expect to transform our information technology service capability into an
efficient, high quality enabler for driving our global supply chain initiatives
as well as contributing to our cost reduction objectives. Under the outsourcing
provisions of this contract, CGI will manage our data center services, networks,
desktops, telecommunications and legacy systems, with an anticipated annual cost
savings of about $1 million. Through this contract, we will be able to leverage
the resources of CGI to assist us in achieving our information technology goals
and our targeted cost savings. The corporate restructuring we announced in the
2000 fourth quarter realigns certain functional areas to assist us to achieve
targeted savings. We continue to target 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 have evaluated and continue to refine our debt, working capital and
organizational structures to improve cash management and reduce tax expense. The
plan contemplates the reduction of gross debt to a target of $550 million by the
end of 2002 and a substantial reduction in annual interest expense. Our ability
to achieve this target and reduction could be affected materially by such risk
factors as changes in currency exchange or interest rates, delays in completing
or failures to complete financial options for our flexible graphite or other
technology businesses or to complete strategic alliances, joint ventures or
acquisitions, changes in strategic plans, changes in estimated liabilities or
expenses in connection with antitrust investigations,
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PART I (CONT'D)
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laws or claims or in the anticipated timing of payment thereof, or changes in
conditions affecting our industry or our cost saving, tax planning or other
initiatives.
POWER OF ONE BUSINESS TRANSFORMATION INITIATIVE. 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 expect the initiative
to accelerate development and implementation of business opportunities and
develop leadership skills more broadly within all management levels as well as
support our efforts to reduce costs and working capital needs, improve
efficiencies and product quality, shorten cycle times and achieve "best in
class" performance. We believe that most of the future investment for this
initiative will be funded from cost savings to be realized.
CHANGES AFFECTING OUR GRAPHITE SPECIALTIES BUSINESS. During late 1999 and
into the 2000 first quarter, our graphite specialties business experienced
significant adverse change due to a decline in demand, particularly from certain
segments of the semiconductor industry, growth in supply due to expansion by
other producers, a decline in prices and delays in bringing new or improved
products to market. This change indicated the need for assessing the
recoverability of the long-lived assets of this business. These assets were
located primarily at our plant in Clarksburg, West Virginia. We estimated the
future undiscounted cash flows expected to result from the use of these assets
and concluded they were below the respective carrying amounts. Accordingly, we
recorded an impairment loss of $35 million for the unrecoverable portion of
these assets, effectively writing down the carrying value of the fixed assets to
their estimated fair value of $6 million. In 2000, we restructured the business.
The key elements of the restructuring consisted of elimination of low
profitability product lines, rationalization of operations to generate costs
savings and improve profitability of the remaining product lines, and use of
graphite specialties technology to develop new and expand existing markets.
Accordingly, in the 2000 first quarter, we recorded a restructuring charge of $6
million. In the 2000 third quarter, based on subsequent developments, we decided
not to demolish certain buildings. Accordingly, we reversed the $4 million of
the charge related thereto. The $2 million balance of the charge related
primarily to severance costs. 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 were amended in
October 2000. We used the net proceeds from the New Senior Facilities 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 replace the outstanding borrowings under our prior revolving credit
facility, to repay certain other debt and to pay related expenses. The debt
recapitalization lowered our average annual interest rate, extended the average
maturities of our debt and replaced our financial and other covenants. In light
of changes in conditions affecting our industry, changes in global and regional
economic conditions, our recent financial performance
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
and other factors, we closely monitor our compliance with those covenants. 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.
ANTITRUST LITIGATION AGAINST US. 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 products in the U.S. and elsewhere. We recorded a pre-tax charge against
results of operations for 1997 in the amount of $340 million as a reserve for
estimated potential liabilities and expenses in connection with antitrust
investigations and related lawsuits and claims.
In April 1998, UCAR pled guilty to a one-count charge of violating U.S.
federal antitrust law in connection with the sale of graphite electrodes and was
sentenced to pay a fine in the aggregate amount of $110 million, payable in six
annual installments (the "DOJ FINE"), of which $87 million is treated as a fine
and $23 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 U.S. and Canada
as well as antitrust claims by certain other customers. In the aggregate, the
fines and net settlements and expenses are within the amounts we used for
purposes of evaluating the $340 million charge. None of the settlement or plea
agreements contain restrictions on future prices of our graphite electrodes. In
January 2000, the antitrust authority of the European Union 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 fine has not yet been assessed, and we are
continuing to cooperate with the antitrust authority in the European Union in
its on-going investigation.
Actual fines, settlements, liabilities and expenses, including any fine to
be assessed by the antitrust authority of the European Union, could be
materially higher than the amounts we used for purposes of the $340 million
charge and the timing of payment thereof could be sooner than anticipated. The
guilty pleas make it more difficult to defend against other investigations,
lawsuits and claims. At our request, each of the remaining three payments of the
DOJ fine has been deferred by one year. Our insurance has not and will not
materially offset liabilities that have or may become due in connection with
antitrust investigations or related lawsuits or claims.
HIGHLIGHTS OF 2001 FIRST QUARTER AS COMPARED TO 2000 FOURTH QUARTER. The
net sales of our Advanced Energy Technology Division increased to $35 million in
the 2001 first quarter from $31 million in the 2000 fourth quarter, primarily
due to higher volume of all products,
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PART I (CONT'D)
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particularly carbon refractories, sold. The gross profit in the 2001 first
quarter was $11 million (31.4% of net sales), an increase from gross profit in
the 2000 fourth quarter of $9 million (29.0% of net sales). The increase in
gross margin was primarily due to higher volume sold and technical service and
technology license fees.
The net sales of our Graphite Power Systems Division declined to $136
million in the 2001 first quarter from $159 million in the 2000 fourth quarter,
primarily due to lower volume of all products sold, partially offset by higher
prices for graphite electrodes. Volume of graphite electrodes sold during the
2001 first quarter was 43,000 metric tons as compared to 55,300 metric tons in
the 2000 fourth quarter. The lower volume of graphite electrodes sold
represented a reduction of $30 million in net sales. Average sales revenue per
metric ton of graphite electrodes in the 2001 first quarter was $2,419 as
compared to the average in the 2000 fourth quarter of $2,260. The higher average
sales revenue per metric ton represented an increase of $9 million in net sales.
About 68% of the increase in the average was due to higher selling prices and
changes in product mix, and the balance was due to changes in currency exchange
rates. The gross profit of the division in the 2001 first quarter was $38
million (27.9% of net sales), a decrease from gross profit in the 2000 fourth
quarter of $42 million (26.4% of net sales). The decrease in gross profit was
largely due to lower volume sold, higher energy costs in North America and lower
operating levels. Lower operating levels and higher energy costs resulted in a
$55 increase in average cost of sales of graphite electrodes per metric ton for
the 2001 first quarter as compared to the 2000 fourth quarter. The increase in
gross margin was primarily due to higher average graphite electrode prices and
improvements in our cathode business.
Selling, administrative and other expense was $21 million in the 2001
first quarter, an increase of $2 million from $19 million in the 2000 fourth
quarter. The increase was primarily due to increases in the provision for
doubtful receivables. Interest expense was $19 million in the 2001 first
quarter, an increase of $1 million from the 2000 fourth quarter.
For the 2001 first quarter, the effective income tax rate was 40%, an
increase from the 2000 fourth quarter effective income tax rate of 30%,
primarily due to the fact that a higher percentage of our earnings were derived
from higher tax jurisdictions.
GLOBAL ECONOMIC CONDITIONS AND OUTLOOK. We are a global company and serve
all major geographic markets. Accordingly, we are impacted in varying degrees,
both positively and negatively, as country or regional conditions affecting the
markets for our products fluctuate.
Throughout 1998 and the 1999 first quarter, electric arc furnace steel
production declined as a result of adverse global and regional economic
conditions. A recovery began in the 1999 second quarter that lasted through
mid-2000. Beginning in mid-2000, electric arc furnace steel production began to
weaken in North America. The weakening became more severe in the 2000 fourth
quarter and is expected to continue at least through the 2001 second quarter,
and may impact other regional economies. Notwithstanding that weakening, in
2000, estimated
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
worldwide electric arc furnace steel production was a record 285 million metric
tons (about 34% of total steel production). These fluctuations in electric arc
furnace steel production resulted in corresponding fluctuations in demand for
graphite electrodes. Pricing, however, weakened throughout most of this period.
In 1998 and 1999, demand and prices for most of our other products were
adversely affected by the same global and regional economic conditions that
affected graphite electrodes. In the 1999 second quarter, however, worldwide
production by customers for many of our other products began to gradually
recover. During 2000, demand for most of these products as a group was
relatively stable. Pricing, however, has not yet strengthened. The circumstances
that impacted demand and prices for these products in 2000 are expected to
continue in 2001.
In light of, among other things, the weakening of electric arc furnace
steel production in North America, we believe that worldwide electric arc
furnace steel production will decline 3% to 4% in 2001 as compared to 2000. We
expect that demand for our graphite electrodes will decline 3% to 6% in 2001 as
compared to 2000 due to the decline in electric arc furnace steel production and
our efforts to implement price increases. Assuming no change in product mix and
no change in currency exchange rates from those in effect at December 31, 2000,
we expect average prices of our graphite electrodes to increase 4% to 5% due to
those price increases.
In anticipation of lower demand in 2001 and consistent with our continuing
efforts to reduce inventory levels, we have reduced operating levels at certain
of our facilities. This resulted in a layoff in 2000 of about 70 production
employees in North America. Assuming no change in product mix and no change in
currency exchange rates from those in effect at December 31, 2000, we believe
that lower production rates and higher energy and raw material costs will
increase our graphite electrode costs of sales by 3% to 4% in 2001 as compared
to 2000.
In our Advanced Energy Technology Division, we expect double-digit net
sales growth in 2001 and margin expansion over 2000.
In April 2001, Conoco UK Ltd. experienced an explosion at its petroleum
coke plant in Humberside, England. Conoco produces petroleum coke at two plants,
Humberside and Lake Charles, Louisiana. Conoco UK Ltd. has placed petroleum coke
customers on allocation until the end of July. We are working with Conoco and
other coke producers to minimize interruptions in deliveries to us.
Our outlook could be significantly impacted by changes in global or
regional economic conditions, including the impact of interest rate reductions
on the part of the U.S. Federal Reserve and an improvement in the automotive
industry in North America.
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
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
by changes in currency exchange rates and by inflation in countries with highly
inflationary economies where we have manufacturing facilities. To manage certain
exposures to risks caused by changes in currency exchange rates, we engage in
hedging activities and use various off-balance sheet financial instruments. To
account for translation of foreign currencies into dollars for consolidation and
reporting purposes, we record foreign currency translation adjustments in
accumulated other comprehensive income (loss) as part of stockholders' equity in
the Consolidated Balance Sheets, except in the case of operations in highly
inflationary economies or which predominantly use the 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 2000 and the 2001 first quarter, many of the currencies in which we
manufacture and sell our products weakened against the dollar. The most
significant consisted of the weakening of the euro, which devalued about 6%
against the dollar during 2000 and about 6% in the 2001 first quarter, the
weakening of the Brazilian currency, which devalued about 8% against the dollar
during 2000 and devalued about 10% in the 2001 first quarter, and the weakening
of the South African currency, which devalued about 19% during 2000 and about 6%
in the 2001 first quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO THREE MONTHS ENDED MARCH
31, 2000. Net sales of $171 million in the 2001 first quarter represented a $24
million, or 12%, decrease from net sales of $195 million in the 2000 first
quarter. Gross profit of $49 million in the 2001 first quarter represented an $8
million, or 14%, decrease from gross profit of $57 million in the 2000 first
quarter. Gross profit margin was 28.7% in the 2001 first quarter as compared to
29.2% in the 2000 first quarter. The decrease in net sales and gross profit was
primarily due to lower volume of graphite and carbon electrodes sold.
Cost of sales declined primarily due to lower volumes sold. The impact of
lower volumes sold was partially offset by higher energy costs. Cost of sales
per metric ton increased due to lower production levels. The decrease in gross
profit margin was primarily due to the fact that the percentage decrease in net
sales was greater than the percentage decrease in cost of sales, some of which
are essentially fixed.
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales increased to $35 million in
the 2001 first quarter from $34 million in the 2000 first quarter, primarily due
to an increase in volume of all products sold, particularly refractories, and
technical service and technology license fees, partially offset by a decrease in
volume of flexible graphite sold for gasket applications due to lower demand
from the automotive industry. Cost of sales decreased to $24 million in the 2001
first quarter from $26 million in the 2000 first quarter. The decrease was
primarily due to lower
39
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
volume of flexible graphite sold for gasket applications and the impact of the
restructuring of our graphite specialties business. Gross profit in the 2001
first quarter was $11 million (31.4 % of net sales), an increase from gross
profit in the 2000 first quarter of $8 million (23.5 % of net sales). The
increase in gross margin was due to the fact that net sales increased and cost
of sales decreased.
GRAPHITE POWER SYSTEMS DIVISION. Net sales declined to $136 million in the
2001 first quarter from $161 million in the 2000 first quarter, primarily due to
lower volume of all products sold, particularly graphite electrodes. Volume of
graphite electrodes sold was 43,000 metric tons during the 2001 first quarter as
compared to 51,200 metric tons in the 2000 first quarter. The decrease in volume
of graphite electrodes sold represented a reduction of $20 million in net sales.
Average sales revenue per metric ton of graphite electrodes in the 2001 first
quarter was $2,419 as compared to the average in the 2000 first quarter of
$2,485. The lower average sales revenue per metric ton represented a reduction
of $3 million in net sales. Unfavorable changes in currency exchange rates
represented a reduction of $5 million in net sales of graphite electrodes,
offsetting the benefits of increases in selling prices in local currencies. Cost
of sales decreased to $98 million in the 2001 first quarter from $112 million in
the 2000 first quarter. The decrease was primarily due to lower volume of
electrodes sold. Lower operating levels and higher energy costs resulted in a
$30 higher average cost of sales per metric ton for the 2001 first quarter as
compared to the 2000 first quarter. Gross profit in the 2001 first quarter was
$38 million (27.9% of net sales), a decrease from gross profit in the 2000 first
quarter of $49 million (30.4% of net sales). The decrease in gross margin was
due to the fact that the decline in net sales exceeded the decline in cost of
sales.
OPERATING PROFIT FOR US AS A WHOLE. Operating profit in the 2001 first
quarter was $25 million, or 14.6% of net sales, as compared to operating profit
in the 2000 first quarter of $24 million, or 12.3% of net sales. Operating
profit in the 2000 first quarter includes a restructuring charge of $6 million
relating to our graphite specialties business. Excluding the restructuring
charge, operating profit in the 2000 first quarter would have been 15.4% of net
sales, which was higher than in the 2001 first quarter primarily due to higher
gross profit, partially offset by higher selling, administrative and other
expenses.
Selling, administrative and other expense decreased to $21 million in the
2001 first quarter from $24 million in the 2000 first quarter primarily due to
lower variable compensation expense and lower costs related to our POWER OF ONE
initiative.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense decreased to $19
million in the 2001 first quarter from $21 million in the 2000 first quarter.
The decrease resulted from lower average annual interest rates and lower average
total debt outstanding. Average outstanding total debt was $729 million in the
2001 first quarter as compared to $841 million in the 2000 first quarter. The
average annual interest rate was 8.8% in the 2001 first quarter as compared to
9.5% in the 2000
40
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
first quarter. These average annual interest rates exclude imputed interest on
the DOJ fine. The decrease in the average annual interest rate was due primarily
to a change in the index for determining our variable interest rates (from LIBOR
to euro LIBOR), partially offset by an increase in the margin over the index on
which our interest rates are determined.
Provision for income taxes was $2 million in the 2001 first quarter as
compared to nil in the 2000 first quarter. The effective tax rate for the 2001
first quarter was 40%, which was higher than the U.S. federal statutory income
tax rate of 35%. The higher rate in the 2001 first quarter was primarily a
result of the fact that a substantial percentage of our earnings were derived
from higher tax jurisdictions. The effective tax rate for the 2000 first
quarter, excluding the impact of the tax benefit relating to the restructuring
of our graphite specialties business, was 25%. The rate for the 2000 first
quarter was lower than the U.S. federal statutory income tax rate primarily a
result of tax planning strategies, earnings repatriation plans and earnings from
consolidated entities with lower effective tax rates.
In connection with our debt recapitalization, we recorded an extraordinary
charge of $13 million, net of tax, in the 2000 first quarter.
As a result of the changes described above, net income for the 2001 first
quarter was $3 million as compared to net loss for the 2000 first quarter of $11
million.
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 antitrust investigations, lawsuits and claims. We had total debt of $715
million and stockholders' deficit of $320 million at March 31, 2001 as compared
to total debt of $735 million and stockholders' deficit of $316 million at
December 31, 2000. Our leverage and obligations, as well as changes in
conditions affecting our industry, changes in global and regional economic
conditions and other factors, have adversely impacted our recent operating
results.
Cash and cash equivalents were $56 million at March 31, 2001 as compared
to $47 million at December 31, 2000. Net debt (which is total debt, net of cash,
cash equivalents and short-term investments) was $659 million at March 31, 2001
as compared to $688 million at December 31, 2000.
In February 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
41
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
the Subordinated Notes, to repay certain other debt and to pay related expenses.
As a result of our high leverage and substantial obligations in connection with
antitrust investigations, lawsuits and claims, changes in conditions affecting
our industry, changes in global and regional economic conditions and other
factors, we have placed high priority on efforts to manage cash and reduce debt.
We use, and are dependent on, funds available under our revolving credit
facility, including continued compliance with the financial covenants under the
New Senior Facilities, as well as monthly or quarterly cash flow from operations
as our primary sources of liquidity. We believe that our cost savings will, over
the next one to two years, continue to improve our cash flow from operations for
a given level of net sales. Among other things, we are seeking to improve cash
flow from operations through improvements in sales and operations planning, cash
management (including accounts payable and receivable management), production
scheduling and inventory management. Improvements in cash flow from operations
resulting from these initiatives are being partially offset by associated cash
implementation costs, while they are being implemented.
Our high leverage and substantial obligations in connection with antitrust
investigations, lawsuits and claims could have a material impact on our
liquidity. Cash flow from operations services payment of our debt and these
obligations, thereby reducing funds available to us for other purposes. Our
leverage and these obligations make us more vulnerable to economic downturns or
in the event that these obligations (including any fine to be assessed by the
antitrust authority of the European Union) are greater or timing of payment is
sooner than expected.
Our ability to service our debt, as it comes due, including maintaining
compliance with the covenants under the New Senior Facilities, and to meet these
and other obligations as they come due is dependent on our future financial and
operating performance. This performance, in turn is subject to various factors,
including certain factors beyond our control, such as changes in conditions
affecting our industry, changes in global and regional economic conditions,
changes in interest and currency exchange rates, developments in antitrust
investigations, lawsuits and claims involving us and inflation in raw material,
energy and other costs. While there is no requirement as to when fines, if any,
must be assessed, we believe that it is likely that fines to be assessed by the
antitrust authority of the European Union will be assessed during 2001.
We cannot assure you that our cash flow from operations and capital
resources will be sufficient to enable us to meet our debt service and other
obligations when due. Even if we are able to meet our debt service and other
obligations when due, we may not be able to comply with the financial covenants
under the New Senior Facilities. A failure to so comply, unless waived by the
lenders thereunder, would be a default thereunder. This would permit the lenders
to accelerate the maturity of substantially all of our debt. It would also
permit them to terminate their commitments to extend credit under our revolving
credit facility. This would have an immediate material adverse effect on our
liquidity. If we were unable to repay our debt to the lenders, the lenders could
proceed against the collateral securing the New Senior Facilities and
42
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
exercise all other rights available to them. In either such case, we could be
required to limit or discontinue, temporarily or permanently, certain of our
business plans, activities or operations, reduce or delay certain capital
expenditures, sell certain of our assets or businesses, restructure or refinance
some or all of our debt or incur additional debt, or sell additional common
stock or other securities. We cannot assure you that we would be able to obtain
any such waiver or take any of such actions on favorable terms or at all.
We are dependent on our revolving credit facility and continuing
compliance with the financial covenants under the New Senior Facilities for
liquidity. The New Senior Facilities require us to, among other things, comply
with specified minimum interest coverage and maximum leverage ratios. In October
2000, we obtained an amendment to the New Senior Facilities. The amendment,
among other things, increased the maximum leverage ratio permitted thereunder
through June 30, 2001. Beginning September 30, 2001, the ratios become more
restrictive. At March 31, 2001, we were in compliance with those financial
covenants.
While our revolving credit facility provides for maximum borrowings of up
to[euro]250 million, our current ability to borrow under this facility is
effectively substantially less than the maximum due to the impact additional
borrowings under this facility would have on our compliance with the maximum
leverage ratio permitted under the New Senior Facilities.
While no assurances can be made, we believe we will comply with the
covenants under the New Senior Facilities through 2001. If we subsequently
believe that we will not continue to comply with such covenants, we will seek an
appropriate waiver or amendment from the lenders thereunder. There can be no
assurance that we will be able to obtain such waiver or amendment on acceptable
terms or at all.
We believe that the long-term fundamentals of our business continue to be
sound. Accordingly, although we cannot assure you that such will be the case, we
believe, based on our expected cash flow from operations, our expected
resolution of our remaining obligations in connection with antitrust
investigations, lawsuits and claims, and existing capital resources, and taking
into account our efforts to reduce costs and working capital needs, improve
efficiencies and product quality, generate growth and earnings and maximize
funds available to meet our debt service and other obligations, we will be able
to manage our working capital and cash flow to permit us to service our debt and
meet our obligations as they become due.
CASH FLOW PROVIDED BY OPERATING ACTIVITIES. Cash flow provided by
operating activities was $11 million in the 2001 first quarter as compared to
cash flow provided by operating activities of $14 million in the 2000 first
quarter. The decreased generation of cash flow of $3 million resulted primarily
from changes in non-cash charges.
CASH FLOW USED IN INVESTING ACTIVITIES. We used $4 million of cash flow
for investing activities during the 2001 first quarter as compared to $7 million
during the 2000 first quarter.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
This reduction of $3 million was primarily due to a reduction in cash flow used
for capital expenditures.
CASH FLOW PROVIDED BY FINANCING ACTIVITIES. Cash flow provided by
financing activities was $4 million for the 2001 first quarter as compared to
cash used in financing activities of $9 million in the 2000 first quarter.
During the 2001 first quarter, we received $9 million from an additional
minority investment in connection with the broadening of our strategic alliance
in the cathode business with Pechiney. During the 2000 first quarter, we
incurred $28 million of costs in connection with our debt recapitalization in
February 2000, of which we paid $25 million in the 2000 first quarter.
ACCOUNTING CHANGES
In September 2000, FASB issued Statement of Financial Accounting Standard
("SFAS") 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 140"), a replacement of SFAS 125 which
has the same title. SFAS 140 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings, and requires certain additional disclosures. SFAS 140 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001, and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. We
believe that SFAS 140 will not materially impact our results of operations, cash
flows or financial position.
In June 1998, FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 was later amended by SFAS 137 and
SFAS 138. SFAS 133, as amended, requires recognition of the fair value of all
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively called derivatives), on the balance sheet and
establishes new accounting rules for hedging activities. We were required to
adopt SFAS 133, as amended, on January 1, 2001. The adoption did not materially
impact our results of operations, cash flows or financial position.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risks primarily from changes in interest rates
and currency exchange rates. To manage our exposure to these changes, we
routinely enter into various transactions that have been authorized according to
documented policies and procedures. We do not use derivatives for trading or
speculative purposes or to generate income.
Our exposure to changes in interest rates results primarily from variable
or floating rate long-term debt where the interest rate is determined based on
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. At March 31, 2001 we had an
interest rate cap on $100 million of debt, limiting the floating interest rate
factor on this debt to 6.6% through May 8, 2001 and we had interest rate caps
on[euro]200 million of debt, limiting the floating interest rate factor on this
debt to 5.0% through February 27, 2002.
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 $74 million at
March 31, 2001 and $69 million at December 31, 2000. All of our contracts mature
within one year. All of our contracts are marked-to-market monthly and,
accordingly, transaction gains and losses are reflected in the Consolidated
Statements of Operations. Unrealized gains and losses on our outstanding
contracts were a $1 million unrealized loss at March 31, 2001 and nil at
December 31, 2000.
45
PART II
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
ANTITRUST INVESTIGATIONS
In June 1997, we were served with subpoenas issued by the U.S. 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 the offices of one
of our French subsidiaries for purposes of gathering information in connection
with an investigation as to whether there had been any violation of the
antitrust law of the European Community by those producers. In October 1997, we
were served with subpoenas by the DOJ to produce documents relating to, among
other things, our carbon electrode and bulk graphite businesses.
In 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. In addition, in
April 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. At our request, each of the remaining three payments has
been deferred by one year.
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 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 were 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.
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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, 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. Mitsubishi
entered a plea of not guilty. In February 2001, a jury found Mitsubishi guilty
of the charge. Mitsubishi has entered into a sentencing agreement with the DOJ,
which is subject to approval of the Court, pursuant to which Mitsubishi has
agreed to pay a fine of $134 million and not appeal its conviction.
In April 1998, we became aware that 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.
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. We have no facilities or employees in Japan. We believe that, among
other things, we have good defenses to any claim that we are subject to the
jurisdiction of the Japanese antitrust 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 October 1999, we became aware that the Korean antitrust authority had
commenced an investigation as to whether there had been any violations of Korean
antitrust law by producers and distributors of graphite electrodes. We have no
facilities or employees in Korea. We have received requests for information from
the Korean antitrust authority.
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 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,
47
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
entitled to a reduction in the amount of any fine which would otherwise be
assessed. While there is no requirement as to when fines, if any, must be
assessed, we believe that it is likely that fines will be assessed during 2001.
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 other producers and distributors of graphite
electrodes. We are also cooperating with the EU Competition Authority and the
Korean antitrust authorities in their continuing investigations. In connection
therewith, we have produced and are producing information, documents or
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 U.S. 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 and Canadian antitrust laws and
Canadian conspiracy law in connection with the sale of graphite electrodes.
In 1999 and 2000, we and other producers of graphite electrodes were
served with three complaints commencing three separate civil antitrust lawsuits
in the District Court (the "FOREIGN CUSTOMER LAWSUITS"). The first complaint,
entitled FERROMIN INTERNATIONAL TRADE CORPORATION, ET AL. V. UCAR INTERNATIONAL
INC., ET AL. was filed by 26 steelmakers and related parties, all but one of
whom are located outside the U.S. 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. The third complaint, entitled SAUDI IRON
AND STEEL COMPANY V. UCAR INTERNATIONAL INC., ET AL., was filed by a steelmaker
who is located outside the U.S. In each
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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. We have filed motions to dismiss the first and
second complaints.
In 1999 and 2000, we were served with three complaints commencing three
civil antitrust lawsuits (the "CARBON ELECTRODE LAWSUITS"). The first complaint,
filed in the District Court, is entitled GLOBE METALLURGICAL, INC. V. UCAR
INTERNATIONAL INC., ET AL. The second complaint, filed in U.S. Bankruptcy Court
for the Northern District of Ohio, is entitled IN RE SIMETCO, INC. The third
complaint, filed in the U.S. 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. 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 first and 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.
We understand that 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 March 31, 2001, 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. The settlement of the antitrust class action also covers the actual
and potential claims against us by certain foreign customers arising out of
alleged antitrust violations occurring prior to the date of the respective
settlements in connection with the sale of graphite electrodes sourced from the
U.S. 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.
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
49
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 continuing
investigations 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 March 31, 2001, such amount continues to represent our estimate of
these liabilities and expenses. In the aggregate, the fines and net settlements
and expenses are within the amounts we used to evaluate the $340 million charge.
Through March 31, 2001, we have paid an aggregate of $241 million of fines
and net settlement and expense payments and $11 million of imputed interest. At
March 31, 2001, $99 million remained in the reserve and, based on information
known to us at April 30, 2001, the aggregate amount of remaining committed
payments for fines and settlements at March 31, 2000 was about $55 million. The
aggregate amount of remaining committed payments for imputed interest at March
31, 2001 was about $12 million. About $6 million of the committed payments for
fines and settlements are due on or before March 31, 2002.
During the 2001 first quarter, at our request, we obtained an agreement
from the DOJ to defer each of our three remaining annual payments of the DOJ
fine by one year.
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.
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
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 expected to incur 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 expected.
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 Corporation and Union Carbide Corporation. The other defendants named
in the lawsuit include 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 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. In January 2000, Mitsubishi
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. Mitsubishi entered a plea of not guilty. In February 2001, a jury
found Mitsubishi guilty of the charge. Mitsubishi has entered into a
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
sentencing agreement with the DOJ, which is subject to approval of the District
Court, pursuant to which Mitsubishi has agreed to pay a fine of $134 million and
not appeal its conviction. Mitsubishi has also been named as a defendant in
several civil antitrust lawsuits commenced by electric arc furnace steel
producers with respect to its alleged participation in those activities. In
addition, we allege that, in January 1995, UCAR did not have the statutory
capital surplus required to lawfully authorize the payments that UCAR made to
its former parents. We also allege that Mitsubishi and Union Carbide were
unjustly enriched by receipts from their investments in UCAR and that they
knowingly induced or actively and substantially assisted former senior
management of UCAR to engage in illegal graphite electrode price fixing
activities in breach of their fiduciary duties to UCAR.
Based on the allegations summarized above, we believe that Mitsubishi and
Union Carbide are liable for more than $1.5 billion in damages, including
interest. Some of our claims provide for joint and several liability; however,
damages from our various claims would not generally be additive to each other.
The defendants have filed motions to dismiss this lawsuit and motions to
disqualify certain of our counsel from representing us in this lawsuit. We are
vigorously opposing those motions.
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.
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 March
31, 2001, we incurred $4 million of such legal expenses. This lawsuit is in its
earliest stages. The ultimate outcome of 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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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The exhibits listed in the following table have been
filed as part of this Quarterly Report on Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
None.
(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.
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UCAR INTERNATIONAL INC.
Date: May 7, 2001 By:/S/ Corrado F. De Gasperis
--------------------------------
Corrado F. De Gasperis
VICE PRESIDENT AND
CHIEF INFORMATION OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
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