================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ....................
TO ....................
---------------
COMMISSION FILE NUMBER: 1-13888
---------------
UCAR INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1385548
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
---------------
3102 WEST END AVENUE
SUITE 1100 37203
NASHVILLE, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 760-8227
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
As of June 30, 2001, 45,407,724 shares of common stock, par value $.01 per
share, were outstanding.
================================================================================
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 2000
and June 30, 2001........................................... Page 2
Consolidated Statements of Operations for the Three Months
and Six Months ended June 30, 2000 and 2001................. Page 3
Consolidated Statements of Cash Flows for the Six Months
ended June 30, 2000 and 2001................................ Page 4
Consolidated Statement of Stockholders' Equity (Deficit)
for the Six Months ended June 30, 2001...................... Page 5
Notes to Consolidated Financial Statements................... Page 6
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1............... Page 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. Page 31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS.............................................. Page 54
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS.......................................... Page 56
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ Page 63
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... Page 64
SIGNATURE............................................................. Page 66
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, JUNE 30,
ASSETS 2000 2001
---- ----
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 47 $ 35
Notes and accounts receivable................................. 121 97
Inventories:
Raw materials and supplies................................. 41 42
Work in process............................................ 103 111
Finished goods............................................. 31 37
--------- --------
175 190
Prepaid expenses and deferred income taxes.................... 18 18
--------- --------
Total current assets................................ 361 340
--------- --------
Property, plant and equipment.................................... 1,043 937
Less: accumulated depreciation................................... 652 630
--------- --------
Net fixed assets.................................... 391 307
Other assets..................................................... 156 188
--------- --------
Total assets........................................ $ 908 $ 835
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................................. $ 99 $ 96
Short-term debt............................................... 3 2
Payments due within one year on long-term debt................ 27 42
Accrued income and other taxes................................ 41 37
Other accrued liabilities..................................... 90 81
--------- --------
Total current liabilities........................... 260 258
--------- --------
Long-term debt................................................... 705 651
Other long-term obligations...................................... 209 222
Deferred income taxes............................................ 36 35
Minority stockholders' equity in consolidated entities........... 14 23
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, 48,156,536
shares issued at June 30, 2001.............................. - -
Additional paid-in capital.................................... 525 537
Accumulated other comprehensive income (loss)................. (241) (249)
Retained earnings (deficit)................................... (515) (551)
Treasury stock at cost, 2,319,482 shares at December 31, 2000
and 2,322,412 at June 30, 2001.............................. (85) (85)
Common stock held in employee benefits trust, 426,400 shares
at June 30, 2001............................................ - (6)
--------- --------
Total stockholders' equity (deficit)............................. (316) (354)
--------- --------
Total liabilities and stockholders' equity (deficit)............. $ 908 $ 835
========= ========
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 2001 2000 2001
---- ---- ---- ----
Net sales................................... $ 199 $ 171 $ 394 $ 342
Cost of sales............................... 143 120 281 242
--------- ---------- ---------- ---------
Gross profit............................ 56 51 113 100
Research and development.................... 2 3 5 6
Selling, administrative and other expenses.. 23 19 47 40
Restructuring charge........................ - 5 6 5
Impairment charge........................... - 53 - 53
Antitrust investigations and related
lawsuits and claims..................... - 10 - 10
Securities class action and stockholder
derivative lawsuits..................... (1) - (1) -
Other (income) expense (net)................ (1) - (1) -
--------- ---------- ---------- ---------
Operating profit (loss)................. 33 (39) 57 (14)
Interest expense............................ 18 16 39 35
--------- ---------- ---------- ---------
Income (loss) before provision for income
taxes, minority interest and
extraordinary items................... 15 (55) 18 (49)
Provision (benefit) for income taxes......... 4 (16) 4 (14)
--------- ---------- ---------- ---------
Income (loss) of consolidated entities
before minority interest and
extraordinary items.................. 11 (39) 14 (35)
Less: Minority stockholders' share of income. - - 1 1
--------- ---------- ---------- ---------
Income (loss) before extraordinary item 11 (39) 13 (36)
Extraordinary item, net of tax.............. - - 13 -
--------- ---------- ---------- ---------
Net income (loss)....................... $ 11 $ (39) $ - $ (36)
========= ========== ========== =========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item. $ 0.24 $ (0.87) $ 0.28 $ (0.80)
Extraordinary item, net of tax.......... - - (0.28) -
--------- ---------- --------- ---------
Net income (loss) per share............. $ 0.24 $ (0.87) $ - $ (0.80)
Weighted average common shares outstanding
(in thousands)....................... 45,138 45,346 45,127 45,284
========= ========== ========= =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item. $ 0.24 $ (0.87) $ 0.28 $ (0.80)
Extraordinary item, net of tax.......... - - (0.28) -
--------- ---------- --------- ---------
Net income (loss) per share............. $ 0.24 $ (0.87) $ - $ (0.80)
Weighted average common and common
equivalent shares outstanding
(in thousands)....................... 45,734 45,346 45,959 45,284
========= ========== ========= =========
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)
SIX MONTHS
ENDED JUNE 30,
2000 2001
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ - $ (36)
Extraordinary item, net of tax................................. 13 -
Non-cash charges to net income (loss):
Depreciation and amortization.............................. 22 19
Deferred income taxes...................................... 9 (21)
Antitrust investigations and related lawsuits and claims... - 10
Restructuring charge....................................... 6 -
Impairment charge.......................................... - 53
Other non-cash charges (credits)........................... 8 (3)
Working capital *.............................................. (33) (21)
Long-term assets and liabilities............................... - -
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 25 1
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures........................................... (23) (11)
Sale of assets................................................. - 4
Maturity of short-term investments............................. 2 -
Purchase of investment......................................... (1) -
------- -------
NET CASH USED IN INVESTING ACTIVITIES................... (22) (7)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt borrowings (reductions), net................... 1 (1)
Revolving credit facility borrowings, net...................... 63 13
Long-term debt borrowings...................................... 641 1
Long-term debt reductions...................................... (688) (29)
Minority interest investment................................... - 9
Sale of common stock - stock options........................... - 2
Financing costs................................................ (26) -
------- -------
NET CASH USED IN FINANCING ACTIVITIES................... (9) (5)
------- -------
Net increase (decrease) in cash and cash equivalents............... (6) (11)
Effect of exchange rate changes on cash and cash equivalents....... - (1)
Cash and cash equivalents at beginning of period................... 17 47
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 11 $ 35
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest expense........................................... $ 50 $ 33
======= =======
Income taxes............................................... $ 1 $ 15
======= =======
* Net change in working capital due to the following components:
(Increase)decrease in current assets:
Notes and accounts receivable............................ $ 14 $ 18
Inventories.............................................. (8) (26)
Prepaid expenses......................................... (1) (1)
Increase (decrease) in accounts payable and accruals....... (18) 1
Antitrust investigations and related lawsuits and claims... (16) (8)
Restructuring payments..................................... (4) (5)
------- -------
WORKING CAPITAL......................................... $ (33) $ (21)
======= =======
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 STOCKHOLDERS'
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 (loss)....... - - - (36) - - (36)
Foreign currency
translation
adjustments........... - - (8) - - - (8)
--- ------ ------- ------- ------- -------- --------
Total comprehensive
loss............. - - (8) (36) - - (44)
Sale of 2.5% of Graftech.... - 4 - - - - 4
Common stock issued to
employee benefits trust... - 6 - - - (6) -
Sale of common stock -
stock options............. - 2 - - - - 2
--- ------ ------- ------- ------- -------- --------
BALANCE AT JUNE 30, 2001.... $ - $ 537 $ (249) $ (551) $ (85) $ (6) $ (354)
=== ====== ======= ======= ======= ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 six months ended June 30, 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 in the Consolidated Financial Statements.
"UCAR" refers to UCAR International Inc. only. UCAR is our public 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 97.5% owned
(wholly owned prior to June 5, 2001) subsidiary engaged in the development,
manufacture and sale of natural graphite-based products.
"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" refers to those companies which, at the relevant time,
are or were majority owned or wholly owned directly or indirectly by UCAR or its
predecessors to the extent that those predecessors' activities related to the
graphite and carbon business. All of UCAR's subsidiaries have been wholly owned
(with DE MINIMIS exceptions in the case of certain foreign subsidiaries) from at
least January 1, 1998 through June 30, 2001, except for:
6
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o our German subsidiary, which was acquired in early 1997 and 70%
owned until early 1999, when it became wholly owned;
o Carbone Savoie, which has been and is 70% owned; and
o Graftech, which was 100% owned until June 5, 2001 when it became
97.5% 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 and its subsidiaries or,
if the context so requires, UCAR, UCAR Global or UCAR Finance, individually.
FOREIGN CURRENCY TRANSLATION
Generally, except for operations in Russia where high inflation has
existed, unrealized gains and losses resulting from translating assets and
liabilities of foreign operations into 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 predominantly used the dollar for their purchases and sales are
included in other (income) expense (net) in the Consolidated Statements of
Operations. Our Mexican subsidiary began using the dollar as its functional
currency during 1999 because its sales and purchases are predominantly
dollar-denominated. Accordingly, since January 1, 1999, translation gains and
losses of its operations are included in income in the Consolidated Statements
of Operations, regardless of inflation in Mexico. 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.
OTHER ACCOUNTING MATTERS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations," and SFAS 142, "Goodwill and Other Intangible Assets", both of
which are effective for all fiscal years beginning after December 15, 2001.
These statements establish accounting and reporting standards for business
combinations, goodwill, and intangible assets. We are currently evaluating the
impact of SFAS 141 and SFAS 142 on our results of operations, cash flows and
financial position.
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," 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
7
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(2) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
share data:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 2001 2000 2001
---- ---- ---- ----
Weighted average common shares
outstanding for basic calculation....... 45,137,732 45,345,828 45,126,619 45,284,211
Add: Effect of stock options............... 596,407 - 832,177 -
---------- ---------- ---------- ----------
Weighted average common shares
outstanding, adjusted for diluted
calculation............................. 45,734,139 45,345,828 45,958,796 45,284,211
========== ========== ========== ==========
Basic earnings (loss) per common share is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the sum of the weighted average number of common shares
outstanding plus all additional common shares that would have been outstanding
if potentially dilutive securities had been issued. As a result of the net loss
from operations reported for the three months and six months ended June 30,
2001, 986,196 and 898,781, respectively, of potential common shares have been
excluded from the calculation of diluted earnings (loss) per share because their
effect would reduce the loss per share.
In addition, the calculation of weighted average common shares
outstanding for the diluted calculation excludes the consideration of stock
options covering 4,337,647 and 4,305,447 shares in each of the three months
ended June 30, 2000 and 2001, respectively, and 3,074,499 and 4,311,847 shares
in each of the six months ended June 30, 2000 and 2001, respectively, because
the exercise of these options would not have been dilutive for those periods due
to the fact that the exercise prices were greater than the weighted average
market price of our common stock for each of those periods.
(3) SEGMENT REPORTING
Beginning in the 2001 first quarter, we have realigned our businesses
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
8
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
electrode and cathode businesses serving primarily the steel, aluminum and
ferroalloy industries. Our Advanced Energy Technology Division includes
Graftech, our Advanced Carbon and Graphite Materials business unit, which
includes our former graphite and carbon specialties businesses, 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 table summarizes financial information concerning our
reportable segments.
THREE MONTHS ENDED JUNE SIX MONTHS ENDED
JUNE 30 JUNE 30
------- -------
2000 2001 2000 2001
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Net sales to external customers:
Graphite Power Systems Division........ $ 170 $ 137 $ 331 $ 273
Advanced Energy Technology Division.... 29 34 63 69
-------- ------- -------- --------
Consolidated net sales............... $ 199 $ 171 $ 394 $ 342
======== ======= ======== ========
Gross profit:
Graphite Power Systems Division........ $ 49 $ 41 $ 98 $ 79
Advanced Energy Technology Division.... 7 10 15 21
-------- ------- -------- --------
Consolidated gross profit............ $ 56 $ 51 $ 113 $ 100
======== ======= ======== ========
(4) RESTRUCTURING CHARGES
In the 2001 second quarter, we recorded a $58 million charge for
restructuring and asset impairment related to the shutdown of our graphite
electrode manufacturing operations in Clarksville and Columbia, Tennessee.
Graphite machining operations in Clarksville will continue using products from
our other facilities. The $58 million charge includes restructuring charges of
$2 million for severance and related benefits associated with a work force
reduction of 171 people and $3 million in plant shutdown and related costs. The
shutdown is expected to be completed by the end of the 2001 third quarter.
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 2001 first half, we paid about $0.5 million of these expenses.
9
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The 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 and our Canadian
plant ceased production activities in April 1999. The relocation of our
corporate headquarters to Nashville, Tennessee was completed during 1999. In the
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.
SEVERANCE
AND PLANT SHUTDOWN POST SHUTDOWN
RELATED AND RELATED MONITORING AND
COSTS COSTS RELATED COSTS TOTAL
----- ----- -------------- -----
(DOLLARS IN MILLIONS)
BALANCE AT DECEMBER 31, 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 charges 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)
------ ------- -------- --------
10
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEVERANCE
AND PLANT SHUTDOWN POST SHUTDOWN
RELATED AND RELATED MONITORING AND
COSTS COSTS RELATED COSTS TOTAL
----- ----- -------------- -----
(DOLLARS IN MILLIONS)
BALANCE AT DECEMBER 31, 2000........ 13 9 4 26
Restructuring charges in 2001....... 2 3 - 5
Payments in 2001.................... (5) - - (5)
------ ------- -------- --------
BALANCE AT JUNE 30, 2001............ $ 10 $ 12 $ 4 $ 26
====== ======= ======== ========
The restructuring accrual is included in other accrued liabilities on
the Consolidated Balance Sheets.
(5) LONG-TERM DEBT AND LIQUIDITY
The following table summarizes our long-term debt:
AT DECEMBER 31, AT JUNE 30,
2000 2001
---- ----
(DOLLARS IN MILLIONS)
New Senior Facilities:
Tranche A euro facility.............. $ 239 $ 194
Tranche A USD facility............... 54 48
Tranche B USD facility............... 346 345
Revolving facility................... 88 101
---------- -------
Total New Senior Facilities........ 727 688
---------- -------
Swiss mortgage and other European debt... 5 5
---------- -------
Subtotal............................. 732 693
Less: payments due within one year...... 27 42
---------- -------
Total................................ $ 705 $ 651
========== =======
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 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
the margin which is added to either euro LIBOR or the alternate base rate in
order to determine the interest rate payable thereunder increased by 25 basis
points.
11
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2001, the New Senior Facilities were amended to, among other
things, exclude certain expenses incurred in connection with the lawsuit
initiated by us against our former parents (up to a maximum of $20 million, but
not more than $3 million in any quarter) and certain charges and payments in
connection with antitrust fines, settlements and expenses from the calculation
of financial covenants. Charges (over and above the $340 million charge recorded
in 1997) recorded on or before June 30, 2002 for antitrust fines, settlements
and expenses are excluded from the calculation of financial covenants (until
paid) up to a maximum of $130 million (reduced by the amount of certain debt
incurred by us that is not incurred under the New Senior Facilities, $5 million
of which debt was outstanding at June 30, 2001). The fine assessed by the
antitrust authority of the European Union and the additional $10 million charge
described in Note 7 and any payments related to such fine (including payments
within the $340 million charge recorded in 1997) are excluded from the
calculation of financial covenants through June 30, 2002.
In July 2001, the New Senior Facilities were amended to, among other
things, change our financial covenants so that they will be less restrictive
through 2006 than would otherwise have been the case. In connection therewith,
we have agreed that our investments in Graftech and any of our other
unrestricted subsidiaries after this amendment will be made in the form of
secured loans, which will become collateral under the New Senior Facilities, and
the maximum amount of capital expenditures permitted under the New Senior
Facilities will be reduced in 2001 and 2002. We do not expect that our capital
expenditures will exceed such maximums. In connection therewith, we paid an
amendment fee of $2 million and the margin which is added to either euro LIBOR
or the alternate base rate in order to determine the interest rate payable
thereunder increased 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.
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.
12
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 made (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).
After initial application of the net proceeds from our public offering
of common stock in July 2001, the aggregate principal payments (based on euro to
dollar exchange rates at June 30, 2001) due on the Tranche A Term Loans and
Tranche B Term Loans are $42 million in 2002, $55 million in 2003, $59 million
in 2004, $59 million in 2005, $149 million in 2006 and $155 million in 2007.
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 incurrence of
certain indebtedness.
o 50% of the net proceeds of the issuance of certain UCAR equity
securities (60%, in the case of the net proceeds from our public
offering of common stock in July 2001).
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
13
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 applicable to the Tranche A and Revolving Facilities
are, at our option, either euro LIBOR plus a margin ranging from 1.00% to 3.00%
(depending on our leverage ratio) or the alternate base rate plus a margin
ranging from 0.00% to 2.00% (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 3.25% (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 June 30, 2001, the interest rates on our outstanding debt under the
New Senior Facilities was: Tranche A Euro Facility, 7.31%; Tranche A USD
Facility, 6.50%; Tranche B Facility, 7.16%; and Revolving Facility, 6.98%. The
weighted average interest rate on the New Senior Facilities was 8.38% during the
2001 first half.
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
14
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
leverage ratios, which become more restrictive over time, beginning with the
quarter beginning October 1, 2002.
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 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 after February 22, 2000 of up to $15 million
for the purpose of making investments 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.
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 [euro]17 million (about $15
million at currency exchange rates in effect on September 30, 2000) 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. As discussed in Note 7, we also have
substantial obligations in connection with antitrust investigations, lawsuits
and claims. At June 30, 2001, we had total debt of $695 million and a
stockholders' deficit of $354 million. A majority of our debt has variable
interest rates.
To minimize interest expense, except for our Brazilian subsidiary prior
to mid-1999, we attempt to operate on a "zero-cash" basis. This means that 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
15
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other purposes. Our leverage and these obligations make us more vulnerable to
economic downturns and make us more vulnerable in the event that these
obligations are greater or the 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.
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, which become
more restrictive over time, beginning in October 2002. At June 30, 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 that we will comply with the
covenants under the New Senior Facilities at least through 2002. 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
16
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $119 million in
the 2001 first half and $52 million in the 2000 first half. None of the
receivables sold were recorded on the Consolidated Balance Sheets at June 30,
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, the due date of 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 our former 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
17
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 has been approved by 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 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 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. On July 18, 2001, the EU Competition Authority
issued its decision regarding the allegations. Under the decision, the EU
Competition Authority assessed a fine of [euro] 50.4 million (about $43 million)
against UCAR.
18
Seven other graphite electrode producers were also fined under the decision,
with fines ranging up to [euro] 80.2 million (about $69 million). From the
initiation of its investigation, we have cooperated with the EU Competition
Authority. As a result of our cooperation, our fine reflects a 40% reduction
from the amount that otherwise would have been assessed. The policy of the EU
Competition Authority is to negotiate appropriate terms of payment of antitrust
fines, including extended payment terms. We are discussing payment terms with
the EU Competition Authority.
In the second quarter of 2001, we learned that the Brazilian antitrust
authorities have requested written information from various steelmakers in
Brazil. We have not received a request for information from the Brazilian
antitrust authorities.
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 Korean antitrust authority
in its continuing investigation. 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.
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 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
19
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 June 2001, our motion to dismiss the first and second complaints
was granted with respect to substantially all of the plaintiffs' claims.
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. We filed motions
to dismiss the second and third complaints. In May 2001, our motion to dismiss
the second complaint was denied. The guilty pleas described above do not relate
to carbon electrodes.
Certain customers who purchased carbon electrodes or other products from
us or who purchased graphite electrodes from us in various countries outside the
U.S. and Canada 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 June 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 June 30, 2001, we have paid an aggregate of $241 million of
fines and net settlement and expense payments and $11 million of imputed
interest. At June 30, 2001, $109 million remained in the reserve, of which $57
million is for committed payments for fines and settlements, and the balance of
which is for the fine assessed by the EU Competition Authority and other
matters. The aggregate amount of remaining committed payments for imputed
interest at June 30, 2001 was about $9 million.
20
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The foreign customer lawsuits and the carbon electrode lawsuits have not
been settled and are still in their early stages. We have been vigorously
defending, and intend to continue to vigorously defend, against these lawsuits
as well as all threatened lawsuits and possible unasserted claims, including
those mentioned above. We may at any time, however, settle these lawsuits as
well as any threatened lawsuits and possible claims.
It is possible that additional civil antitrust lawsuits seeking, among
other things, to recover damages could be commenced against us in the U.S. and
in other jurisdictions.
1997 AND 2001 SECOND QUARTER ANTITRUST EARNINGS CHARGES
We recorded a pre-tax charge of $340 million against results of
operations for 1997 and, as a result of the assessment of a fine by the EU
Competition Authority, we recorded a pre-tax charge of an additional $10 million
against results of operations for the 2001 second quarter, as a reserve for
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims. The $350 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 $350 million and the timing of payment thereof
could be sooner than anticipated. In the aggregate (including the assessment of
the fine by the EU Competition Authority and the additional $10 million charge),
the fines and settlements described above and related expenses, net, are within
the amounts we used to evaluate the $350 million charge. To the extent that
aggregate liabilities and expenses, net, are known or reasonably estimable, at
June 30, 2001, $350 million continues to represent our estimate of these
liabilities and expenses. The guilty pleas and the decision by the EU
Competition Authority make it more difficult to defend against other
investigations, lawsuits and claims. Our insurance has not and will not
materially cover liabilities that have or may become due in connection with
antitrust investigations or related lawsuits or claims. We believe that payment
of the fine assessed by the EU Competition Authority will not interfere with the
implementation of our business strategies or compliance with financial covenants
in the New Senior Facilities.
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.
21
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 pre-tax charge of $13.0 million against
results of operations 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. Through June 30, 2001, we had incurred about $4 million
of these legal expenses.
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
22
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is being 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.
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 requirements, 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 manages our data center services, networks,
desktops, telecommunications and legacy systems operations. Twenty-four of our
U.S. based employees were integrated into CGI's U.S. operations as part of the
initial phase of services under this contract. The contract became effective
April 16, 2001.
In June 2001, our subsidiary, Graftech, entered into a new exclusive
development and collaboration agreement and a new exclusive long-term supply
agreement with Ballard. In addition, Ballard invested $5.0 million in shares of
Ballard common stock for a 2.5% equity ownership interest in Graftech. As an
investor in Graftech, Ballard has rights of first refusal with respect to
certain equity ownership transactions, tag along and drag along rights and
preemptive and other rights to acquire additional equity ownership under certain
limited circumstances.
In December 2000, we entered into a license and technical services
agreement with Conoco Inc. 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 provide manufacturing services to Conoco at our
facility in Clarksburg, West Virginia for carbon fibers to be subsequently
produced at Conoco's new facility. Under the tolling agreement, until Conoco's
new facility commences operations, we will use raw materials provided by Conoco
to manufacture the same type of carbon fibers that will be produced at Conoco's
new facility.
23
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2001, we entered into a seven-year supply agreement with Conoco
relating to petroleum coke. This agreement contains customary terms and
conditions.
(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.
(10) SUBSEQUENT EVENT: PUBLIC OFFERING
On July 31, 2001, we sold an aggregate of 10,350,000 shares of our
common stock in a registered public offering at a public offering price of $9.50
per share. The gross proceeds from that offering were about $98 million and the
net proceeds to us were about $91 million. 60% of the net proceeds will be used
to prepay term loans under the New Senior Facilities. Prepayments will be
applied against scheduled maturities of term loans in the order in which they
are due. The balance of the net proceeds will be used to fund growth and
expansion of our Advanced Energy Technology Division, including growth and
expansion through acquisitions, and, pending use, will be applied to reduce the
outstanding balance under our revolving credit facility.
24
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 public 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 97.5% owned
(wholly owned prior to June 5, 2001) subsidiary engaged in the development,
manufacture and sale of natural graphite-based products.
"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" refers to those companies which, at the relevant time,
are or were majority owned or wholly owned directly or indirectly by UCAR or its
predecessors to the extent that those predecessors' activities related to the
graphite and carbon business. All of UCAR's subsidiaries have been wholly owned
(with DE MINIMIS exceptions in the case of certain foreign subsidiaries) from at
least January 1, 1998 through June 30, 2001, except for:
o our German subsidiary, which was acquired in early 1997 and 70%
owned until early 1999, when it became wholly owned;
o Carbone Savoie, which has been and is 70% owned; and
o Graftech, which was 100% owned until June 5, 2001 when it became
97.5% owned.
Our 100% owned Brazilian cathode manufacturing operations were contributed to
Carbone Savoie, and as a result became 70% owned, on March 31, 2001.
25
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
"WE," "US" or "OUR" refer collectively to UCAR and its subsidiaries or,
if the context so requires, UCAR, UCAR Global or UCAR Finance, individually.
"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.
"HOME MARKETS" refer to North America, Western Europe, Brazil and South
Africa. We have major graphite electrode manufacturing facilities located in
each of these markets, and these are our largest markets. All other markets are
called "EXPORT MARKETS."
Unless otherwise noted, references to "MARKET SHARES" are based on unit
volumes in 2000 and references to "MAJOR PRODUCT LINES" mean graphite and carbon
electrodes and cathodes and flexible graphite.
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, since their
acquisitions, and Graftech are consolidated on each line of the Consolidated
Financial Statements and the equity of the other owners 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. 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
26
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
be comparable to methods used by other 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 supplier 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.
All cost savings and reductions are estimates based on a comparison to:
o in the case of our global restructuring and rationalization plan
adopted in September 1998 and enhancements thereto in October
1999, with respect to interest expense and provision for income
taxes, costs in 1998 or, for all other costs, costs in the 1998
fourth quarter (annualized);
o costs in 1999, in the case of actions taken in 2000; and
o costs in 2000, in the case of actions taken in 2001.
Unless otherwise specifically noted, market and market share data in
this Report are our own estimates. Market data relating to the steel industry,
our general expectations concerning such industry and our market position and
market share within such industry, both domestically and internationally, are
derived from publications by the International Iron and Steel Institute and
other industry sources as well as assumptions made by us, based on such data and
our knowledge of the industry. Market data relating to the fuel cell power
generation industry, our general expectations concerning such industry and our
market position and market share within such industry, both domestically and
internationally, are derived from publications by securities analysts relating
to Ballard Power Systems Inc. ("BALLARD"), other industry sources and public
filings, press releases and other public documents of Ballard as well as
assumptions made by us, based on such data and our knowledge of the industry.
Market and market share data relating to the graphite and carbon industry as
well as cost information relating to our competitors, our general expectations
concerning such industry and our market position and market share within such
industry, both domestically and internationally, are derived from the sources
described above and public filings, press releases and other public documents of
our competitors as well as assumptions made by us, based on such data and our
knowledge of the industry. Our estimates involve risks and uncertainties and are
subject to change based on various factors, including those discussed under
"Forward Looking Statements." 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.
27
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
The GRAFTECH logo, GRAFCELL(R), eGRAF(TM), GRAFOIL(R), GRAFGUARD(R) and
GRAFSHIELD(R) are our trademarks and trade names. This Report also contains
trademarks and tradenames belonging to other parties.
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 our
industry and us. Neither any statement in this Report nor any charge taken by us
relating to any legal proceedings constitutes an admission as to any wrongdoing
or liability.
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 and sales of steel, aluminum, fuel cells, electronic devices
and other products that incorporate our products or that are produced using our
products; future prices and sales of and demand for graphite electrodes and
other products; future operational and financial performance of various
businesses; strategic plans and programs; impacts of regional and global
economic conditions; restructuring, 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," "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 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
price or sales volume of graphite electrodes;
28
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
o the possibility that economic or technological developments may
adversely affect growth in the use of graphite cathodes in lieu
of carbon cathodes in the aluminum smelting process;
o the possibility of delays in or failure to achieve widespread
commercialization of proton exchange membrane ("PEM") fuel cells
which use natural graphite materials and components and the
possibility that manufacturers of 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 of delays in or failure to achieve successful
development and commercialization of new or improved electronic
thermal management or other products;
o 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 we may not be able to protect our
intellectual property or that intellectual property used by us
infringes the rights of others;
o the occurrence of unanticipated events or circumstances relating
to pending antitrust investigations, lawsuits or claims;
o the commencement of new investigations, lawsuits or claims
relating to the same subject matter as the pending
investigations, lawsuits or claims;
o the possibility that the lawsuit against our former parents
initiated by us could be dismissed or settled, our theories of
liabilities or damages could be rejected, material counterclaims
could be asserted against us, legal expenses and distraction of
management could be greater than anticipated, or unanticipated
events or circumstances may occur;
o the possibility that expected cost savings from our enhanced
global restructuring and rationalization plan, our POWER OF ONE
initiative, the restructuring of our graphite and carbon
specialties businesses, the shutdown of certain of our
facilities and other cost reduction efforts will not be fully
realized;
o the possibility that anticipated benefits from the realignment
of our businesses into two new divisions may be delayed or may
not occur;
29
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
o the possibility that we may incur unanticipated health, safety
or environmental compliance, remediation or other costs or
experience unanticipated raw material or energy supply,
manufacturing operations or labor difficulties;
o the occurrence of unanticipated events or circumstances relating
to strategic plans or programs or relating to restructuring,
realignment, strategic alliance, supply chain, technology
development, 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.
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.
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.
30
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
We are one of the world's largest providers of natural and synthetic
graphite and carbon products and services. Our products provide energy solutions
to customers in the steel, aluminum, fuel cell power generation, electronics,
semiconductor and transportation industries. We have a global business, selling
our products and engineering and technical services in more than 80 countries,
with 15 manufacturing facilities strategically located in Brazil, France, Italy,
Mexico, Russia, South Africa, Spain and the U.S. and a joint venture
manufacturing facility located in China, which, subject to receipt of required
Chinese governmental approvals, is expected to commence operations in 2002. As a
result of our experience, technology and manufacturing capability, we believe
that we have the largest worldwide market share in all of our major product
lines.
In June 1998, we began to implement management changes, which have
resulted in a new senior management team. This team has actively lowered costs,
reduced debt and developed growth initiatives. In early 2001, we launched a
strategic initiative to strengthen our competitive position and to change our
corporate vision from an industrial products company to an energy solutions
company. In connection with this initiative, we have realigned our company and
management around two new operating divisions, our Graphite Power Systems
Division and our Advanced Energy Technology Division.
GRAPHITE POWER SYSTEMS DIVISION
Our Graphite Power Systems Division delivers high quality graphite and
carbon electrodes and cathodes and related services that are key components of
the conductive power systems used to produce steel, aluminum, and other
non-ferrous metals. We are the leading producer of graphite and carbon
electrodes and cathodes in the world. In 2000, net sales of this division were
$651 million, with gross profit of $184 million.
Graphite electrodes, which accounted for about 81% of this division's
net sales in 2000, are a key component in the production of steel in electric
arc furnaces, the steel making technology used by all "mini-mills," the higher
growth sector of the steel industry. Electrodes act as conductors of electricity
in a furnace, generating sufficient heat to melt scrap metal and other raw
materials. We believe there is currently no commercially viable substitute for
graphite electrodes in electric arc furnaces. They are the only product that
combines the required level of electrical conductivity with the ability to
withstand the high levels of heat generated during the production of steel in
electric arc furnaces. Graphite electrodes are also used for refining steel in
ladle furnaces and in other smelting processes. Carbon electrodes are used in a
similar fashion in the production of silicon metal, a raw material used in the
manufacture of aluminum.
31
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Graphite and carbon cathodes are key components in the conductive power
systems used in aluminum smelting furnaces. We have used our expertise in
graphite technology and high temperature industrial applications together with
the technology of our strategic partner, Pechiney, the world's leading provider
of aluminum smelting technology, to develop significant improvements in graphite
cathodes. Graphite cathodes are the preferred technology for new smelting
furnaces in the aluminum industry because they allow for substantial
improvements in process efficiency. We believe that our improved graphite
cathodes position us well to receive incremental orders upon the commencement of
operation of the new, more efficient aluminum smelting furnaces that are being
built, even as older furnaces are being shut down.
We believe that this division is positioned to benefit from the expected
cyclical recovery in steel production which, coupled with our global network of
manufacturing facilities strategically located in key markets, we expect to
enhance our cash flow and earnings per share.
In May 2001, we announced that we intend to shut down our graphite
electrode manufacturing operations in our Clarksville and Columbia, Tennessee
facilities for an undetermined period of time. The shutdown is part of our
strategy of reducing costs and optimizing global production capacity, and
reflects current graphite electrode market conditions. These operations are our
highest cost graphite electrode manufacturing operations. The shutdown is
expected to be completed by the end of the 2001 third quarter. These operations
have capacity to manufacture about 40,000 tons of graphite electrodes annually.
We expect to incrementally expand graphite electrode manufacturing capacity at
our facilities in Mexico and Europe. After the shutdown and expansion our total
annual graphite electrode manufacturing capacity will be reduced from 230,000
metric tons to 210,000 metric tons.
We believe that the barriers to new entrants in the graphite and carbon
electrode industries are high. There have been no significant new entrants since
1950. We believe that our average capital investment to increase our annual
graphite electrode manufacturing capacity by about 15% would be about $500 per
metric ton, which we estimate is less than 20% of the initial investment for
"greenfield" capacity.
The strategic goal of this division is to generate strong cash flow by
pursuing the following strategies:
o BEING THE LOW COST SUPPLIER. We have aggressively reduced our
costs of production by closing higher cost facilities and
migrating that capacity to lower cost facilities, reducing our
average cost of sales per metric ton of graphite electrodes by
about 15% since the end of 1998. We are continuing our efforts
to aggressively reduce costs and recently announced our
intention to shut down our highest cost graphite electrode
manufacturing operations. We believe that this division's cost
structure is currently among the lowest of all major producers
of graphite electrodes and that the shutdown of these operations
will further enhance our position as a low cost supplier.
32
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
o DELIVERING EXCEPTIONAL AND CONSISTENT QUALITY. We believe that
we operate the world's premier electrode and cathode research
and development laboratories and that our products are among the
highest quality available. We have worked diligently in recent
years to improve the consistent quality and uniformity of our
products on a worldwide basis, providing the flexibility to
source most orders from the facility that best satisfies
customer needs and optimizes profitability. We believe that the
consistently high quality of our products enables customers to
achieve significant production efficiencies, which we believe
provides us with an important competitive advantage.
o PROVIDING SUPERIOR TECHNICAL SERVICE. We believe that we are the
recognized industry leader in providing value added technical
services to customers and that we have more technical service
engineers, located in more countries, than any of our
competitors. We believe that our superior service provides us
with another important competitive advantage.
o CAPITALIZING ON OUR GLOBAL PRESENCE AND EXECUTING OUR ASIAN
GROWTH STRATEGY. We believe that this division has the number
one market share in all of its major product lines. We are one
of only two global producers of graphite and carbon electrodes
and cathodes. We believe that our network of state-of-the-art
manufacturing facilities in diverse geographic regions,
including Brazil, France, Italy, Mexico, Russia, South Africa
and Spain, coupled with our joint venture manufacturing facility
located in China, which, subject to receipt of required Chinese
governmental approvals, is expected to commence operations in
2002, provides us with significant operational flexibility and a
significant competitive advantage. As the steel industry
continues to consolidate, with the largest steel producers now
operating in multiple countries, we believe that we are the
producer of graphite electrodes best positioned to serve their
global graphite electrode purchasing requirements.
Our new joint venture with Jilin Carbon Co., Ltd. ("JILIN") in
China is expected to provide us, for the first time, with access
to graphite electrode manufacturing capability in Asia. To date,
we believe that our share of the Asian market for graphite
electrodes has been only about 4% as compared to our worldwide
market share (excluding the Asian market) of about 31%. We
believe that this low cost facility will provide us with an
excellent platform to expand our market share, both in China and
in the rest of Asia.
ADVANCED ENERGY TECHNOLOGY DIVISION
Our Advanced Energy Technology Division was established to develop high
quality, highly engineered natural and synthetic graphite- and carbon-based
energy technologies, products and services for high growth markets. We believe
that we will be successful because of our proprietary technology related to
graphite and carbon materials science and our processing and manufacturing
technology. We currently sell natural and synthetic graphite- and carbon-based
33
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
products to the transportation, semiconductor, aerospace, fuel cell power
generation, electronics and other markets. Due to the growth potential for fuel
cell power generation, electronic thermal management and other identified
markets, we are investing substantial resources in developing proprietary
technologies and products for these markets. In addition, we are providing cost
effective technical services for a broad range of markets and licensing our
proprietary technology in markets where we do not anticipate engaging in
manufacturing ourselves. This division currently holds about 140 of our issued
patents and about 270 of our pending patent applications and perfected patent
application priority rights worldwide. In 2000, net sales of this division were
$125 million, with gross profit of $32 million.
For the fuel cell power generation market, we are developing materials
and components for PEM fuel cells and fuel cell systems, including flow field
plates and gas diffusion layers. For the electronic thermal management market,
we are developing and selling thermal interface products and developing and
introducing prototype heat spreaders, heat sinks and heat pipes for computer,
communications, industrial, military, office equipment and automotive electronic
applications. Other identified markets include fire retardant products for
transportation applications and building and construction materials
applications, industrial thermal management products for high temperature
process applications, and conductive products for batteries and supercapacitor
power storage applications.
Natural graphite-based products, including flexible graphite, are
developed and manufactured by our subsidiary, Graftech. Our synthetic graphite-
and carbon-based products are developed and manufactured by our Advanced Carbon
and Graphite Materials business unit, which includes our former graphite and
carbon specialties businesses. Our technology licensing and technical services
are marketed and sold by our High Tech High Temp business unit.
The strategic goal of this division is to create stockholder value
through commercialization of proprietary technologies into high growth markets.
To achieve this goal, we intend to leverage our strengths at:
o developing and protecting intellectual property;
o developing and commercializing prototype and next generation
products and services;
o establishing strategic alliances with customers, suppliers and
other third parties; and
o setting and achieving those milestones that are critical to the
successful, timely commercialization of our technologies.
We believe that our two largest growth opportunities are in the fuel
cell power generation and electronic thermal management markets.
34
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
FUEL CELL POWER GENERATION OPPORTUNITIES. Fuel cells provide power
generation for transportation, stationary and portable applications. The use of
fuel cells in the U.S. in light vehicles for transportation applications has
been projected by Frost & Sullivan to reach 2.6 million vehicles by 2010. We
believe that worldwide annual sales of fuel cells for non-transportation
applications (stationary and portable) could reach over $2 billion by 2010.
We have been working with Ballard since 1992 on developing natural
graphite-based materials for use in Ballard fuel cells for power generation.
Ballard is the world leader in developing PEM fuel cells, including direct
methanol fuel cells, for power generation. In 1999, we entered into a
collaboration agreement with Ballard to coordinate our respective research and
development efforts on flow field plates and a supply agreement for flexible
graphite materials. In 2000, Ballard launched its new Mark 900 PEM fuel cell
stack and announced that it was the foundation for Ballard fuel cells for
transportation, stationary and portable applications. The flow field plates used
in Ballard Mark 900 PEM fuel cell stacks are made from our GRAFCELL(TM) advanced
flexible graphite products. In June 2001, our subsidiary, Graftech, entered into
a new exclusive development and collaboration agreement and a new exclusive
long-term supply agreement with Ballard, which significantly expand the scope
and term of the 1999 agreements. In addition, Ballard became a strategic
investor in Graftech.
ELECTRONIC THERMAL MANAGEMENT OPPORTUNITIES. As electronics
manufacturers develop highly advanced integrated circuits, processing chips and
power supplies, their ability to dissipate heat is constrained by the
limitations of current thermal management products and technology. We are
developing and introducing high quality, highly engineered products, designs and
solutions for thermal management in computer, communications, industrial,
military, office equipment and automotive electronic applications. We are
targeting:
o thermal interface products, with a projected market of about
$400 million in annual sales by 2005 and an annual growth rate
of about 17% through 2005, in each case as projected by Business
Communications Company, Inc.;
o heat sink products, with a projected market of about $850
million in annual sales by 2005 and an annual growth rate of
about 10% through 2005, in each case as projected by Business
Communications Company; and
o heat spreader and heat pipe products, with a projected market of
about $585 million in annual sales by 2005 and an annual growth
rate of about 20% through 2005, in each case as projected by
Business Communications Company.
In December 2000, we announced the introduction of, and began selling,
our new line of eGraf(TM) thermal management products designed to aid the
cooling of chip sets and other heat generating components in computers,
communications equipment and other electronic devices. We can provide custom or
off-the-shelf thermal interface products, heat sinks, heat spreaders and heat
pipes and sophisticated thermal solutions for cooling complex devices. Our new
product line
35
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
offers advantages for mobile communications and other electronic devices over
competitive products such as copper, aluminum and other current thermal
interface materials. These advantages include our new products' excellent
ability to conduct heat, their mechanical and thermal stability, their
lightweight, compressible and conformable nature, their cost competitiveness,
and their ease of handling.
RECENT PUBLIC OFFERING
In July 2001, we completed a public offering of 10,350,000 shares of our
common stock at a public offering price of $9.50 per share. The gross proceeds
from that offering were about $98 million and the net proceeds to us were about
$91 million. 60% of the net proceeds will be used to prepay term loans under the
New Senior Facilities. Prepayments will be applied against scheduled maturities
of term loans in the order in which they are due. The balance of the net
proceeds will be used to fund growth and expansion of our Advanced Energy
Technology Division, including growth through acquisitions, and, pending use,
will be applied to reduce the outstanding balance under our revolving credit
facility.
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. The plan is intended to enhance stockholder
value by focusing on optimizing margins, maximizing free cash flow, generating
growth in earnings and strengthening competitiveness through operating and
overhead cost reductions and plant rationalization. The plan is also intended,
over the long term, to strengthen our position as a low cost supplier to the
steel and metals industries and, over the near term, to respond to economic
conditions that have been impacting our customers. We believe that the plan is
the most aggressive major cost reduction plan currently being implemented in the
graphite and carbon industry. These savings are permanent on-going cost savings.
The original plan included plant rationalization, plant cost reduction
and overhead cost reduction. The original plan resulted in a restructuring
charge of $86 million in the 1998 third quarter, of which $29 million was a
non-cash charge. We also recorded an impairment loss on long-lived Russian
assets of $60 million in the 1998 third quarter.
As planned, we ceased manufacturing operations at our plant in Germany
in 1998. Our Canadian plant ceased production activities in April 1999. We
completed, ahead of schedule, our consolidation of administrative offices with
the relocation of headquarter activities to Nashville, Tennessee and European
administration activities to our Swiss subsidiary. About 366 positions were
eliminated pursuant to those elements of the plan.
We achieved cost savings of about $73 million in 1999, exceeding our
original target of $64 million. We achieved about $41 million of those savings
in cost of sales.
36
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
We achieved cost savings of about $96 million in 2000, exceeding our
original target of $93 million. We achieved about $64 million of those savings
in cost of sales.
We believe that the cost savings under the plan have enabled us to
strengthen our competitiveness. We also believe that we must continue to enhance
our focus on cost savings to achieve the ultimate objectives of the plan.
Accordingly, in October 1999, we announced and launched additional initiatives
to add $30 million of further targeted cost savings to the plan by the end of
2002.
Among other things, we increased the number of identified plant cost
reduction projects from the more than 120 originally identified to more than
230. We evaluated every aspect of our supply chain and 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.
We have evaluated and continue to refine our debt, working capital and
organizational structures to improve cash management and reduce tax expense. We
believe that our effective average annual tax rate will be about 45% in 2001.
During late 1999 and into the 2000 first quarter, our graphite
specialties business, which now is part of our Advanced Carbon and Graphite
Materials business unit, experienced significant adverse change due to a decline
in demand, particularly from certain segments of the semiconductor industry, the
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 in the 1999 fourth
quarter 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
37
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 $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 about $7 million by the end of 2001.
In the 2000 third quarter, we recorded an impairment loss of $3 million
on long-lived cathode assets in connection with the re-sourcing of our U.S.
cathode production to our facilities in Brazil and France and the related
reduction of certain graphite electrode manufacturing capacity in those
facilities. This re-sourcing was undertaken to respond to growing global demand
for graphite cathodes from the aluminum industry.
In the 2000 fourth quarter, we recorded a $4 million charge in
connection with a corporate restructuring involving a workforce reduction of
about 85 employees. The functional areas affected include finance, accounting,
sales, marketing and administration. The charge consists primarily of severance
costs. The restructuring is expected to reduce spending by about $2 million in
2001 and about $6 million per year thereafter. We continue to target reducing
selling and administrative expenses to about $76 million by the end of 2002, a
reduction of about 26% as compared to 1998.
In May 2001, we announced that we intend to shut down our graphite
electrode manufacturing operations at our facilities in Clarksville and
Columbia, Tennessee for an undetermined period of time. Graphite electrode
machining operations in Clarksville will continue using products from our other
facilities. The shutdown is part of our strategy of reducing costs and
optimizing global production capacity and reflects current graphite electrode
market conditions. These operations are our highest cost graphite electrode
manufacturing operations.
We expect that the shutdown will result in annual cost savings of $18
million beginning in 2002 and will enable us to avoid $9 million in otherwise
necessary capital expenditures. We recorded restructuring, impairment and
related charges of $58 million in the 2001 second quarter in connection with the
shutdown, including $2 million of cash costs for severance and $3 million of
cash costs related to the plant shutdown. The shutdown will affect 171
employees. The shutdown is expected to be completed by the end of the 2001 third
quarter. We expect to incrementally expand graphite electrode manufacturing
capacity at our facilities in Mexico and Europe for an expected capital
investment of about $3 million.
POWER OF ONE BUSINESS TRANSFORMATION INITIATIVE
In support of our strategy, we are implementing 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
38
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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.
The initiative is also designed to enable us to achieve the successful
completion of our previously announced cost reduction activities. Through June
30, 2001, our investment in the initiative included about $5 million in expenses
and $3 million of capital expenditures, primarily for advanced planning and
scheduling supply chain software and global treasury management information
systems. We believe that most of the future investment for this initiative will
be funded from realized cost savings.
Effective April 2001, we entered into a ten year service contract with
CGI Group Inc. 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 our global supply chain initiatives as well
as a contributor 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 believe that we will be
able to leverage the resources of CGI to assist us in achieving our information
technology goals and our targeted cost savings.
STRATEGIC ALLIANCES
We are pursuing strategic alliances that enhance or complement our
existing or related businesses and have the potential to generate strong cash
flow. Strategic alliances may be in the form of joint venture, licensing, supply
or other arrangements that leverage our strengths to achieve cost savings,
improve margins and cash flow, and increase net sales and earnings growth.
In December 2000, we entered into a license and technical services
agreement with Conoco Inc. 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 provide manufacturing services to Conoco at our
facility in Clarksburg, West Virginia for carbon fibers to be subsequently
produced at Conoco's new facility. Under the tolling agreement, until Conoco's
new facility commences operations, we will use raw materials provided by Conoco
to manufacture the same type of carbon fibers that will be produced at Conoco's
new facility. Conoco's new carbon fiber technology could be used in portable
power applications, such as batteries for personal computers and cell phones, as
well as a wide range of other electronic devices and automotive applications. In
2001, we entered into a seven-year supply agreement with Conoco relating to
petroleum coke.
39
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
This agreement contains customary terms and conditions. We are working with
Conoco to expand our strategic relationship in supply chain and other areas.
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 in cash
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 a joint venture agreement with Jilin to
produce and sell high quality graphite electrodes in China, which we believe to
be the largest market for graphite electrodes in the world. Jilin is the largest
producer of graphite electrodes and other graphite and carbon products in China.
The 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. The 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. We will
contribute $6 million of cash plus technical assistance for a 25% ownership
interest in the joint venture. The completion of the parties' capital
contributions to the joint venture is subject to the receipt of required Chinese
governmental and corporate confirmations and approvals.
We have been working with Ballard since 1992 on developing natural
graphite-based materials for use in Ballard fuel cells for power generation. We
expect commercialization of fuel cells to occur in the middle of this decade,
particularly as countries around the world deal with environmental problems
created from other sources of energy. We believe that advances in fuel cell
technology, growth in worldwide power demand and deregulation of power utilities
as well as environmental issues are driving the market for fuel cells. Potential
fuel cell applications include transportation, stationary and portable
applications.
Ballard is the world leader in developing zero-emission fuel cells known
as PEM fuel cells, including direct methanol fuel cells, for power generation.
Eleven out of the fourteen prototype fuel cell vehicles in the California Fuel
Cell Partnership are powered by Ballard fuel cells, including Ford's FC5 and
Daimler Chrysler's NECAR 4A, Jeep Commander and, most recently, NECAR 5. In
2001, the California Air Resource Board reiterated its commitment that,
beginning in 2003, a minimum of 10% of the vehicles sold in California meet low
or zero-emission vehicle standards.
40
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
In 1999, we entered into a collaboration agreement with Ballard to
coordinate our respective research and development efforts on flow field plates
and a supply agreement for flexible graphite materials. In 2000, Ballard
launched its new Mark 900 PEM fuel cell stack and announced that it was the
foundation for Ballard's fuel cells for transportation, stationary and portable
applications. The flow field plates used in Ballard Mark 900 PEM fuel cell
stacks are made from our GRAFCELL(TM) advanced flexible graphite products.
In June 2001, our subsidiary, Graftech, entered into a new exclusive
development and collaboration agreement and a new exclusive long-term supply
agreement with Ballard, which significantly expand the scope and term of the
1999 agreements. In addition, Ballard became a strategic investor in Graftech,
investing $5 million in shares of Ballard common stock for a 2.5% equity
ownership interest, to support the development and commercialization of natural
graphite-based materials and components for PEM fuel cells. As an investor in
Graftech, Ballard has rights of first refusal with respect to certain equity
ownership transactions, tag along and drag along rights, and preemptive and
other rights to acquire additional equity ownership under certain limited
circumstances.
The scope of the new exclusive development and collaboration agreement
includes natural graphite-based materials and components, including flow field
plates and gas diffusion layers, for use in PEM fuel cells and fuel cell systems
for transportation, stationary and portable applications. The initial term of
this agreement extends through 2011. As part of this agreement, we have agreed
to develop and manufacture prototype graphitic materials and components and
provide early stage testing of these prototypes in an on-site fuel cell testing
center. Under the new supply agreement, we will be the exclusive manufacturer
and supplier of natural graphite-based materials for Ballard fuel cells and fuel
cell systems. We will also be the exclusive manufacturer of natural
graphite-based components, other than those components that Ballard manufactures
for itself. The initial term of this agreement, which contains customary terms
and conditions, extends through 2016. We have the right to manufacture and sell,
after agreed upon release dates, natural graphite-based materials and components
for use in PEM fuel cells to other parties in the fuel cell industry. In
connection with the manufacture and sale of components, Ballard will grant us a
royalty-bearing license for related manufacturing process technology.
REFINANCING AND DEBT RECAPITALIZATION.
In November 1998, the Prior Senior Facilities were refinanced and the
indenture governing the Subordinated Notes (the "SUBORDINATED NOTE INDENTURE")
was amended. In connection with the refinancing, we obtained additional term
debt of $210 million. Our new management team undertook this refinancing to
enable us to pay antitrust fines, liabilities and expenses and to strengthen our
financial condition by extending maturities of some of our debt.
In February 2000, we completed a debt recapitalization. We obtained the
New Senior Facilities, which were amended in October 2000, April 2001 and July
2001. The New Senior
41
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Facilities consist of a [euro] 300 million six year term loan facility, a $350
million eight year term loan facility and a [euro] 250 million six year
revolving credit facility. The six year term loan and revolving credit
facilities are dollar/euro dual currency facilities. 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 repay certain other
debt and to pay related expenses. 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. 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 and other factors, we closely monitor our compliance with those
covenants.
In October 2000, the New Senior Facilities were amended to, among other
things, increase the maximum leverage ratio permitted there under through June
30, 2001. In connection therewith, we paid an amendment fee of $2 million and
our interest rates increased by 25 basis points.
In April 2001, the New Senior Facilities were amended to, among other
things, exclude certain expenses incurred in connection with the lawsuit
initiated by us against our former parents and certain charges and payments in
connection with antitrust fines, settlements and expenses from the calculation
of financial covenants through June 30, 2002 and in certain cases thereafter.
In July 2001, the New Senior Facilities were amended to, among other
things, change our financial covenants so that they will be less restrictive
through 2006 than would otherwise have been the case. In connection therewith,
we agreed that our investments in Graftech and any of our other unrestricted
subsidiaries after this amendment will be made in the form of secured loans,
which will become collateral under the New Senior Facilities, and that the
maximum amount of capital expenditures permitted under the New Senior Facilities
will be reduced in 2001 and 2002. We do not expect that our capital expenditures
will exceed such maximums. In addition, we paid an amendment fee of $2 million
and our interest rates increased by 25 basis points.
LITIGATION AGAINST OUR FORMER PARENT COMPANIES INITIATED BY US
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,
42
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 UCAR 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 from the date of filing the complaint through
trial. Through June 30, 2001, we had incurred about $4 million of these legal
expenses.
ANTITRUST AND OTHER LITIGATION AGAINST US
Since 1997, we have been subject to antitrust investigations by
antitrust authorities in the U.S., the European Union, Canada, Japan and Korea.
In addition, we have learned that the Brazilian antitrust authorities have
requested written information from various steel makers in Brazil. 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., Canada
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 of $20 million, $15 million, $15 million, $18 million, $21
million, and $21 million, commencing July 23, 1998 (the "DOJ FINE"). The
payments due in 1998, 1999 and 2000 were timely made. At our request, the due
date of each of the remaining three payments has been deferred by one year. Of
the $110 million aggregate amount, $90 million is treated as a fine and $20
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 steel makers in the U.S. and Canada
as well as antitrust claims by certain other customers. None of the settlement
or plea agreements contain restrictions on future prices of our graphite
electrodes. There remain, however, certain pending lawsuits and claims. 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. No fine has been
assessed. The maximum fine, if any, for such a violation is five percent of a
company's sales of the relevant product during the period of violation, a
maximum fine of about $5.3 million in our case. Any such fine would be subject
to reduction for cooperation.
43
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 alleged 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. On July 18, 2001, that
authority issued its decision. Under the decision, that authority assessed a
fine of (euro) 50.4 million (about $43 million) against UCAR resulting from the
role of our former management in a graphite electrode price fixing cartel. That
authority also assessed fines against seven other graphite electrode producers
under the decision, with fines ranging up to (euro) 80.2 million (about $69
million). As a result of the assessment of the fine against us, we recorded a
pre-tax charge of $10 million against results of operations in the 2001 second
quarter as an additional reserve for potential liabilities and expenses related
to antitrust investigations and related lawsuits and claims. We are very pleased
that this decision brings to a conclusion our last major pending antitrust
liability. From the initiation of its investigation, we have cooperated with the
antitrust authority of the European Union. As a result of our cooperation, our
fine reflects a 40% reduction from the amount that otherwise would have been
assessed. That authority's policy is to negotiate appropriate terms of payment
of antitrust fines, including extended payment terms. Based on that policy and
our recent discussions regarding payment terms with that authority, we believe
that payment of the fine will not interfere with the implementation of our
business strategies or compliance with financial covenants in the New Senior
Facilities.
We are continuing to cooperate with the DOJ and the Canadian antitrust
authorities in their continuing investigations of other producers and
distributors of graphite electrodes. We are also cooperating with the Korean
antitrust authority in its continuing investigation. 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.
We cannot assure you that remaining liabilities and expenses in
connection with antitrust investigations, lawsuits and claims will not
materially exceed the remaining uncommitted balance of the reserve or that the
timing of payment thereof will not be sooner than anticipated. At June 30, 2001,
before taking into account the fine assessed by the antitrust authority of the
European Union and any related payment terms, but after giving effect to the
additional $10 million charge, the remaining uncommitted balance of the reserve
was about $52 million. In the aggregate (including the assessment of the fine by
the antitrust authority of the European Union and the additional $10 million
charge), the fines and settlements described above and related expenses, net,
were within the amounts we used to evaluate the $350 million charge. To the
extent that aggregate liabilities and expenses, net, are known or reasonably
estimable, $350 million represents our estimate of these liabilities and
expenses. The guilty pleas and the decision by the antitrust authority of the
European Union make it more difficult to defend against other investigations,
lawsuits and claims. Our insurance has not and will not materially cover
liabilities that have or may become due in connection with antitrust
investigations or related lawsuits or claims.
44
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
UCAR had been named as a defendant in a stockholder derivative lawsuit
and as a defendant in a securities class action lawsuit, each of which was
based, in part, on the subject matter of the antitrust investigations, lawsuits
and claims. In October 1999, UCAR and the other defendants settled these
lawsuits for an aggregate of $40.5 million, of which $11.0 million was paid by
us. These settlements have become final. We recorded a charge of $13 million,
which included $2 million of expenses, in the 1999 third quarter, in connection
with these settlements. In the 2000 second quarter, we reversed $1 million of
this charge because expenses were lower than expected.
CUSTOMER BASE
We are a global company and serve all major geographic markets. Sales of
our products to customers outside the U.S. accounted for about 69% of our net
sales in 2000. Our customer base includes both steel makers and non-steel
makers. In 2000, five of our ten largest customers were purchasers of
non-graphite electrode products or purchasers of graphite electrodes for
non-steel making purposes. In 2000, five of our ten largest customers were based
in Europe, two were in the U.S. and one in each of Africa, Mexico and Brazil. No
single customer or group of affiliated customers accounted for more than 4% of
our net sales in 2000.
GLOBAL ECONOMIC CONDITIONS AND OUTLOOK
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 end of 2001, and may
impact other regional economies. Notwithstanding that weakening, in 2000
estimated 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. Overall pricing, however, weakened throughout
most of this period.
We estimate that worldwide graphite electrode demand increased by about
4% in 2000 as compared to 1999. Our volume of graphite electrodes sold increased
by 5% in 2000 as compared to 1999. We implemented, and are continuing to
implement, increases in local currency selling prices of our graphite electrodes
announced in 2000 in Europe, the Asia Pacific region, the Middle East and South
Africa. In April 2001, we implemented an additional 8% local currency selling
price increase in Europe.
In light of, among other things, the weakness in electric arc furnace
steel production in North America, we believe that worldwide electric arc
furnace steel production will decline in 2001
45
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
as compared to 2000. We expect that demand for our graphite electrodes will
decline in 2001 as compared to 2000 due to the decline in electric arc furnace
steel production and our efforts to implement those local currency selling price
increases. Assuming no change in product mix, we expect average local currency
selling prices of our graphite electrodes to increase slightly in 2001 as
compared to 2000.
In anticipation of lower demand in 2001 and consistent with our
continuing efforts to reduce inventory levels, we initially reduced operating
levels and laid off certain production employees at certain of our facilities in
North America. We recently announced that we intend to shut down graphite
electrode manufacturing operations at two of our facilities in the U.S. 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 in 2001 as compared to 2000. We believe, however, that the impact of this
shutdown will more than offset this increase by 2002.
In 1998 and 1999, demand and prices for most of our other products sold
to the metals industries were adversely affected by the same global and regional
economic conditions that affected graphite electrodes. In the 1999 second
quarter, however, worldwide demand 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. Overall pricing did not strengthen. The
circumstances that impacted demand and prices for these products in 2000 are
expected to continue in 2001.
In April 2001, Conoco experienced an explosion at its petroleum coke
plant in Humberside, England. Conoco produces petroleum coke at two plants,
Humberside and Lake Charles, Louisiana. Conoco has placed customers of petroleum
coke from its Humberside facility on allocation until August 2001. We are
working with Conoco and other coke producers to minimize interruptions in
deliveries to us. We currently expect that Conoco will begin to phase in
increases in customer allocations in August as production is restored and that
allocations will be fully restored by the end of 2001. We have not been
materially adversely affected by this event to date and do not expect to be so
affected in the future unless supply of coke from that plant continues to be
interrupted for longer than currently expected.
Our outlook could be significantly impacted by changes in global or
regional economic conditions, including the impact of interest rate changes on
the part of the U.S. Federal Reserve Board and changes in the automotive
industry in North America.
HIGHLIGHTS OF 2001 SECOND QUARTER AS COMPARED TO 2001 FIRST QUARTER
The net sales of our Graphite Power Systems Division increased to $137
million in the 2001 second quarter from $136 million in the 2001 first quarter,
primarily due to higher volume of graphite electrodes sold, partially offset by
lower volume of carbon electrodes and cathodes sold. Volume of graphite
electrodes sold was 46,000 metric tons in the 2001 second quarter as compared to
43,000 metric tons in the 2001 first quarter. The higher volume of graphite
electrodes sold represented an increase of $7 million in net sales. Average
sales revenue per metric ton of graphite electrodes in the 2001 second quarter
was $2,367 as compared to the average in the 2001 first quarter of $2,419. The
lower average sales revenue per metric ton represented a decrease of $2 million
in net sales. The decrease in average selling prices was due to the impact of
changes in currency exchange rates. The gross profit of the division in the 2001
second quarter was $41 million (29.8% of net sales), an increase from gross
profit in the 2001 first quarter of $38 million (27.4% of net sales). The
increase in gross profit was largely due to
46
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
the increase in net sales, plant costs reductions and lower costs due to the
strengthening of the dollar.
The net sales of our Advanced Energy Technology Division decreased to
$34 million in the 2001 second quarter from $35 million in the 2001 first
quarter, primarily due to lower volume of carbon refractories sold. The gross
profit in the 2001 second quarter was $10 million (31.2% of net sales), a
decrease from gross profit in the 2001 first quarter of $11 million (32.0% of
net sales). The decrease in gross margin was primarily due to the decrease in
net sales.
Selling, administrative and other expenses were $19 million in the 2001
second quarter, a decrease of $2 million from $21 million in the 2001 first
quarter. Interest expense was $16 million in the 2001 second quarter, a decrease
of $3 million from the 2001 first quarter due to lower average interest rates
and lower average debt outstanding.
For the 2001 second quarter, the effective income tax rate before
special charges was 48%, an increase from the 2001 first quarter effective
income tax rate of 40%, primarily due to the fact that a higher percentage of
our earnings was derived from higher tax jurisdictions.
CURRENCY MATTERS
We incur manufacturing costs and sell our products in multiple
currencies. As a result, in general, our results of operations and financial
condition are affected by changes in currency exchange rates and by inflation in
countries with highly inflationary economies where we have manufacturing
facilities. To manage certain exposures to risks caused by changes in currency
exchange rates, we use various off-balance sheet financial instruments. To
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 use the dollar as their functional currency)
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 half, many of the currencies in which we
manufacture and sell our products weakened against the dollar. The most
significant consisted of the weakening of the euro, which devalued about 6%
against the dollar during 2000 and about 10% in the 2001
47
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
first half, the weakening of the Brazilian currency, which devalued about 8%
against the dollar during 2000 and devalued about 16% in the 2001 first half,
and the weakening of the South African currency, which devalued about 19% during
2000 and about 6% in the 2001 first half.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 AS COMPARED TO THREE MONTHS ENDED JUNE
30, 2000. Net sales of $171 million in the 2001 second quarter represented a $28
million, or 14%, decrease from net sales of $199 million in the 2000 second
quarter. Gross profit of $51 million in the 2001 second quarter represented a $5
million, or 9%, decrease from gross profit of $56 million in the 2000 second
quarter. Gross profit margin was 29.9% in the 2001 second quarter as compared to
28.1% in the 2000 second quarter. The decrease in net sales and gross profit was
primarily due to lower volume of graphite electrodes sold.
Cost of sales declined primarily due to lower volumes sold. Cost of
sales per metric ton decreased due to plant cost reductions and lower costs due
to the strengthening of the dollar. The increase in gross profit margin was
primarily due to the fact that the percentage decrease in net sales was less
than the percentage decrease in cost of sales, some of which are essentially
fixed.
GRAPHITE POWER SYSTEMS DIVISION. Net sales declined to $137 million in
the 2001 second quarter from $170 million in the 2000 second quarter, primarily
due to lower volume of all products sold, particularly graphite electrodes.
Volume of graphite electrodes sold was 46,000 metric tons during the 2001 second
quarter as compared to 56,800 metric tons during the 2000 second quarter. The
decrease in volume of graphite electrodes sold represented a reduction of $26
million in net sales. Average sales revenue per metric ton of graphite
electrodes in the 2001 second quarter was $2,367 as compared to the average in
the 2000 second quarter of $2,374. Unfavorable changes in currency exchange
rates represented a reduction of $5 million in net sales of graphite electrodes,
more than offsetting the benefits of increases in selling prices in local
currencies. Cost of sales decreased to $96 million in the 2001 second quarter
from $121 million in the 2000 second quarter. The decrease was primarily due to
lower volume of electrodes sold. Plant cost reductions and lower costs due to
the strengthening of the dollar resulted in a $27 lower average cost of sales
per metric ton for the 2001 second quarter as compared to the 2000 second
quarter. Gross profit in the 2001 second quarter was $41 million (29.8% of net
sales), a decrease from gross profit in the 2000 second quarter of $49 million
(28.7% of net sales).
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales increased to $34 million
in the 2001 second quarter from $29 million in the 2000 second quarter,
primarily due to an increase in volume of refractories sold and an increase in
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 was $24 million in the 2001 second
quarter as compared to $22 million in the 2000 second quarter. The increase was
primarily due to higher volume of refractories sold. Gross profit in the 2001
second quarter was $10 million
48
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(31.2% of net sales), an increase from gross profit in the 2000 second quarter
of $7 million (23.8% of net sales).
OPERATING PROFIT FOR US AS A WHOLE. Operating loss in the 2001 second
quarter was $39 million as compared to operating profit in the 2000 second
quarter of $33 million, or 16.6% of net sales. Operating loss in the 2001 second
quarter includes restructuring, impairment and antitrust charges aggregating $68
million that relate primarily to our graphite electrode business. Excluding the
special charges, operating profit in the 2001 second quarter would have been $29
million or 17.0% of net sales.
Selling, administrative and other expense decreased to $19 million in
the 2001 second quarter from $23 million in the 2000 second quarter primarily
due to reduced corporate spending.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense decreased to $16
million in the 2001 second quarter from $18 million in the 2000 second quarter.
The decrease resulted from lower average annual interest rates and lower average
total debt outstanding. Average outstanding total debt was $703 million in the
2001 second quarter as compared to $760 million in the 2000 second quarter. The
average annual interest rate was 8.0% in the 2001 second quarter as compared to
8.6% in the 2000 second quarter. These average annual interest rates exclude
imputed interest on the DOJ fine.
Provision for income taxes before restructuring, impairment and
antitrust charges was $6 million in the 2001 second quarter as compared to $4
million in the 2000 second quarter. The effective income tax rate for the 2001
second quarter was 48%, which was higher than the U.S. federal statutory income
tax rate of 35%. The higher rate in the 2001 second quarter was primarily as a
result of the fact that a substantial percentage of our earnings were derived
from higher tax jurisdictions. The effective income tax rate for the 2000 second
quarter was 25%. The rate for the 2000 second quarter was lower than the U.S.
federal statutory income tax rate primarily as a result of tax planning
strategies, earnings repatriation plans and earnings from consolidated entities
with lower effective tax rates.
As a result of the changes described above, net loss for the 2001 second
quarter was $39 million as compared to net income for the 2000 second quarter of
$11 million.
SIX MONTHS ENDED JUNE 30, 2001 AS COMPARED TO SIX MONTHS ENDED JUNE 30,
2000. Net sales of $342 million in the 2001 first half represented a $52
million, or 13%, decrease from net sales of $394 million in the 2000 first half.
Gross profit of $100 million in the 2001 first half represented a $13 million,
or 12%, decrease from gross profit of $113 million in the 2000 first half. Gross
profit margin was 29.2% in the 2001 first half as compared to 28.7% in the 2000
first half. The decrease in net sales and gross profit was primarily due to
lower volume of graphite electrodes sold.
49
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Cost of sales declined primarily due to lower volumes sold. Cost of
sales per metric ton decreased due to plant costs reductions and lower costs due
to the strengthening of the dollar. The increase in gross profit margin was
primarily due to the fact that the percentage decrease in net sales was less
than the percentage decrease in cost of sales, some of which are essentially
fixed.
GRAPHITE POWER SYSTEMS DIVISION. Net sales declined to $273 million in
the 2001 first half from $331 million in the 2000 first half, primarily due to
lower volume of all products sold, particularly graphite electrodes. Volume of
graphite electrodes sold was 89,000 metric tons during the 2001 first half as
compared to 108,000 metric tons in the 2000 first half. The decrease in volume
of graphite electrodes sold represented a reduction of $46 million in net sales.
Average sales revenue per metric ton of graphite electrodes in the 2001 first
half was $2,392 as compared to the average in the 2000 first half of $2,426.
Unfavorable changes in currency exchange rates represented a reduction of $10
million in net sales of graphite electrodes, more than offsetting the benefits
of increases in selling prices in local currencies. Cost of sales decreased to
$194 million in the 2001 first half from $233 million in the 2000 first half.
The decrease was primarily due to lower volume of electrodes sold. Plant cost
reductions and lower costs due to the strengthening of the dollar resulted in a
slightly lower average cost of sales per metric ton for the 2001 first half as
compared to the 2000 first half. Gross profit in the 2001 first half was $79
million (28.6% of net sales), a decrease from gross profit in the 2000 first
half of $98 million (29.8% of net sales).
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales increased to $69 million
in the 2001 first half from $63 million in the 2000 first half, primarily due to
an increase in volume of refractories sold and an increase in 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 was $48 million in each period. Gross profit
in the 2001 first half was $21 million (31.6% of net sales), an increase from
gross profit in the 2000 first half of $15 million (23.2% of net sales).
OPERATING PROFIT FOR US AS A WHOLE. Operating loss in the 2001 first
half was $14 million as compared to operating profit in the 2000 first half of
$57 million, or 14.5% of net sales. Operating profit in the 2001 first half
includes aggregate restructuring, impairment and antitrust charges of $68
million that relate primarily to our graphite electrode business. Excluding the
special charges, operating profit in the 2001 first half would have been $54
million, or 15.8% of net sales.
Selling, administrative and other expense decreased to $40 million in
the 2001 first half from $47 million in the 2000 first half primarily due to
reduced corporate spending.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense decreased to $35
million in the 2001 first half from $39 million in the 2000 first half. The
decrease resulted from lower average annual interest rates and lower average
total debt outstanding. Average outstanding total debt was
50
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
$716 million in the 2001 first half as compared to $767 million in the 2000
first half. The average annual interest rate was 8.4% in the 2001 first half as
compared to 9.4% in the 2000 first half. These average annual interest rates
exclude imputed interest on the DOJ fine.
Excluding the restructuring, impairment and antitrust charges, the
provision for income taxes in the 2001 first half reflects a 45% effective
income tax rate, which is higher than the U.S. Federal income tax rate of 35%
primarily due to the fact that a higher percentage of our earnings was derived
from higher tax jurisdictions. Excluding the restructuring charge, the provision
for income taxes in the 2000 first half reflects a 25% effective rate, primarily
due to the fact that a higher percentage of our earnings was derived from
jurisdictions with lower effective income tax rates.
As a result of the changes described above, net loss was $36 million in
the 2001 first half, a decrease from net income before extraordinary item of $13
million in the 2000 first half.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of funds have consisted principally of invested capital,
cash flow from operations and debt financing. Our uses of those funds (other
than for operations) have consisted principally of debt reduction, capital
expenditures and payment of fines, liabilities and expenses in connection with
investigations, lawsuits and claims.
We are highly leveraged and have substantial obligations in connection
with antitrust investigations, lawsuits and claims. At June 30, 2001, we had
total debt of $695 million and a stockholders' deficit of $354 million, as
compared to total debt of $735 million and a 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 $35 million at June 30, 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 $660 million at June 30, 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 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.
51
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
To minimize interest expense, except for our Brazilian subsidiary prior
to mid-1999, we attempt to operate on a "zero-cash" basis. This means that 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 and
make us more vulnerable in the event that these obligations are greater or the
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.
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 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.
52
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 which
become more restrictive over time. In October 2000, April 2001 and July 2001 we
obtained amendments to the New Senior Facilities. The amendments, among other
things, change our financial covenants so that they will be less restrictive
through 2006 than would otherwise be the case and exclude certain litigation and
antitrust charges and payments from the calculation of financial covenants
through June 30, 2002 and in certain cases thereafter. At June 30, 2001, we were
in compliance with the financial covenants in the New Senior Facilities.
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 at least through 2002. 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 $1 million in the 2001 first half as compared to cash
flow provided by operating activities of $25 million in the 2000 first half. The
decreased generation of cash flow of $24 million resulted primarily from a
reduction of gross profit and non-cash charges included in net income (loss).
CASH FLOW USED IN INVESTING ACTIVITIES. We used $7 million of cash flow
for investing activities during the 2001 first half as compared to $22 million
during the 2000 first half. This reduction of $15 million was primarily due to a
reduction in cash flow used for capital expenditures.
CASH FLOW PROVIDED BY FINANCING ACTIVITIES. Cash flow used in financing
activities was $5 million for the 2001 first half as compared to cash flow used
in financing activities of $9
53
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
million in the 2000 first half. During the 2001 first half, we received $9
million from an additional minority investment in connection with the broadening
of our strategic alliance in the cathode business with Pechiney and made $16
million in net debt repayments. During the 2000 first half, we incurred $28
million of costs in connection with our debt recapitalization in February 2000,
of which we paid $26 million in the 2000 first half, and had an increase in net
borrowings of $17 million.
ACCOUNTING CHANGES
In July 2001, the FASB issued Statement of Financial Account Standards
("SFAS") 141, "Business Combinations," and SFAS 142, "Goodwill and Other
Intangible Assets," both of which are effective for all fiscal years beginning
after December 15, 2001. These statements establish accounting and reporting
standards for business combinations, goodwill, and intangible assets. We are
currently evaluating the impact of SFAS 141 and SFAS 142 on our results of
operations, cash flows and financial position.
In September 2000, FASB issued SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," 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.
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 June
30, 2001, we had an interest rate cap on $100 million of debt, limiting the
floating interest rate factor on this debt to 5.0% through June 29, 2002, 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.
54
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 $83 million at
June 30, 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 $2 million unrealized loss at June 30, 2001 and nil at December
31, 2000.
55
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 July 23, 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, the due date of 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 was sentenced to a term of incarceration and payment of a
fine. In January 2000, George S. Schwegler, former Director, Export Sales
Europe, was indicted by the DOJ on a similar charge.
56
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 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 has been approved by the District 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 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. On July 18, 2001, the EU Competition Authority
issued its decision regarding the allegations. Under the decision the EU
Competition Authority assessed a fine of [euro] 50.4 million (about $43 million)
against UCAR. Seven other graphite electrode producers were also fined under the
decision, with fines ranging up to [euro] 80.2 million (about $69 million). From
the initiation of its investigation, we have cooperated with the EU Competition
Authority. As a result of our cooperation, our fine reflects a 40% reduction
from the amount that otherwise would have been assessed. The policy of the EU
57
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Competition Authority is to negotiate appropriate terms of payment of antitrust
fines, including extended payment terms. We are discussing payment terms with
the EU Competition Authority. Assessment of the fine is subject to appeal before
the Court of First Instance in Luxembourg. Any appeal would need to be filed
within three months after the fine was assessed and the fine or collateral
security therefor would typically be required to be paid or provided at about
the time the appeal was filed. We have not decided whether to appeal the
assessment of the fine.
In the second quarter of 2001, we learned that the Brazilian antitrust
authorities have requested written information from various steelmakers in
Brazil. We have not received a request for information from the Brazilian
antitrust authorities.
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 Korean antitrust authority
in its continuing investigation. 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 and the decision by the EU Competition Authority 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 and seek, among other things, an award of treble damages. 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,
58
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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
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 June 2001, our motion to dismiss the first and second
complaints was granted with respect to substantially all of the plaintiffs'
claims.
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 complaints. 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. We filed motions to
dismiss the second and third complaints. In May 2001, our motion to dismiss the
second complaint was denied. The guilty pleas described above do not relate to
carbon electrodes.
Certain customers who purchased carbon electrodes or other products from
us or who purchased graphite electrodes from us in various countries outside the
U.S. and Canada 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 were or are 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 June 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 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
59
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 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, and intend to continue to vigorously defend, against these lawsuits
as well as all threatened lawsuits and possible unasserted claims, including
those mentioned above. We may at any time, however, settle these lawsuits as
well as any threatened lawsuits and possible claims. The guilty pleas and the
decision by the EU Competition Authority make it more difficult to defend
against civil lawsuits and claims.
It is possible that additional civil antitrust lawsuits seeking, among
other things, to recover damages could be commenced against us in the U.S. and
in other jurisdictions.
1997 AND 2001 SECOND QUARTER ANTITRUST EARNINGS CHARGES
We recorded a pre-tax charge of $340 million against results of
operations for 1997 and, as a result of the assessment of a fine by the EU
Competition Authority, we recorded a pre-tax charge of an additional $10 million
against results of operations for the 2001 second quarter, as a reserve for
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims. The $350 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 $350 million and the timing of payment thereof
could be sooner than anticipated. In the aggregate (including the assessment of
the fine by the EU Competition Authority and the additional $10 million charge),
the fines and net settlements and expenses are within the amounts we used to
evaluate the $350 million charge. To the extent that aggregate liabilities and
expenses, net, are known or reasonably estimable, at June 30, 2001, $350 million
continues to represent our estimate of these liabilities and expenses.
Through June 30, 2001, we have paid an aggregate of $241 million of
fines and net settlement and expense payments and $11 million of imputed
interest. At June 30, 2001, $109 million remained in the reserve, of which $57
million is for committed payments for fines and settlements, and the balance of
which is for the fine assessed by the EU Competition Authority and other
matters. The aggregate amount of remaining committed payments for imputed
interest at June 30, 2001 was about $9 million.
During the 2001 first quarter, at our request, we obtained an agreement
from the DOJ to defer the due date of each of our three remaining annual
payments of the DOJ fine by one year.
60
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 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 pre-tax charge of $13.0 million against
results of operations 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.
61
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 sentencing
agreement with the DOJ, which has been approved by 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 June
30, 2001, we had incurred $4 million of these 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.
62
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 8, 2001, UCAR held its annual meeting of stockholders in
Nashville, Tennessee. The stockholders elected the following directors with
corresponding votes for and withheld:
NUMBER OF PERCENTAGE OF NUMBER OF
NAME OF DIRECTOR SHARES VOTED FOR VOTES CAST FOR SHARES WITHHELD
- ---------------- ---------------- -------------- ----------------
R. Eugene Cartledge 38,935,324 98.89 436,060
Mary B. Cranston 39,013,249 99.09 358,135
John R. Hall 38,935,324 98.89 436,060
Thomas Marshall 38,963,772 98.96 407,612
Michael C. Nahl 38,967,872 98.98 403,512
Gilbert E. Playford 38,912,473 98.83 458,911
63
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The exhibits listed in the following table have been filed as part of
this Quarterly Report on Form 10-Q.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
10.52 Underwriting Agreement, dated as of July 25, 2001, among J.P.
Morgan Securities Inc., Credit Suisse First Boston Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and the other
underwriters named therein and UCAR International Inc.
10.53 Second Amendment dated as of April 25, 2001 to the Credit
Agreement dated as of February 22, 2000 among UCAR International
Inc., UCAR Global Enterprises Inc., UCAR Finance Inc., the LC
subsidiaries from time to time a party thereto, the Lenders a
party thereto and Morgan Guaranty Trust of New York, an
Administrative Agent, Collateral Agent and Issuing Bank.
10.54 Third Amendment dated as of July 10, 2001 to the Credit
Agreement dated as of February 22, 2000 among UCAR International
Inc., UCAR Global Enterprises Inc., UCAR Finance Inc., the LC
subsidiaries from time to time a party thereto, the Lenders a
party thereto and Morgan Guaranty Trust of New York, an
Administrative Agent, Collateral Agent and Issuing Bank.
10.55* Outsourcing Services Agreement, dated as of March 30, 2001,
effective April 2001, by and between CGI Information Systems and
Management Consultants, Inc. and UCAR International Inc.
10.56* Joint Development and Collaboration Agreement, effective June 5,
2001, among UCAR Carbon Company Inc., Graftech Inc., and Ballard
Power Systems Inc.
10.57* Master Supply Agreement, effective June 5, 2001, between UCAR
Carbon Company Inc. and Ballard Power Systems Inc.
10.58* Agreement, effective as of January 1, 2001.
10.59* Agreement, effective as of January 1, 2001.
- ----------
* Confidential treatment requested as to certain portions.
64
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
(B) REPORTS ON FORM 8-K
The following Reports on Form 8-K were filed during the quarter ended
June 30, 2001:
a) Report on Form 8-K dated May 15, 2001 as filed by UCAR International
Inc., relating to a change in the certifying accountants of UCAR International
Inc. from KPMG LLP to Deloitte & Touche LLP.
b) Report on Form 8-K dated June 5, 2001 as filed by UCAR International
Inc., filing a press release dated May 15, 2001 announcing the shutdown of
certain U.S. graphite electrode manufacturing operations.
No financial statements were filed with such Reports on Form 8-K.
65
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: August 7, 2001 By: /S/ CORRADO F. DE GASPERIS
-----------------------------
Corrado F. De Gasperis
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER & CHIEF INFORMATION OFFICER
66
PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
10.52 Underwriting Agreement, dated as of July 25, 2001, among J.P.
Morgan Securities Inc., Credit Suisse First Boston Corporation,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and the other
underwriters named therein and UCAR International Inc.
10.53 Second Amendment dated as of April 25, 2001 to the Credit
Agreement dated as of February 22, 2000 among UCAR International
Inc., UCAR Global Enterprises Inc., UCAR Finance Inc., the LC
subsidiaries from time to time a party thereto, the Lenders a
party thereto and Morgan Guaranty Trust of New York, an
Administrative Agent, Collateral Agent and Issuing Bank.
10.54 Third Amendment dated as of July 10, 2001 to the Credit
Agreement dated as of February 22, 2000 among UCAR International
Inc., UCAR Global Enterprises Inc., UCAR Finance Inc., the LC
subsidiaries from time to time a party thereto, the Lenders a
party thereto and Morgan Guaranty Trust of New York, an
Administrative Agent, Collateral Agent and Issuing Bank.
10.55* Outsourcing Services Agreement, dated as of March 30, 2001,
effective April 2001, by and between CGI Information Systems and
Management Consultants, Inc. and UCAR International Inc.
10.56* Joint Development and Collaboration Agreement, effective June 5,
2001, among UCAR Carbon Company Inc., Graftech Inc., and Ballard
Power Systems Inc.
10.57* Master Supply Agreement, effective June 5, 2001, between UCAR
Carbon Company Inc. and Ballard Power Systems Inc.
10.58* Agreement, effective as of January 1, 2001.
10.59* Agreement, effective as of January 1, 2001.
- ----------
* Confidential treatment requested as to certain portions.