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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 _______________________
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COMMISSION FILE NUMBER: 1-13888
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UCAR INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1385548
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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3102 WEST END AVENUE
SUITE 1100 37203
NASHVILLE, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 760-8227
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
As of September 30, 2001, 55,769,177 shares of common stock, par value $.01 per
share, were outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 2000 and
September 30, 2001........................................ Page 2
Consolidated Statements of Operations for the Three Months
and Nine Months ended September 30, 2000 and 2001......... Page 3
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 2000 and 2001......................... Page 4
Consolidated Statement of Stockholders' Deficit for the Nine
Months ended September 30, 2001........................... Page 5
Notes to Consolidated Financial Statements................... Page 6
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1................ Page 27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... Page 33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS..................................................... Page 61
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS......................................... Page 62
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... Page 70
SIGNATURE.......................................................... Page 71
PART I
ITEM 1. FINANCIAL STATEMENTS
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
2000 2001
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 47 $ 20
Notes and accounts receivable................................. 121 103
Inventories:
Raw materials and supplies................................. 41 42
Work in process............................................ 103 116
Finished goods............................................. 31 37
-------- --------
175 195
Prepaid expenses and deferred income taxes.................... 18 13
-------- --------
Total current assets................................ 361 331
-------- --------
Property, plant and equipment.................................... 1,043 953
Less: accumulated depreciation................................... 652 641
-------- --------
Net fixed assets.................................... 391 312
Other assets..................................................... 156 195
-------- --------
Total assets........................................ $ 908 $ 838
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.............................................. $ 99 $ 85
Short-term debt............................................... 3 2
Payments due within one year on long-term debt................ 27 31
Accrued income and other taxes................................ 41 39
Other accrued liabilities..................................... 90 55
-------- --------
Total current liabilities........................... 260 212
-------- --------
Long-term debt................................................... 705 605
Other long-term obligations...................................... 209 236
Deferred income taxes............................................ 36 35
Minority stockholders' equity in consolidated entities........... 14 24
STOCKHOLDERS' 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, 58,517,989
shares issued at September 30, 2001......................... - 1
Additional paid-in capital.................................... 525 628
Accumulated other comprehensive loss.......................... (241) (265)
Retained deficit.............................................. (515) (547)
Treasury stock at cost, 2,319,482 shares at December 31, 2000
and 2,322,412 shares at September 30, 2001.................. (85) (85)
Common stock held in employee benefits trust, 426,400 shares at
September 30, 2001............................................ - (6)
-------- --------
Total stockholders' deficit...................................... (316) (274)
-------- --------
Total liabilities and stockholders' deficit...................... $ 908 $ 838
======== ========
SEE ACCOMPANYING NOTES.
2
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 2001 2000 2001
---- ---- ---- ----
Net sales............................................ $ 192 $ 157 $ 586 $ 499
Cost of sales........................................ 139 114 420 356
-------- -------- -------- ---------
Gross profit......................................... 53 43 166 143
Research and development............................. 3 3 8 9
Selling, administrative and other expenses........... 20 19 67 59
Restructuring charge (credit)........................ (1) - 5 5
Impairment loss on long-lived assets................. - - - 53
Antitrust investigations and related lawsuits and claims - - - 10
Securities class action and stockholder derivative lawsuits - - (1) -
Other income......................................... - (1) (1) (1)
-------- -------- -------- ---------
Operating profit .................................... 31 22 88 8
Interest expense..................................... 18 14 57 49
Income (loss) before provision for income taxes, minority
interest and extraordinary items................. 13 8 31 (41)
Provision for (benefit from) income taxes............ 5 3 9 (11)
-------- -------- -------- ---------
Income (loss) of consolidated entities before minority
interest and extraordinary item.................. 8 5 22 (30)
Less: minority stockholders' share of income......... 1 1 2 2
-------- -------- -------- ---------
Income (loss) before extraordinary item.............. 7 4 20 (32)
Extraordinary item, net of tax....................... - - 13 -
-------- -------- -------- ---------
Net income (loss).................................... $ 7 $ 4 $ 7 $ (32 )
======== ======== ======== =========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item.............. $ 0.16 $ 0.07 $ 0.44 $ (0.68)
Extraordinary item, net of tax....................... - - (0.28) -
-------- -------- -------- ---------
Net income (loss) per share.......................... $ 0.16 $ 0.07 $ 0.16 $ (0.68)
======== ======== ======== =========
Weighted average common shares outstanding (IN THOUSANDS) 45,152 52,389 45,135 47,679
======== ======== ======== =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item.............. $ 0.16 $ 0.07 $ 0.43 $ (0.68)
Extraordinary item, net of tax....................... - - (0.28) -
-------- -------- -------- ---------
Net income (loss) per share.......................... $ 0.16 $ 0.07 $ 0.15 $ (0.68)
======== ======== ======== =========
Weighted average common shares outstanding (IN THOUSANDS) 45,813 53,203 45,910 47,679
======== ======== ======== =========
SEE ACCOMPANYING NOTES.
3
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
2000 2001
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ 7 $ (32)
Extraordinary item, net of tax............................... 13 -
Non-cash charges to net income (loss):
Depreciation and amortization............................ 32 27
Deferred income taxes.................................... (15) (21)
Antitrust investigations and related lawsuits and claims. - 10
Restructuring charge..................................... 5 -
Impairment loss on long-lived assets..................... - 53
Other non-cash charges (credits)......................... 16 (1)
Working capital *............................................ (32) (57)
Long-term assets and liabilities............................. 14 2
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES... 40 (19)
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures......................................... (35) (22)
Sale of assets............................................... - 4
Purchase of short-term investments........................... (1) -
Maturity of short-term investments........................... 2 -
------- -------
NET CASH USED IN INVESTING ACTIVITIES................. (34) (18)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt borrowings (reductions), net................. 4 (1)
Revolving credit facility borrowings (reductions), net....... 59 (3)
Long-term debt borrowings.................................... 657 2
Long-term debt reductions.................................... (705) (87)
Minority interest investment................................. - 9
Sale of common stock, net.................................... - 94
Financing costs.............................................. (26) (3)
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES... (11) 11
------- -------
Net decrease in cash and cash equivalents........................ (5) (26)
Effect of exchange rate changes on cash and cash equivalents..... (1) (1)
Cash and cash equivalents at beginning of period................. 17 47
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................... $ 11 $ 20
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest expense......................................... $ 66 $ 44
======= =======
Income taxes............................................. $ 7 $ 21
======= =======
* Net change in working capital due to the following components:
(Increase) decrease in current assets:
Notes and accounts receivable............................ $ 11 $ 15
Inventories.............................................. (7) (33)
Prepaid expenses......................................... (1) -
Decrease in accounts payable and accruals.................... (12) (13)
Antitrust investigations and related lawsuits and claims..... (17) (14)
Restructuring payments....................................... (6) (12)
------- -------
WORKING CAPITAL....................................... $ (32) $ (57)
======= =======
SEE ACCOMPANYING NOTES.
4
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(DOLLARS IN MILLIONS)
(UNAUDITED)
COMMON
STOCK HELD
ACCUMULATED IN
ADDITIONAL OTHER EMPLOYEE TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY BENEFITS STOCKHOLDER'S
STOCK CAPITAL LOSS DEFICIT STOCK TRUST DEFICIT
----- ------- ---- ------- ------ -------- -------------
BALANCE AT DECEMBER 31, 2000..... $ - $ 525 $ (241) $ (515) $ (85) - $ (316)
Comprehensive loss:
Net loss..................... - - - (32) - - (32)
Foreign currency translation
adjustments................ - - (22) - - - (22)
Change in unrealized net
loss on marketable
securities................. - - (2) - - - (2)
-------- ------- -------- ------- ------- -------- -------
Total comprehensive loss. - - (24) (32) - - (56)
Sale of 2.5% of Graftech......... - 4 - - - - 4
Common stock issued to employee
benefits trust............... - 6 - - - (6) -
Sale of common stock, net........ 1 93 - - - - 94
-------- ------- -------- ------- ------- -------- -------
BALANCE AT SEPTEMBER 30, 2001.... $ 1 $ 628 $ (265) $ (547) $ (85) $ (6) $ (274)
======== ======= ======== ======= ======= ======== =======
SEE ACCOMPANYING NOTES.
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 nine months ended September 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 September 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 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 August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets,
excluding goodwill and other intangible assets not being amortized pursuant to
SFAS 142, and certain other assets. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. We are
currently evaluating the impact of SFAS 144 on our results of operations, cash
flows and financial position.
In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143, which requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value
7
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
can be made. SFAS 143 will be effective for all financial statements for fiscal
years beginning after June 15, 2002. We are currently evaluating the impact of
SFAS 143 on our results of operations, cash flows and financial position.
In July 2001, the FASB issued 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
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 2001 2000 2001
---- ---- ---- ----
Weighted average common shares
outstanding for basic
calculation..................... 45,152,472 52,389,057 45,135,299 47,678,518
Add: effect of stock options....... 660,179 814,001 774,833 -
----------- ------------ ----------- ----------
Weighted average common shares
outstanding for diluted
calculation..................... 45,812,651 53,203,058 45,910,132 47,678,518
=========== ============ =========== ==========
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 the 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 nine months ended September 30, 2001, 870,515
of potential common shares underlying dilutive securities have been excluded
from the calculation of diluted earnings (loss) per share because their effect
would reduce the loss per share.
8
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, after giving effect to , among other things, our annual
grant in September 2001 of ten-year options to employees to purchase an
aggregate of 1,551,080 shares at an exercise price of $8.85 per share, the
calculation of weighted average common shares outstanding for the diluted
calculation excludes the consideration of stock options covering 4,200,147
shares and 5,938,477 shares in each of the three months ended September 30, 2000
and 2001, respectively, and 3,449,723 shares and 4,853,960 shares in each of the
nine months ended September 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 realigned our businesses into
two new reportable segments: our Graphite Power Systems Division ("GPS"); and
our Advanced Energy Technology Division ("AET"). GPS includes our graphite and
carbon electrode and cathode businesses serving primarily the steel, aluminum
and ferroalloy industries. AET includes Graftech, our Advanced Carbon and
Graphite Materials business unit ("ACGM"), which includes our former graphite
and carbon specialties businesses, and a new business unit called High Tech High
Temp ("HT(2)") 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 2001 2000 2001
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Net sales to external customers:
Graphite Power Systems Division.......... $ 161 $ 126 $ 492 $ 399
Advanced Energy Technology Division...... 31 31 94 100
-------- --------- -------- --------
Consolidated net sales............... $ 192 $ 157 $ 586 $ 499
======== ========= ======== ========
Gross profit:
Graphite Power Systems Division........ $ 44 $ 33 $ 142 $ 112
Advanced Energy Technology Division.... 9 10 24 31
-------- --------- -------- --------
Consolidated gross profit............ $ 53 $ 43 $ 166 $ 143
======== ========= ======== ========
9
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) RESTRUCTURING AND IMPAIRMENT CHARGES
In the 2001 third quarter, we recorded a $2 million charge for
restructuring and impairment loss on long-lived assets related to our business
restructuring and realignment of our businesses into AET and GPS, the relocation
of our corporate headquarters and the shutdown of our coal calcining operations
located in Niagara Falls, New York. As part of the realignment, we have
centralized management functions of AET in Cleveland, Ohio, and management
functions of GPS in Etoy, Switzerland. We are relocating our corporate
headquarters, consisting of approximately 10 employees, from Nashville,
Tennessee, to Wilmington, Delaware. The relocation is expected to be completed
by the end of 2001. The charge includes severance and related benefits
associated with a workforce reduction of 24 employees and impairment of
leasehold improvement assets.
In the 2001 third quarter, we reversed $2 million of prior restructuring
charges based on revised lower estimates of workforce reductions and plant
closure costs, and we reclassified $4 million of prior restructuring charges
related to on-site waste disposal post monitoring costs to the other long-term
obligations.
In the 2001 second quarter, we recorded a $58 million charge for
restructuring and impairment loss on long-lived assets 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 employees and $3 million in plant
shutdown and related costs. The shutdown was completed on schedule 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 employees. The functional
areas affected included finance, accounting, sales, marketing and
administration. In the 2001 first nine months, we paid about $1 million of these
expenses. In the 2001 third quarter, we revised the workforce reduction estimate
to 45 employees and reversed a portion of the $4 million charge. The reversal is
part of the $2 million reversal described above.
In the 2000 third quarter, we recorded an impairment loss on long-lived
assets of $3 million in connection with the re-sourcing of our U.S. cathode
production to our facilities in Brazil and France and the reduction of graphite
electrode production capacity to accommodate such increased cathode production
in Brazil and France. This was a non-cash charge related to the write off of
certain long-lived assets located at one of our facilities in the U.S. The
charge affected GPS.
10
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, in the 2000 third quarter, 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.
The fair value of the long-lived assets was calculated on the basis of
discounted estimated future cash flows. Estimates of the discounted future cash
flows are subject to significant uncertainties and assumptions. Accordingly,
actual values could vary significantly from such estimates.
11
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity relating to the accrued expense
in connection with the restructuring charges.
POST
PLANT SHUTDOWN
SEVERANCE SHUTDOWN MONITORING
AND AND AND
RELATED RELATED RELATED
COSTS COSTS COSTS TOTAL
----- ----- ----- -----
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)
-------- -------- -------- --------
BALANCE AT DECEMBER 31, 2000........ 13 9 4 26
Restructuring charges in 2001....... 2 3 - 5
Payments in 2001.................... (9) (3) - (12)
Change in estimate and impact of
exchange rate changes in 2001.... - (2) 2 -
Reclassification of on-site disposal
and monitoring costs............. - - (4) (4)
-------- -------- --------- --------
BALANCE AT SEPTEMBER 30, 2001....... $ 6 $ 7 $ 2 $ 15
======== ======== ======== ========
The restructuring accrual is included in other accrued liabilities on
the Consolidated Balance Sheets.
12
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) LONG-TERM DEBT AND LIQUIDITY
The following table summarizes our long-term debt:
AT DECEMBER 31, AT SEPTEMBER 30,
2000 2001
---- ----
(DOLLARS IN MILLIONS)
New Senior Facilities:
Tranche A euro facility................... $ 239 $ 209
Tranche A USD facility.................... 54 23
Tranche B USD facility.................... 346 313
Revolving facility........................ 88 85
-------- -------
Total New Senior Facilities............. 727 630
Swiss mortgage and other European debt........ 5 6
-------- -------
Subtotal.................................. 732 636
Less: payments due within one year........... 27 31
-------- -------
Total..................................... $ 705 $ 605
======== =======
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 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.
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.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of $130 million (reduced by the amount of certain debt incurred by us that is
not incurred under the New Senior Facilities, $6 million of which debt was
outstanding at September 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 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.
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
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 application of the net proceeds from our public offering of common
stock in July 2001, the aggregate principal payments due on the Tranche A Term
Loans and Tranche B Term Loans are $46 million in 2002, $59 million in 2003, $63
million in 2004, $63 million in 2005, $149 million in 2006 and $165 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 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
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2001, the interest rates on our outstanding debt under
the New Senior Facilities were: Tranche A Euro Facility, 7.31%; Tranche A USD
Facility, 6.69%; Tranche B Facility, 6.93%; and Revolving Facility, 6.31%. The
weighted average interest rate on the New Senior Facilities was 7.54% during the
2001 first nine months.
We enter into agreements with financial institutions, which are intended
to limit, or cap, our exposure to incurrence of additional interest expense due
to increases in variable interest rates. Use of these agreements is allowed
under the New Senior Facilities.
The New Senior Facilities contain a number of significant covenants
that, among other things, significantly restrict our ability to sell assets,
incur additional debt, repay or refinance other debt or amend other debt
instruments, create liens on assets, enter into sale and lease-back
transactions, make investments or acquisitions, engage in mergers or
consolidations, make capital expenditures, make intercompany dividend payments
to UCAR, pay intercompany debt owed to UCAR, engage in transactions with
affiliates, pay dividends to stockholders of UCAR or make other restricted
payments and that otherwise significantly restrict corporate activities. In
addition, we are required to comply with specified minimum interest coverage and
maximum leverage ratios, which become more restrictive over time, beginning 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
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
We are highly leveraged. As discussed in Note 7, we also have
substantial obligations in connection with antitrust investigations, lawsuits
and claims. At September 30, 2001, we had total debt of $638 million and a
stockholders' deficit of $274 million. A majority of our debt has variable
interest rates. In addition, if we are required to pay or issue a letter of
credit to secure payment of the fine assessed by the EU Competition Authority
pending resolution of our appeal regarding the amount of the fine, the payment
would be financed by borrowing under, or the letter of credit would constitute a
borrowing under, the Revolving Facility.
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 the Revolving Facility as well
as monthly or quarterly cash flow from operations as our primary sources of
liquidity.
Our high leverage and substantial obligations in connection with
antitrust investigations, lawsuits and claims could have a material impact on
our liquidity. Cash flow from operations services payment of our debt and these
obligations, thereby reducing funds available to us for other purposes. Our
leverage and these obligations make us more vulnerable to economic downturns 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, to maintain the
availability of funds under the Revolving Facility, to continue to comply 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
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Revolving 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 September 30, 2001, we
were in compliance with those financial covenants.
While the Revolving Facility provides for maximum borrowings of up to
[euro]250 million, our current ability to borrow under the Revolving Facility
may effectively be substantially less than the maximum due to the impact that
additional borrowings under the Revolving Facility would have on our compliance
with the maximum leverage ratio permitted under the New Senior Facilities. In
addition, payment or issuance of a letter of credit to secure payment of the
fine assessed by the EU Competition Authority would significantly reduce
remaining funds available under the Revolving Facility for operating and other
purposes.
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 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 $169 million in
the 2001 first nine months and $84 million in the 2000 first nine months. None
of the receivables sold were recorded on the Consolidated Balance Sheets at
September 30, 2001 or December 31, 2000.
18
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 DOJ fine is
payable in six annual installments of $20 million, $15 million, $15 million, $18
million, $21 million and $21 million, commencing July 23, 1998. The 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 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
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. In July 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 against UCAR. Seven
other graphite electrode producers were also fined under the decision, with
fines ranging up to [euro]80.2 million. The decision brings to a conclusion our
last major pending antitrust liability and provides certainly as to the maximum
level of the fine. From the initiation of its investigation, we have cooperated
with the EU Competition Authority. As a result of our cooperation, our fine
reflects a substantial reduction from the amount that otherwise would have been
assessed. It is the policy of the EU Competition Authority to negotiate
appropriate terms of payment of antitrust fines, including extended payment
terms. We are discussing payment terms with the EU Competition Authority. After
an in-depth analysis of the decision, however, in October 2001, we filed an
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
appeal to the court challenging the amount of the fine. The fine or collateral
security therefor would typically be required to be paid or provided at about
the time the appeal was filed. We are currently in discussions with the EU
Competition Authority regarding the appropriate form of security during the
pendency of the appeal. If the results of these discussions are not acceptable
to us, we may file an interim appeal with the court to waive the requirement for
security or to allow us to provide alternative security for payment. We cannot
predict how or when the court would rule on such interim appeal.
In the 2001 second quarter, 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 and/or witnesses. It is possible that
antitrust investigations seeking, among other things, to impose fines and
penalties could be initiated by authorities in Brazil or 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 complaints were filed by a total of 31
steelmakers and related parties, all but one of whom are located outside the
U.S. In each complaint, the plaintiffs allege that the defendants violated U.S.
federal antitrust law in connection with the sale of graphite electrodes sold or
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
sourced from the U.S. and those sold and sourced outside the U.S. The plaintiffs
seek, among other things, an award of treble damages resulting from such alleged
violations. We believe that we have strong defenses against claims alleging that
purchases of graphite electrodes outside the U.S. are actionable under U.S.
federal antitrust law. In June 2001, our motions to dismiss the first and second
complaints, which were filed by 30 of the 31 plaintiffs, were granted with
respect to substantially all of the plaintiffs' claims. Appeals have been filed
by the plaintiffs and defendants with regard to these dismissals.
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 September 30, 2001, except as described below, we have settled
or obtained dismissal of 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, among other things, 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.
The foreign customer lawsuits and two of the three carbon electrode
lawsuits have not been settled. These remaining lawsuits are still in their
early stages. We have been vigorously defending, and intend to continue to
vigorously defend, against these remaining lawsuits as well as all threatened
lawsuits and possible unasserted claims, including those mentioned above. We may
at any time, however, settle these remaining lawsuits as well as any threatened
lawsuits and possible claims.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 aggregate reserve of $350 million is
calculated on a basis net of, among other things, imputed interest on
installment payments of the DOJ fine. Actual aggregate liabilities and expenses
(including settled investigations, lawsuits and claims as well as continuing
investigations, pending appeals 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 aggregate charge of $350 million. To the extent that aggregate
liabilities and expenses, net, are known or reasonably estimable, at September
30, 2001, $350 million represents 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.
Through September 30, 2001, we have paid an aggregate of $247 million of
fines and net settlement and expense payments and $11 million of imputed
interest. At September 30, 2001, $106 million remained in the reserve. The
aggregate amount of remaining committed payments for imputed interest at
September 30, 2001 was about $9 million.
STOCKHOLDER DERIVATIVE AND SECURITIES CLASS ACTION LAWSUITS
In March 1998, UCAR was served with a complaint commencing a stockholder
derivative lawsuit. Certain former and current officers and directors were named
as defendants. UCAR was named as a nominal defendant. In October 1999, UCAR and
the individual defendants entered into an agreement settling the lawsuit. The
settlement became final in January 2000.
In April and May 1998, UCAR was served with several complaints
commencing securities class actions. The complaints were consolidated into a
single complaint. 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
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 September 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 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
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 Power Systems Inc. The scope of the new agreements
significantly expands upon Graftech's and
24
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ballard's initial collaboration announced in 1999. The development agreement,
which has been extended from 2002 in the initial collaboration to 2011, includes
natural graphite-based materials and components for use in proton exchange
membrane fuel cells and fuel cell systems for transportation, stationary and
portable applications. The joint development program will concentrate on the
development of cost-effective graphitic materials and components, including flow
field plates and gas diffusion layers. As a part of this arrangement, Graftech
will also develop and manufacture prototype materials and components and provide
early stage testing of these prototypes in an on-site fuel cell testing center.
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.
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 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 manufacturing 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 manufacturing 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. In
25
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
addition 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) 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 $98 million and the net
proceeds to us were $91 million. Sixty percent of the net proceeds were used to
prepay term loans under the New Senior Facilities. Prepayments of $23 million
under the Tranche A Facility and $32 million under the Tranche B Facility were
applied against scheduled maturities in the order in which they were due. The
balance of the net proceeds will be used to fund growth and expansion of AET,
including growth and expansion through acquisitions, and, pending use, were
applied to reduce the outstanding balance under the Revolving Facility.
26
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 September 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.
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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 accounting
principles generally accepted in the U.S. or as a measure of a company's
profitability or liquidity. Our method for calculating EBITDA may not be
comparable to methods used by other companies and is not the same as the method
for calculating EBITDA under the New Senior Facilities.
28
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 other actions taken in 2000; and
o costs in 2000, in the case of other 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.
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.
29
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 AND RISK FACTORS
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 us or 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;
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;
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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;
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;
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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 or the amount of funds
available for borrowing under the New Senior Facilities; and
o other risks and uncertainties, including those described
elsewhere or incorporated by reference in this Report.
Occurrence of any of the events or circumstances described above could
also have a material adverse effect on our business, financial condition,
results of operations or cash flows.
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.
32
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 14 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 are the world's leading producer 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 ("GPS") and our Advanced Energy Technology Division ("AET").
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.
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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 were our
highest cost graphite electrode manufacturing operations. The shutdown was
completed by the end of the 2001 third quarter. These operations had the
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, Europe and South Africa. After the shutdown and
incremental 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.
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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 is the worldwide
leader 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. We
believe that our share of the Asian market for graphite
electrodes was only about 4% in 2000 as compared to our
worldwide market share (excluding the Asian market) of about 31%
in 2000. 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
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
manufacturing technology. We currently sell natural and synthetic graphite- and
carbon-based 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 ("ACGM"), 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 ("HT(2)").
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.
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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. 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.
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 the Mark 900 are made from our
GRAFCELL(R) 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.
In October 2001, Ballard launched its most advanced fuel cell platform
to date, the Mark 902. Building upon the Mark 900, the advantages of the Mark
902 include lower cost, improved design for volume manufacturing, improved
reliability, higher power density and enhanced compatibility with customer
system requirements. The unit cell design of the Mark 902 allows scalable
combinations to achieve a variety of power outputs ranging from 10kW to 300kW
and is designed to allow configuration for stationary and transportation
applications. Ballard reported that it has received commercial orders for the
Mark 902 scheduled for delivery in 2001 and that the Mark 902 will power the
ten-city European Union bus program scheduled for 2002 and 2003.
Graftech's GRAFCELL(R) advanced flexible graphite is a strategic
material for the Mark 902. GRAFCELL(R) advanced flexible graphite offers the
merits of excellent electrical and
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thermal conductivity, low cost, light weight, and compatibility with continuous
process high volume manufacturing.
GRAFCELL(R) advanced flexible graphite will also be included in the Cdn
$34.5 million sale by Ballard of Mark 900 series fuel cells to Ford Motor
Company, the largest single fuel cell order in the industry to date. It will
also be included in the Cdn $25.9 million sale by Ballard of fuel cells to
Honda. GRAFCELL(R) advanced flexible graphite is included in Ballard's 60kW
engineering prototype stationary fuel cell power generator. This unit
incorporates the Mark 900 architecture that Ballard has stated will be developed
for a range of fuel cell applications.
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 a wide range of 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;
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 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.
In the 2001 third quarter, our Advanced Energy Technology Division
launched its information and services website: www.HT2.com. The HT2 website
offers technology solutions and technical services built on our extensive
expertise in high temperature production and carbon technology to a broad range
of customers. The website includes technical papers on graphite and
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carbon science, technical literature, searches, industry news, and access to
services like high temperature testing and analysis, high temperature heat
treating, consulting for process and product development and technology
licensing.
In the 2001 third quarter, Graftech's advanced flexible graphite line
for fuel cell component and electronic thermal management product manufacturing
successfully began production.
PUBLIC OFFERING
In July 2001, we completed a public offering of 10,350,000 shares of
common stock at a public offering price of $9.50 per share. The gross proceeds
from that offering were $98 million and the net proceeds to us were $91 million.
Sixty percent of the net proceeds were used to prepay term loans under the New
Senior Facilities. 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.
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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.
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 have been and continue to be redesigned 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 long-lived assets to their estimated fair value of $6
million. In 2000, we restructured the business. The key elements of the
restructuring consisted of elimination of low profitability product lines,
rationalization of operations to generate costs savings and improve
profitability of the remaining product lines, and use of graphite specialties
technology to develop new, and expand existing, markets. Accordingly, in
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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. 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 the 2001 second quarter, we recorded a $58 million charge for
restructuring and impairment loss on long-lived assets related to the shutdown
of 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. The shutdown will affect 171
employees. The shutdown was completed on schedule near 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.
In the 2001 third quarter, we recorded a $2 million charge for
restructuring and impairment loss on long-lived assets related to our business
restructuring and realignment of our businesses into our Advanced Energy
Technology and Graphite Power Systems Divisions, the relocation of our corporate
headquarters and the shut down of our coal calcining operations located in
Niagara Falls, New York. We are shutting down our coal calcining operations
primarily because we have entered into a five-year agreement to purchase
calcined coal from a third party at a lower net effective cost than we can
produce it for ourselves. We expect the shutdown to be completed by the end of
2001. As part of the realignment, we have centralized management functions of
our Advanced Energy Technology Division in Cleveland, Ohio, and management
functions of our Graphite Power Systems Division in Etoy, Switzerland. We are
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
relocating our corporate headquarters, consisting of approximately 10 employees,
from Nashville, Tennessee, to Wilmington, Delaware. The relocation is expected
to be completed by the end of 2001. The charge consists primarily of severance
costs associated with a workforce reduction of 24 employees.
In the 2001 third quarter, we reversed $2 million of prior restructuring
charges based on revised lower estimates of workforce reductions and plant
closure costs and we reclassified $4 million of prior restructuring charges
related to on-site waste disposal post monitoring costs to the other long term
obligations.
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 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 September 30, 2001, our investment in the
initiative included about $4 million of consulting fees 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
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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 manufacturing 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 manufacturing 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. 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. In
1999, we entered into a
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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 Mark 900 PEM fuel cell stack
and announced that it was the foundation for Ballard's fuel cells for
transportation, stationary and portable applications. In October 2001, Ballard
launched the Mark 902, its most advanced fuel cell platform to date, which
builds on the Mark 900. The Mark 900 and 902 include our GRAFCELL(R) advanced
flexible graphite materials and 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.
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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 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,
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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 September 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, among others, 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 5% 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.
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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. In July 2001, that authority
issued its decision. Under the decision, that authority assessed a fine of
[euro]50.4 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. 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 in connection with 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 substantial
reduction from the amount that otherwise would have been assessed. It is the
policy of that authority to negotiate appropriate terms of payment of antitrust
fines, including extended payment terms. We are discussing payment terms with
that authority. After an in-depth analysis of the decision, however, in October
2001, we filed an appeal to the court challenging the amount of the fine. The
fine or collateral security therefor would typically be required to be paid or
provided at about the time the appeal was filed. We are currently in discussions
with that authority regarding the appropriate form of security during the
pendency of the appeal. If the results of these discussions are not acceptable
to us, we may file an interim appeal to the court to waive the requirement for
security or to allow us to provide alternative security for payment. We cannot
predict how or when the court would rule on such interim appeal.
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 and/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 September 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,
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, $350 million represents our estimate of these liabilities and
expenses. The guilty pleas and the decision by the antitrust
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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.
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 unreimbursed 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 was 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
global, regional or country 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. This weakening became more severe in the 2000 fourth
quarter and began impact other regional economies. Notwithstanding this
weakening, in 2000, estimated worldwide electric arc furnace steel production
was a record 285 million metric tons (about 34% of total steel production).
The weakening in North America has continued and become more severe in
2001. In addition, its impact on other regional economies also became more
severe during 2001, particularly in Europe beginning at the end of August 2001.
Further, electric arc furnace steel production declined in Brazil in the 2001
third quarter by about 25% as compared to the 2001 second quarter. This decline
was caused both by shortages of electricity brought on by a drought that has
reduced hydroelectric power generation as well as by the weakening in global
economic conditions. This global weakness is now being exacerbated by the impact
on economic conditions of the terrorist
48
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
acts in the U.S. beginning in September 2001. Worldwide electric arc furnace
steel production is experiencing a record decline in 2001. We estimate that it
has declined in 2001 by about 11% as compared to 2000 and about 5% as compared
to 1999. More than 15 steel companies in the U.S. have filed for protection
under the Bankruptcy Code or closed plants. Moreover, notwithstanding a
substantial decrease in steel production in the U.S., steel inventories,
particularly those held by steel service centers, remains high.
These fluctuations in electric arc furnace steel production resulted in
corresponding fluctuations in demand for graphite electrodes. 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. Overall pricing worldwide was weak throughout most of this period.
However, we implemented 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. These price increases have been sustained.
We are experiencing intense competition in the graphite electrode
industry. One of our U.S. competitors, The Carbide/Graphite Group, Inc., filed
for protection under Bankruptcy Code in October 2001. In order to seek to
minimize our credit risks, we have reduced our sales of, or refused to sell
(except for cash on delivery), graphite electrodes to some customers and
potential customers in the U.S. In April 2001, we implemented an additional 8%
local currency selling price increase in Europe. Notwithstanding the price
increases described above, overall pricing worldwide, particularly in North
America beginning in September 2001, is weak.
We expect that demand for our graphite electrodes will decline
substantially in 2001 as compared to 2000 due to the decline in electric arc
furnace steel production, our efforts to implement and maintain local currency
selling price increases and our efforts to seek to minimize credit risks.
Assuming no change in product mix, we believe that the average local currency
selling prices of our graphite electrodes will decline in most regions in 2001
as compared to 2000 and will increase slightly in Europe 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 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
would expect that lower production rates and higher costs for energy and some
raw materials increase our costs of sales per metric ton of graphite electrodes
in 2001 as compared to 2000. We believe that the impact of this shutdown and our
continuing cost reduction efforts will more than offset this increase.
In 1998 and 1999, demand and prices for most of our other products sold
to the metals, automotive and semiconductor 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 these products began to gradually recover. During
49
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
2000, demand for most of these products as a group was relatively stable.
Overall pricing did not strengthen. The global and regional economic conditions
that have impacted demand and prices for graphite electrodes since mid-2000 have
also similarly impacted demand and prices for most of these products (other than
graphite cathodes). Demand and prices for graphite cathodes has remained
relatively strong since the recovery began in 1999 primarily due to construction
of new aluminum smelters using graphite cathodes even as old smelters using
carbon cathodes are removed from service.
In April 2001, Conoco experienced an explosion at its petroleum coke
plant in Humber, England. Conoco produces petroleum coke at two plants, Humber
and Lake Charles, Louisiana. Conoco placed customers of petroleum coke from its
Humber facility on allocation until August 2001. We have been and are working
with Conoco and other coke producers to minimize interruptions in deliveries to
us. Conoco began to phase in increases in customer allocations in August 2001 as
production was restored and we expect that allocations will be fully restored by
the end of 2001. We have not been and do not expect to be materially adversely
affected by this event.
We believe that business conditions for most of our products (other than
graphite cathodes) will remain challenging through 2002 and that a significant
recovery in the steel, automotive and semiconductor industries will not occur
until the 2002 second half, at the earliest. We have already received orders for
a majority of our production of graphite cathodes for 2002. We expect our cost
improvement trends in graphite electrode production, interest expense and
overhead to continue through 2001. We believe that these cost improvements will
further strengthen our competitive position during the current economic
recession and will position us well for an economic recovery. We expect that our
Advanced Energy Technology Division will continue to achieve major milestones in
the fuel cell, electronic thermal management and other growth areas leading to
significant revenue growth over the next few years.
Our outlook could be significantly impacted by changes in interest rates
by the U.S. Federal Reserve Board and the European Central Bank, changes in tax
and fiscal policies by the U.S. and other governments, the occurrence of further
terrorist acts and developments (including increases in security, transportation
and other costs, transportation delays and continuing or increased economic
uncertainty and weakness) resulting from the terrorist acts in the U.S.
beginning in September 2001 and the war on terrorism, and changes in global and
regional economic conditions. We are focusing on cost reduction and other
contingency plans to respond to an extended recession.
HIGHLIGHTS OF 2001 THIRD QUARTER AS COMPARED TO 2001 SECOND QUARTER
The net sales of our Graphite Power Systems Division decreased to $126
million in the 2001 third quarter from $137 million in the 2001 second quarter,
primarily due to lower volume of carbon and graphite electrodes sold, partially
offset by higher volume of cathodes sold. Volume of graphite electrodes sold was
42,200 metric tons in the 2001 third quarter as compared to 46,000 metric tons
in the 2001 second quarter. The lower volume of graphite electrodes sold
50
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
represented a decrease of $9 million in net sales. In addition to the seasonally
lower graphite electrode sales volume in Europe during the 2001 third quarter,
volume was negatively impacted compared to the 2001 second quarter by continued
weakness in the North American steel production and softening demand in Brazil
and Europe. Average sales revenue per metric ton of graphite electrodes in the
2001 third quarter was $2,323 as compared to the average in the 2001 second
quarter of $2,367. 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 primarily to normal changes in product mix. Our recent increases in local
currency selling prices in Europe have been sustained in the 2001 third quarter.
The gross profit of the division in the 2001 third quarter was $33 million
(27.2% of net sales), a decrease from gross profit in the 2001 second quarter of
$41 million (29.8% of net sales). The decrease in gross profit was largely due
to the decrease in net sales. The cost of sales per metric ton of graphite
electrodes in the 2001 third quarter was essentially the same as in the 2001
second quarter.
The net sales of our Advanced Energy Technology Division decreased to
$31 million in the 2001 third quarter from $34 million in the 2001 second
quarter, primarily due to lower volume of graphite specialties sold. The gross
profit in the 2001 third quarter was $10 million (29.0% of net sales), the same
as gross profit in the 2001 second quarter of $10 million (31.2% of net sales).
The decrease in gross margin was primarily due to less favorable product mix in
both sealing and specialties products.
Selling, administrative and other expenses were $19 million in the 2001
third quarter, the same as in the 2001 second quarter. Interest expense was $14
million in the 2001 third quarter, a decrease of $2 million from the 2001 second
quarter due to lower average interest rates and lower average debt outstanding.
The effective income tax rate before special charges was 45% in the 2001
third quarter as compared to 48% in the 2001 second quarter.
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 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 in the Consolidated Statement of Operations. We also record foreign
currency transaction gains and losses as part of other income.
51
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
During 2000 and the 2001 first nine months, 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 3% in the 2001 first nine months, the
weakening of the Brazilian currency, which devalued about 8% against the dollar
during 2000 and devalued about 27% in the 2001 first nine months, and the
weakening of the South African currency, which devalued about 19% during 2000
and about 16% in the 2001 first nine months.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000. Net sales of $157 million in the 2001 third quarter
represented a $35 million, or 18%, decrease from net sales of $192 million in
the 2000 third quarter. Gross profit of $43 million in the 2001 third quarter
represented a $10 million, or 19%, decrease from gross profit of $53 million in
the 2000 third quarter. Gross margin was 27.6% in the 2001 third quarter, the
same as in the 2000 third quarter, primarily due to sustained, strong cost
control in our graphite electrode and cathode businesses. 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 of most products
sold. Cost of sales per metric ton of graphite electrodes sold decreased
primarily due to plant cost reductions and lower costs due to the strengthening
of the dollar.
GRAPHITE POWER SYSTEMS DIVISION. Net sales declined to $126 million in
the 2001 third quarter from $161 million in the 2000 third quarter, primarily
due to lower volume of most products sold, particularly graphite electrodes.
Volume of graphite electrodes sold was 42,200 metric tons during the 2001 third
quarter as compared to 53,900 metric tons during the 2000 third quarter. The
decrease in volume of graphite electrodes sold represented a reduction of $28
million in net sales. The decrease was primarily a result of a decline in North
American electric arc furnace steel production, our efforts to implement and
maintain increases in selling prices in local currencies of our graphite
electrodes and actions taken by us to manage credit risk. Average sales revenue
per metric ton of graphite electrodes in the 2001 third quarter was $2,323 as
compared to the average in the 2000 third quarter of $2,406. Unfavorable changes
in currency exchange rates represented a reduction of $4 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 $93 million in the 2001
third quarter from $117 million in the 2000 third quarter. The decrease was
primarily due to lower volume of electrodes sold. Cost of sales of graphite
electrodes benefited from improved productivity, head-count reductions, plant
cost reductions, lower costs due to the strengthening of the dollar and lower
maintenance spending as compared to the 2000 third quarter. Average cost of
sales per metric ton of graphite electrodes declined by about 5% in the 2001
third quarter as compared to the 2000 third quarter, despite lower operating
levels. Gross profit in the 2001 third quarter was $33 million (27.2% of net
sales), a decrease from gross profit in the 2000 third quarter of $44 million
(27.2% of net sales). The gross margin
52
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
was the same in both quarters, despite significantly lower graphite electrode
sales volume and lower operating levels.
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales were stable at $31
million in the 2001 third quarter and $31 million in the 2000 third quarter,
primarily due to cyclical increases in volume of refractories sold and in sales
of products to customers in the aerospace industry, new business sales and an
increase in technical service and technology license fees, offset by a decrease
in volume of flexible graphite sold for gasket applications due to lower demand
from the automotive industry as well as a decrease in products sold to the
semiconductor and industrial sectors, particularly in Europe. Cost of sales was
$21 million in the 2001 third quarter as compared to $22 million in the 2000
third quarter. The decrease was primarily due to product mix. Gross profit in
the 2001 third quarter was $10 million (29.0% of net sales), an increase from
gross profit in the 2000 third quarter of $9 million (29.5% of net sales).
OPERATING PROFIT FOR US AS A WHOLE. Operating profit in the 2001 third
quarter was $22 million, or 14.0% of net sales, as compared to operating profit
in the 2000 third quarter of $31 million, or 16.1% of net sales. Selling,
administrative and other expense decreased to $19 million in the 2001 third
quarter from $20 million in the 2000 third quarter primarily due to a change in
vacation policy in the U.S.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense decreased to $14
million in the 2001 third quarter from $18 million in the 2000 third quarter.
The decrease resulted from lower average annual interest rates and lower average
total debt outstanding. Average outstanding total debt was $657 million in the
2001 third quarter as compared to $783 million in the 2000 third quarter. The
decrease was primarily due to use of net proceeds from our public offering in
July 2001 to reduce debt and scheduled repayments of debt due prior to July
2001. The average annual interest rate was 7.6% in the 2001 third quarter as
compared to 8.2% in the 2000 third quarter. These average annual interest rates
exclude imputed interest on the DOJ fine.
Provision for income taxes was $3 million in the 2001 third quarter as
compared to $5 million in the 2000 third quarter. The effective income tax rate
for the 2001 third quarter was 45%, which was higher than the U.S. federal
statutory income tax rate of 35% primarily as a result of the fact that a
substantial percentage of our earnings was derived from higher tax
jurisdictions. The effective income tax rate for the 2000 third quarter,
excluding special charges (credits), was 41%.
As a result of the changes described above, net income for the 2001
third quarter was $4 million as compared to net income for the 2000 third
quarter of $7 million.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000. Net sales of $499 million in the 2001 first nine months
represented an $87 million, or 15%, decrease from net sales of $586 million in
the 2000 first nine months. Gross profit of $143 million in the 2001 first nine
months represented a $23 million, or 14%, decrease
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
from gross profit of $166 million in the 2000 first nine months. Gross margin
was 28.7% in the 2001 first nine months as compared to 28.3% in the 2000 first
nine months, primarily due to sustained, strong cost control in our graphite
electrode and cathode businesses. 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 of most products
sold. Cost of sales per metric ton of graphite electrodes decreased due to plant
costs reductions and lower costs due to the strengthening of the dollar. The
increase in gross 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 $399 million in
the 2001 first nine months from $492 million in the 2000 first nine months,
primarily due to lower volume of all products sold, particularly graphite
electrodes. Volume of graphite electrodes sold was 131,200 metric tons during
the 2001 first nine months as compared to 161,900 metric tons in the 2000 first
nine months. The decrease in volume of graphite electrodes sold represented a
reduction of $74 million in net sales. Average sales revenue per metric ton of
graphite electrodes in the 2001 first nine months was $2,370 as compared to the
average in the 2000 first nine months of $2,420. Unfavorable changes in currency
exchange rates represented a reduction of $14 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 $287 million in the 2001 first nine
months from $350 million in the 2000 first nine months. The decrease was
primarily due to lower volume of electrodes sold. Cost of sales of graphite
electrodes benefited from improved productivity, head-count reductions, plant
cost reductions, lower costs due to the strengthening of the dollar and lower
maintenance spending as compared to the 2000 first nine months. Average cost of
sales per metric ton of graphite electrodes declined by about 2% in the 2001
first nine months as compared to the 2000 first nine months, despite lower
operating levels. Gross profit in the 2001 first nine months was $112 million
(28.2% of net sales), a decrease from gross profit in the 2000 first nine months
of $142 million (28.9% of net sales).
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales increased to $100 million
in the 2001 first nine months from $94 million in the 2000 first nine months,
primarily due to cyclical increases in volume of refractories sold and in sales
of products to customers in the aerospace industry, new business sales 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 as well as a decrease in products sold
to the semiconductor and industrial sectors, particularly in Europe. Cost of
sales decreased to $69 million in the 2001 first nine months from $70 million in
the 2000 first nine months, primarily due to benefits from the restructuring of
our graphite specialties business. Gross profit in the 2001 first nine months
was $31 million (30.8% of net sales), an increase from gross profit in the 2000
first nine months of $24 million (25.2% of net sales) primarily because net
sales increased and cost of sales remained relatively stable.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
OPERATING PROFIT FOR US AS A WHOLE. Operating profit in the 2001 first
nine months was $8 million, or 1.6% of net sales, as compared to operating
profit in the 2000 first nine months of $88 million, or 15.0% of net sales.
Operating profit in the 2001 first nine months includes a restructuring charge
of $5 million and an impairment loss on long-lived graphite electrode assets of
$53 million relating to the shutdown of our graphite electrode operations in our
Clarksville and Columbia, Tennessee facilities and a charge of $10 million
relating to potential liabilities and expenses in connection with antitrust
investigations and related lawsuits and claims. Operating profit in the 2000
first nine months includes a credit of $1 million relating to the reversal of
portion of the charge in 1999 relating to securities class action and
stockholder derivative lawsuits and restructuring charges of $5 million relating
to our graphite electrode businesses. Excluding the special charges and credit,
operating profit in the 2001 first nine months would have been $76 million, or
15.2% of net sales, and in the 2000 first nine months would have been $91
million, or 15.5% of net sales.
Selling, administrative and other expense decreased to $59 million in
the 2001 first nine months from $67 million in the 2000 first nine months
primarily due to reduced corporate spending.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense decreased to $49
million in the 2001 first nine months from $57 million in the 2000 first nine
months. The decrease resulted from lower average annual interest rates and lower
average total debt outstanding. Average outstanding total debt was $696 million
in the 2001 first nine months as compared to $770 million in the 2000 first nine
months. The decrease was primarily due to use of net proceeds from our public
offering in July 2001 to reduce debt. The average annual interest rate was 8.6%
in the 2001 first nine months as compared to 9.2% in the 2000 first nine months.
These average annual interest rates exclude imputed interest on the DOJ fine.
Benefit from income taxes was $11 million in the 2001 first nine months
as compared to provision for income taxes of $9 million in the 2000 first nine
months. Excluding the special charges, the provision for income taxes in the
2001 first nine months reflects a 45% effective income tax rate, which was
higher than the U.S. federal income tax rate of 35% primarily due to the fact
that a substantial percentage of our earnings was derived from higher tax
jurisdictions. Excluding the special charges and credit, the provision for
income taxes in the 2000 first nine months reflects a 30% effective rate, which
was lower than the U.S. federal income tax rate of 35% primarily due to the fact
that a substantial percentage of our earnings was derived from jurisdictions
with lower effective income tax rates.
In the 2000 first nine months, we recorded an extraordinary item, net of
tax, of $13 million in connection with our debt recapitalization in February
2000.
As a result of the changes described above, net loss was $32 million in
the 2001 first nine months, a decrease from net income before extraordinary item
of $20 million in the 2000 first nine months.
55
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
Our sources of funds have consisted principally of invested capital,
cash flow from operations, debt financing and, since July 2001, net proceeds
from our public offering of common stock. 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 September 30, 2001, we
had total debt of $638 million and a stockholders' deficit of $274 million, as
compared to total debt of $735 million and a stockholders' deficit of $316
million at December 31, 2000. A majority of our debt has variable interest
rates. In addition, if we are required to pay or issue a letter of credit to
secure payment of the fine assessed by the EU Competition Authority pending
resolution of our appeal regarding the amount of the fine, the payment would be
financed by borrowing under, or the letter of credit would constitute a
borrowing under, our revolving credit facility. 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 $20 million at September 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 $618 million at
September 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.
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
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.
56
PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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, to maintain the
availability of funds under our revolving credit facility, to maintain
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.
As described above, 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 have been 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
September 30, 2001, we were in compliance with the financial covenants in the
New Senior Facilities.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
While our revolving credit facility provides for maximum borrowings of
up to [euro]250 million, our current ability to borrow under this facility may
effectively be 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. In addition, payment
or issuance of a letter of credit to secure payment of the fine assessed by the
EU Competition Authority would significantly reduce remaining funds available
under our revolving credit facility for operating and other purposes.
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 when due.
CASH FLOW USED IN OR PROVIDED BY OPERATING ACTIVITIES. Cash flow used in
operating activities was $19 million in the 2001 first nine months as compared
to cash flow provided by operating activities of $40 million in the 2000 first
nine months. The increased use of cash flow of $59 million resulted primarily
from a reduction in gross profit and an increase in working capital, primarily
due to an increase in inventories. Inventory levels increased in our Graphite
Power Systems Division primarily due to transitioning activities in connection
with the shutdown of our U.S. graphite electrode manufacturing operations and
lower than expected volume of graphite electrodes sold. Accounts payable
declined primarily due to lower spending and lower purchases of petroleum coke
as excess inventories stockpiled following the explosion at one of Conoco's
petroleum coke plants were reduced. Our average days payable outstanding
increased by about 20 days (but is still less than 60 days) and our days sales
outstanding decreased by about 8 days at the end of the 2001 first nine months
as compared to the end of the 2000 first nine months. Careful management of
credit risk allowed us to avoid significant accounts receivable losses in light
of the poor financial condition of many of our potential and existing customers.
In light of current and prospective global and regional economic conditions, we
cannot assure that we will not be materially adversely affected by accounts
receivable losses in the future.
CASH FLOW USED IN INVESTING ACTIVITIES. We used $18 million of cash flow
for investing activities during the 2001 first nine months as compared to $34
million during the 2000 first nine months. This reduction of $16 million was
primarily due to a reduction in capital expenditures.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
We are focussing our capital expenditures on strategic capital investments and
essential maintenance.
CASH FLOW USED IN OR PROVIDED BY FINANCING ACTIVITIES. Cash flow
provided by financing activities was $11 million during the 2001 first nine
months as compared to cash flow used in financing activities of $11 million in
the 2000 first nine months. During the 2001 first nine months, we received net
proceeds of $91 million from our public offering of common stock in July 2001,
and $9 million from an additional minority investment in connection with the
broadening of our strategic alliance in the cathode business with Pechiney and
made $86 million in long-term debt repayments. During the 2000 first nine
months, we incurred $26 million ($13 million, net of tax) of costs, fees and
expenses in connection with our debt recapitalization in February 2000 and had
an increase in net borrowings of $15 million.
USE OF PROCEEDS AND NET DEBT. We completed a public offering of common
stock in July 2001. Net proceeds from the offering were $91 million. We plan to
use approximately 40% of the net proceeds for growth and expansion. In the
interim, those proceeds have been used to reduce debt. Net debt (which is total
debt, net of cash, cash equivalents and short-term investments) declined $42
million from the end of the 2001 second quarter to $618 million at the end of
the 2001 third quarter. Cash used for increased in working capital, antitrust
payments of $6 million and restructuring payments of $7 million, and a currency
translation adjustment increasing our euro-denominated debt by $15 million,
offset some of the debt reduction from use of those net proceeds. We are
targeting a net debt level of about $600 million at the end of 2001.
ACCOUNTING CHANGES
In August 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets,
excluding goodwill and other intangible assets not being amortized pursuant to
SFAS 142, and certain other assets. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. We are
currently evaluating the impact of SFAS 144 on our results of operations, cash
flows and financial position.
In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. SFAS 143 will be effective for
all financial statements for fiscal years beginning after June 15, 2002. We are
currently evaluating the impact of SFAS 143 on our results of operations, cash
flows and financial position.
In July 2001, the FASB issued SFAS 141, "Business Combinations," and
SFAS 142, "Goodwill and Other Intangible Assets", both of which are effective
for all fiscal years beginning
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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
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.
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PART I (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risks primarily from changes in interest rates
and currency exchange rates. To manage our exposure to these changes, we
routinely enter into various transactions that have been authorized according to
documented policies and procedures. We do not use derivatives for trading or
speculative purposes or to generate income.
Our exposure to changes in interest rates results primarily from
variable or floating rate long-term debt where the interest rate is determined
based on LIBOR or euro LIBOR. We enter into agreements with financial
institutions, which are intended to limit, or cap, our exposure to incurrence of
additional interest expense due to increases in variable interest rates. At
September 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.
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 $156 million at
September 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 gain at September 30, 2001 and nil at
December 31, 2000.
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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 DOJ fine is payable in six annual
installments of $20 million, $15 million, $15 million, $18 million, $21 million
and $21 million, commencing July 23, 1998. The 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. 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.
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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. We believe that Mitsubishi is a defendant in several civil antitrust
lawsuits relating to the subject matter of such violations.
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 against UCAR. Seven
other graphite electrode producers were also fined under the decision, with
fines ranging up to [euro]80.2 million. The decision brings to a conclusion our
last major pending antitrust liability and provides certainty as to the maximum
level of the fine. From the initiation of its investigation, we have cooperated
with the EU Competition Authority. As a result of our cooperation, our fine
reflects a substantial reduction from the amount that otherwise would have been
assessed. It is the policy
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
of the EU Competition Authority to negotiate appropriate terms of payment of
antitrust fines, including extended payment terms. We are discussing payment
terms with the EU Competition Authority. After an in-depth analysis of the
decision, however, in October 2001 we filed an appeal to the Court of First
Instance of the European Communities in Luxembourg challenging the amount of the
fine. Appeals of this type may take two years or longer to be decided. The fine
or collateral security therefor would typically be required to be paid or
provided at about the time the appeal was filed. We are currently in discussions
with the EU Competition Authority regarding the appropriate form of security for
payment of the fine during the pendency of the appeal. If the results of these
discussions are not acceptable to us, we may file an interim appeal with the
Court to waive the requirement for security or to allow us to provide
alternative security for payment. We cannot predict how or when the Court would
rule on such interim appeal.
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 and/or witnesses. It is possible that
antitrust investigations seeking, among other things, to impose fines and
penalties could be initiated by authorities in Brazil or 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
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
petitions, the plaintiffs allege that the defendants violated U.S. federal,
Texas and Canadian antitrust laws and Canadian conspiracy law in connection with
the sale of graphite electrodes.
In 1999 and 2000, we and other producers of graphite electrodes were
served with three complaints commencing three separate civil antitrust lawsuits
in the District Court (the "FOREIGN CUSTOMER LAWSUITS"). The first complaint,
entitled FERROMIN INTERNATIONAL TRADE CORPORATION, ET AL. V. UCAR INTERNATIONAL
INC., ET AL. was filed by 26 steelmakers and related parties, all but one of
whom are located outside the U.S. The second complaint, entitled BHP NEW ZEALAND
LTD. ET AL. V. UCAR INTERNATIONAL INC., ET AL. was filed by 4 steelmakers, all
of whom are located outside the U.S. The third complaint, entitled SAUDI IRON
AND STEEL COMPANY V. UCAR INTERNATIONAL INC., ET AL., was filed by a steelmaker
who is located outside the U.S. In each 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
filed motions to dismiss the first and second complaints. In June 2001, our
motions to dismiss the first and second complaints were granted with respect to
substantially all of the plaintiffs' claims. Appeals have been filed by the
plaintiffs and the defendants with the Third Circuit Court of Appeals with
regard to these dismissals.
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 September 30, 2001, except as described in the next paragraph,
we have settled or obtained dismissal of all of the lawsuits described above,
certain of the threatened civil
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
antitrust lawsuits and certain possible antitrust claims by certain other
customers who negotiated directly with us. The settlements cover, among other
things, 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 thereunder have
been timely made.
The foreign customer lawsuits and two of the three carbon electrode
lawsuits have not been settled. These remaining lawsuits are still in their
early stages. We have been vigorously defending, and intend to continue to
vigorously defend, against these remaining 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 aggregate reserve of $350 million is
calculated on a basis net of, among other things, imputed interest on
installment payments of the DOJ fine. Actual aggregate liabilities and expenses
(including settled investigations, lawsuits and claims as well as continuing
investigations, pending appeals 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 aggregate charge of
$350 million. To the extent that aggregate liabilities and expenses, net, are
known or reasonably estimable, at September 30, 2001, $350 million represents
our estimate of these liabilities and expenses.
Through September 30, 2001, we have paid an aggregate of $247 million of
fines and net settlement and expense payments and $11 million of imputed
interest. At September 30, 2001, $106 million remained in the reserve. The
balance of the reserve is available for the fine assessed by the EU Competition
Authority and other matters. The aggregate amount of remaining committed
payments for imputed interest at September 30, 2001 was about $9 million.
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
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.
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 several 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
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
representatives of Mitsubishi and Union Carbide who served on UCAR's Board of
Directors at the time of our leveraged equity recapitalization in 1995, Hiroshi
Kawamura and Robert D. Kennedy. Mr. Kennedy, who was a director of UCAR at the
time the lawsuit was commenced, resigned as such on March 14, 2000.
In the lawsuit, we allege, among other things, that, in January 1995,
Mitsubishi and Union Carbide had knowledge of facts indicating that UCAR had
engaged in illegal graphite electrode price fixing activities and that any
determination of UCAR's statutory capital surplus would be overstated as a
result of those activities. We also allege that certain of their representatives
knew or should have known about those activities. In January 2000, Mitsubishi
was indicted by the DOJ on a one count charge of aiding and abetting violations
of U.S. federal antitrust law in connection with the sale of graphite
electrodes. Mitsubishi entered a plea of not guilty. In February 2001, a jury
found Mitsubishi guilty of the charge. Mitsubishi has entered into a 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
September 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
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
defenses, claims for indemnification and other counterclaims as well as those
motions to dismiss and motions to disqualify. We may at any time settle this
lawsuit.
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PART II (CONT'D)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 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
------- ----------------------
10.29 Amendment to Employment and Restricted Stock Agreements between
UCAR International Inc. and Gilbert E. Playford dated as of
August 25, 2001.
(B) REPORTS ON FORM 8-K
The following Reports on Form 8-K were filed during the quarter ended
September 30, 2001:
(a) Report on Form 8-K dated July 18, 2001 as filed by UCAR
International Inc., filing a press release dated July 18, 2001 announcing the
resolution of the last major antitrust proceeding pending against UCAR
International Inc. No financial statements were filed with such Report on Form
8-K.
(b) Report on Form 8-K dated July 19, 2001 as filed by UCAR
International Inc., filing a press release dated July 19, 2001 reporting
financial results for the quarter ended June 30, 2001. Summary financial
information for the quarter ended June 30, 2001 was filed with such Report on
Form 8-K.
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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: November 14, 2001 By:/S/ CORRADO F. DE GASPERIS
------------------------------------
Corrado F. De Gasperis
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER & CHIEF INFORMATION OFFICER
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UCAR INTERNATIONAL INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
10.29 Amendment to Employment and Restricted Stock Agreements between
UCAR International Inc. and Gilbert E. Playford dated as of
August 25, 2001.