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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: (1-13888)
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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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39 OLD RIDGEBURY ROAD 06817-0001
DANBURY, CONNECTICUT (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 207-7700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED:
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant'S knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of April 1, 1998, 44,956,725 shares of common stock were outstanding.
The aggregate market value of the outstanding common stock as of April 1, 1998
(based upon the closing sale price of the common stock on the New York Stock
Exchange on such date) held by non-affiliates of the registrant was
approximately $1,408 million.
_____________________
DOCUMENTS INCORPORATED BY REFERENCE
The information required under Part III is incorporated by reference from
the UCAR International, Inc. Proxy Statement for the Annual Meeting of
Stockholders to be held on June 4, 1998, which will be filed on or about April
30, 1998.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business.......................................................... 2
Introduction...................................................... 2
Corporate History................................................. 3
Markets and Industry Overview..................................... 6
Outlook for Graphite Electrodes Industry.......................... 8
Manufacturing Processes and International Operations.............. 8
Products.......................................................... 10
Raw Materials and Suppliers....................................... 10
Sales and Customer Service; Research and Development.............. 11
Distribution...................................................... 12
Patents and Trademarks............................................ 12
Competition....................................................... 12
Environmental Matters............................................. 13
Insurance......................................................... 14
Employees......................................................... 15
Item 2. Properties........................................................ 15
Item 3. Legal Proceedings................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............... 19
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters.............................................. 19
Market Information................................................ 19
Dividend Policy................................................... 19
Item 6. Selected Financial Data........................................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risks....... 36
Item 8. Financial Statements and Supplementary Data....................... 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 73
PART III
Items 10 to 13 inclusive........................................................ 73
Executive Officers and Directors.................................. 73
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...................................................... 75
ii
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). THESE STATEMENTS INCLUDE STATEMENTS ABOUT ELECTRIC
ARC FURNACE ("EAF") STEEL PRODUCTION, PRICES, SALES AND DEMAND FOR GRAPHITE
ELECTRODES AND OTHER PRODUCTS, FUTURE OPERATIONAL AND FINANCIAL PERFORMANCE OF
PRE-EXISTING AND RECENTLY ACQUIRED BUSINESSES, LEGAL FEES AND RELATED COSTS,
CONSULTING FEES AND RELATED PROJECTS, COSTS, MARGINS AND EARNINGS GROWTH. EXCEPT
AS OTHERWISE REQUIRED TO BE DISCLOSED IN PERIODIC REPORTS REQUIRED TO BE FILED
BY COMPANIES REGISTERED UNDER THE EXCHANGE ACT BY THE RULES OF THE SECURITIES
AND EXCHANGE COMMISSION (THE "COMMISSION"), THE COMPANY HAS NO DUTY TO UPDATE
SUCH STATEMENTS. ACTUAL FUTURE EVENTS AND CIRCUMSTANCES (INCLUDING FUTURE
PERFORMANCE, RESULTS AND TRENDS) COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN
SUCH STATEMENTS DUE TO VARIOUS FACTORS. SUCH FACTORS INCLUDE THE POSSIBILITY
THAT ANNOUNCED ADDITIONS TO EAF STEEL PRODUCTION CAPACITY MAY NOT OCCUR OR THAT
INCREASED EAF STEEL PRODUCTION MAY NOT RESULT IN INCREASED DEMAND OR PRICES FOR
GRAPHITE ELECTRODES, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CIRCUMSTANCES
RELATING TO INVESTIGATIONS BY ANTITRUST AUTHORITIES IN THE UNITED STATES AND THE
EUROPEAN UNION OR RELATED ANTITRUST CLASS ACTION, SHAREHOLDER DERIVATIVE OR
SECURITIES CLASS ACTION LAWSUITS, THE ASSERTION OF OTHER CLAIMS RELATING TO SUCH
INVESTIGATIONS OR LAWSUITS OR THE SUBJECT MATTER THEREOF, THE OCCURRENCE OF
UNANTICIPATED EVENTS OR CIRCUMSTANCES RELATING TO RECENTLY ACQUIRED BUSINESSES,
THE OCCURRENCE OF UNANTICIPATED EVENTS OR CIRCUMSTANCES RELATING TO GLOBAL
INTEGRATION AND OTHER PROJECTS, CHANGES IN CURRENCY EXCHANGE RATES, CHANGES IN
ECONOMIC AND COMPETITIVE CONDITIONS, TECHNOLOGICAL DEVELOPMENTS, AND OTHER RISKS
AND UNCERTAINTIES, INCLUDING THOSE SET FORTH HEREIN.
NEITHER THE STATEMENTS CONTAINED HEREIN NOR ANY CHARGE TAKEN BY THE
COMPANY RELATING TO ANY LEGAL PROCEEDINGS SHALL BE DEEMED TO CONSTITUTE AN
ADMISSION AS TO ANY WRONGDOING OR LIABILITY IN CONNECTION WITH THE SUBJECT
MATTER OF SUCH PROCEEDINGS.
UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, ALL
REFERENCES TO "UCAR" MEAN UCAR INTERNATIONAL INC. AND TO THE "COMPANY" MEAN
UCAR, ITS WHOLLY AND MAJORITY OWNED SUBSIDIARIES (INCLUDING UCAR GLOBAL
ENTERPRISES INC. ("GLOBAL") AND EMSA (PTY.) LTD. ("EMSA")) AND ITS AND THEIR
PREDECESSORS (INSOFAR AS A PREDECESSOR'S ACTIVITIES RELATED TO THE CARBON AND
GRAPHITE PRODUCTS BUSINESS), COLLECTIVELY, EXCEPT THAT SUCH REFERENCES DO NOT
INCLUDE UCAR GRAFIT OAO ("UCAR GRAFIT"), CARBONE SAVOIE S.A.S. ("CARBONE
SAVOIE") OR UCAR ELEKTRODEN GMBH ("UCAR ELEKTRODEN" AND, TOGETHER WITH UCAR
GRAFIT, CARBONE SAVOIE AND EMSA, THE "ACQUIRED COMPANIES") WITH RESPECT TO TIME
PERIODS PRIOR TO THEIR RESPECTIVE ACQUISITIONS. SEPARATE FINANCIAL STATEMENTS OF
GLOBAL ARE NOT PRESENTED BECAUSE THEY WOULD NOT BE MATERIAL TO HOLDERS OF
SUBORDINATED NOTES (AS DEFINED HEREIN). REFERENCES TO COST IN THE CONTEXT OF THE
COMPANY'S STRATEGY AS A LOW-COST PRODUCER DO NOT INCLUDE THE $340 MILLION CHARGE
DESCRIBED HEREIN. UNLESS OTHERWISE INDICATED, ALL FINANCIAL INFORMATION REFERS
TO THAT OF THE COMPANY (INCLUDING THE ACQUIRED COMPANIES (OTHER THAN EMSA) SINCE
THEIR RESPECTIVE ACQUISITIONS AND EMSA SINCE THE ACQUISITION IN APRIL 1997 OF
THE 50% OF ITS EQUITY NOT PREVIOUSLY OWNED BY THE COMPANY) ON A CONSOLIDATED
BASIS (USING THE EQUITY METHOD FOR FINANCIAL INFORMATION ONLY FOR EMSA PRIOR TO
THE ACQUISITION OF SUCH EQUITY).
UNLESS OTHERWISE INDICATED, ALL INFORMATION HAS BEEN ADJUSTED TO REFLECT
THE RECLASSIFICATION OF THE COMMON STOCK OF UCAR IN CONNECTION WITH, AND THE
STOCK SPLITS EFFECTED AFTER, THE LEVERAGED RECAPITALIZATION OF THE COMPANY ON
JANUARY 26, 1995 (THE "RECAPITALIZATION").
REFERENCES TO "HOME MARKETS" MEAN NORTH AMERICA, WESTERN EUROPE, BRAZIL
AND SOUTH AFRICA AND TO "FREE WORLD" MEAN WORLDWIDE, EXCLUDING CHINA, THE FORMER
SOVIET UNION, INDIA AND EASTERN EUROPE. UNLESS OTHERWISE INDICATED HEREIN,
MARKET SHARE DATA IS GIVEN FOR 1996, WHICH IS THE LAST YEAR FOR WHICH SUCH
INFORMATION IS READILY AVAILABLE.
1
PART I
ITEM 1. BUSINESS
INTRODUCTION
The Company is the largest manufacturer of graphite and carbon electrodes
in the world, with sales in over 70 countries and manufacturing facilities on
four continents. Graphite electrodes, the Company's principal product, are
consumed primarily in the production of steel in an electric arc furnace, the
steelmaking technology used by virtually all "mini-mills," as well as in the
refining of steel using ladle furnaces. Carbon electrodes are consumed primarily
to produce silicon metal, which is used in the manufacture of aluminum. Graphite
electrodes and carbon electrodes accounted for approximately 72% and 5%,
respectively, of the Company's net sales in 1997. The Company also manufactures
other graphite and carbon products as well as cooling systems and components for
steelmaking furnaces and other high temperature applications.
Electrodes act as conductors of electricity in a furnace, generating
sufficient heat to melt scrap metal or other raw materials used to produce
steel, silicon metal or other materials. The electrodes are gradually consumed
in the course of such production. In the case of graphite electrodes in an EAF,
one electrode must be replaced, on average, every eight to ten operating hours
("a stick a shift"). Graphite electrodes are presently the only products
available that are capable of sustaining the levels of heat (as high as 5,000
degrees Fahrenheit) required in an EAF and, therefore, demand for graphite
electrodes is directly related to the amount of EAF steel produced.
Over the past two decades, EAF steelmaking has become more efficient and
cost effective due to technological improvements in EAF steelmaking processes
and equipment design and in graphite electrodes. This improved efficiency has
resulted in a decrease in the quantity of graphite electrodes consumed per
metric ton of steel produced (known as "Specific Consumption"). From 1985
through mid-1992, this decrease was offset by increased levels of EAF steel
production, which resulted in relatively stable demand for graphite electrodes.
The Company believes that, since mid-1992, increased levels of EAF steel
production have more than offset the decrease in Specific Consumption, which
resulted in increased demand for graphite electrodes. The Company believes that
worldwide demand for graphite electrodes will increase over the long term at an
average annual rate of 1% to 2%. The Company has experienced, and expects to
continue to experience, volatility in demand for graphite electrodes in various
geographic areas as general economic conditions in such areas fluctuate.
The rapid growth in EAF steel production through the 1970s led to an
over-expansion in capacity for the manufacture of graphite electrodes. Beginning
in the early 1980s, this expansion, together with declining Specific
Consumption, resulted in downward pressure on pricing, significant consolidation
in the number of manufacturers and industry wide capacity reduction in the Free
World. The Company estimates that Free World capacity and Company capacity have
each been reduced by approximately one-third since 1985. Presently, there is one
global manufacturer of electrodes in the Free World other than the Company and
there are, in total, eight other Free World graphite electrode manufacturers.
In 1997, the Company was served with subpoenas, search warrants and
information requests by antitrust authorities in the United States and the
European Union in connection with investigations as to whether there has been
any violation of antitrust laws by producers of graphite electrodes.
Subsequently, several antitrust class action civil lawsuits were commenced
against UCAR and certain other producers of graphite electrodes in the United
States. These lawsuits have been consolidated into a single lawsuit, although
additional similar lawsuits have been subsequently commenced. As a result of
recent developments, the Company recorded a charge against results of operations
for 1997 in the amount of $340 million for estimated potential liabilities and
expenses in connection with antitrust investigations and related lawsuits and
claims. UCAR has also been named as a defendant in a shareholder derivative
lawsuit and a securities class action lawsuit, each of which is based, in part
on the subject matter of such antitrust investigations. It is possible that
additional civil lawsuits related to the subject matter of such antitrust
investigations may be commenced. It is also possible that antitrust
investigations in other jurisdictions could be commenced. In April 1998,
pursuant to an agreement with the Antitrust Division of the United States
Department of Justice (the "DOJ"), UCAR agreed to plead guilty to a one-count
charge of violating antitrust laws in the sale of graphite electrodes.
Additionally, UCAR agreed to pay a non-interest-bearing fine in the aggregate
amount of $110
2
million, payable in six annual installments. Under the plea agreement, UCAR will
not be subject to prosecution by the DOJ with respect to any antitrust
violations occurring prior to the date on which the agreement receives court
approval. The fine payable pursuant to the plea agreement is within the amounts
used by the Company for purposes of determining the $340 million charge. The
plea agreement has been submitted for court approval. Although UCAR does not
expect such an outcome, it is possible that the court could reject the plea
agreement. In such event, UCAR would be required to either defend any charges
which could be brought or enter into a less favorable plea agreement. Regardless
of whether the plea agreement is accepted by the court, the plea agreement makes
it more difficult to defend against antitrust civil lawsuits.
The Company is in the process of evaluating the potential impacts from the
$340 million charge, antitrust investigations and related lawsuits and claims.
Although the ultimate outcome of these matters is uncertain, the Company expects
the potential liabilities, expenses and other impacts of these matters to be
material and adverse. Such impacts could require that the Company limit or
discontinue, temporarily or permanently, certain of its business plans,
activities or operations, further reduce or delay capital expenditure, sell
certain of its assets or businesses, restructure or refinance some or all of its
debt or incur additional debt, or sell additional common stock or other
securities. No assurance can be given that the Company will be able to take any
of such actions on favorable terms or at all. Further, such impacts may
ultimately require that the Company seek protection under applicable bankruptcy
laws.
The Company's current plan is to continue its long-term strategy of being
a low-cost producer of high quality products and provider of superior services
to customers. Consistent with this strategy and in order to maximize funds
available to meet its obligations, the Company is focusing significant efforts
on reducing operating expenses, capital expenditures and other cash requirements
and commitments, while maintaining necessary and appropriate business
operations. The Company believes that the long-term fundamentals of its business
continue to be sound. Accordingly, although no assurance can be given that such
will be the case, the Company believes, based on its expected cash flow from
operations and taking into account its efforts to maximize funds available to
meet its obligations, that it will be able to restructure its capitalization and
manage its working capital and cash flow to permit it to meet its obligations as
they become due.
CORPORATE HISTORY
GENERAL. The Company's business was founded in 1886 by National Carbon
Company. In 1917, National Carbon Company, along with Union Carbide Company and
three other companies, combined to form a new corporation named Union Carbide
and Carbon Company, now known as Union Carbide Corporation ("Union Carbide").
National Carbon Company became the Carbon Products Division of Union Carbide.
Effective January 1, 1989, Union Carbide realigned each of its worldwide
businesses into separate subsidiaries (the "Realignment"). In connection
therewith, the business of the Carbon Products Division was separated from Union
Carbide's other businesses and became owned by the Company, which was then
wholly owned by Union Carbide. On February 25, 1991, Union Carbide sold to
Mitsubishi Corporation ("Mitsubishi") 50% of the common equity of the Company.
On January 26, 1995, the Company consummated the Recapitalization pursuant
to the Recapitalization and Stock Purchase and Sale Agreement dated as of
November 14, 1994 (the "Recapitalization Agreement") among Union Carbide,
Mitsubishi, UCAR and a corporation affiliated with Blackstone Capital Partners
II Merchant Banking Fund L.P. and its affiliates (collectively, "Blackstone").
Pursuant to the Recapitalization: (i) UCAR issued common stock representing
approximately 75% of the then outstanding common stock to Blackstone, Chase
Equity Associates (an affiliate of Chase Manhattan Bank) and certain members of
management for $203 million; (ii) Global and certain of its subsidiaries
borrowed $585 million under senior secured bank credit facilities arranged
through Chase Manhattan Bank in connection with the Recapitalization (the
"Recapitalization Bank Facility"); (iii) Global issued $375 million of 12%
senior subordinated notes due 2005 (the "Subordinated Notes"); (iv) the Company
repaid approximately $250 million of then existing indebtedness; (v) UCAR
repurchased and cancelled all of the common equity then held by Mitsubishi for
$406 million; (vi) UCAR paid to Union Carbide a cash dividend of $347 million on
the common equity then held by Union Carbide, which common equity was
reclassified and immediately thereafter represented approximately 25% of the
then outstanding common stock; and (vii) certain members of management received
restricted stock matching a portion of the common stock purchased by them and
options to purchase up to an aggregate of 12% of the then outstanding common
stock on a fully diluted basis, subject to certain vesting provisions. In
connection with the Recapitalization, the Company transferred all of the stock
of its operating
3
subsidiaries to Global or subsidiaries of Global. UCAR currently holds no
material assets other than common stock of Global.
On August 15, 1995, UCAR completed an initial public offering of common
stock (the "Initial Offering"). In connection with the Initial Offering, UCAR
sold common stock representing 22% of the common stock outstanding immediately
after the Initial Offering for net proceeds of $227 million and Union Carbide
sold all of the common stock then owned by it. UCAR used net proceeds from the
Initial Offering to contribute to Global an amount sufficient to redeem $175
million aggregate principal amount of Subordinated Notes at a redemption price
equal to 110% of the aggregate principal amount thereof, plus accrued interest
thereon of $4 million (the "Redemption"). The Company used the balance of the
net proceeds for general corporate purposes and to reduce other outstanding
indebtedness.
On October 19, 1995, the Company refinanced the Recapitalization Bank
Facility with new senior secured bank credit facilities (the "Senior Bank
Facilities") at more favorable interest rates and with more favorable covenants
(the "Refinancing"). The Refinancing resulted in a reduction of annual interest
expense by approximately $13 million (based on the principal amount outstanding
and interest rates in effect at the time of the Refinancing).
On March 7, 1996, Blackstone, Chase Equity Associates and certain members
of management sold shares of common stock in a secondary public offering (the
"1996 Secondary Offering"). After the 1996 Secondary Offering, Blackstone owned
approximately 20% of the then outstanding shares of common stock.
On March 19, 1997, the Senior Bank Facilities were amended to reduce the
interest rates on amounts outstanding thereunder, to increase the amount
available under the revolving credit facility to $250 million from $100 million
and to change certain covenants to allow more flexibility in uses of free cash
flow for acquisitions, capital expenditures and restricted payments.
On April 8, 1997, Blackstone sold approximately 14% of the then
outstanding shares of common stock in a secondary public offering (the "1997
Secondary Offering"). Concurrently with the 1997 Secondary Offering, the Company
repurchased 1,300,000 shares of common stock from Blackstone for $48 million
(the "Blackstone Share Repurchase"), which repurchase constituted part of a
previously announced stock repurchase program. After the 1997 Secondary Offering
and the Blackstone Share Repurchase, Blackstone ceased to be a principal
stockholder of UCAR.
In 1997, UCAR's Board of Directors authorized a program to repurchase up
to $200 million of common stock at prevailing prices from time to time in the
open market or otherwise depending on market conditions and other factors,
without any established minimum or maximum time period or number of shares.
Through December 31, 1997, UCAR purchased an aggregate of $92 million of common
stock (including the Blackstone Share Repurchase) under such program. UCAR does
not currently expect to continue to repurchase common stock under this program.
ACQUISITION OF MINORITY INTERESTS AND INTEREST IN JOINT VENTURE AFFILIATE.
In 1995, the Company acquired substantially all of the shares of its Brazilian
subsidiary that were owned by public shareholders in Brazil for an aggregate
purchase price of $52 million.
On April 22, 1997, the Company purchased the outstanding shares of EMSA
held by Samancor Limited, the Company's former 50% joint venture partner in
EMSA. The purchase price was approximately $75 million, plus expenses. EMSA
currently operates a graphite electrode manufacturing facility and a sales
office in South Africa. Prior to the purchase of such shares, the Company
managed all aspects of the operations of EMSA in substantially the same manner
and with substantially the same business objectives and strategies (including
marketing, human resources, technology, engineering and sales activities and
implementation of Company policies and procedures) as it managed its other
subsidiaries. In 1997, EMSA sold substantially all of the graphite electrodes
purchased in South Africa (which represented approximately 6% of all graphite
electrodes purchased in the Home Markets) and had net sales of $74 million.
The Company believes that these acquisitions have enabled, and will
enable, the Company to better integrate its worldwide operations, to recognize
production efficiencies at various manufacturing facilities, to lower average
Companywide cost of sales and to better capture and manage cash flow from
operations of those subsidiaries.
4
FOCUSED FACTORY PROJECT. During 1996, the Company began construction of an
integrated "focused factory" at its manufacturing facility in Clarksburg, West
Virginia (the "Focused Factory Project"). The Focused Factory Project will add
additional manufacturing processes and new technology (developed and tested by
the Company at its U.S. technology center) to expand capacity to manufacture
"superfine grain" graphite specialty products. The Company believes that
worldwide industry sales of such products approach $400 million annually, that
demand for these products has grown and will continue to grow for at least the
next several years (primarily for use in semiconductor, continuous casting,
non-ferrous metal extrusion and electrical discharge machining applications) and
that all of the significant Free World manufacturers of these products are
currently operating at or near capacity. By the end of 1997, the Company had
spent $12 million in connection with the Focused Factory Project. The Company
expects to expend an additional $3 million in 1998.
ACQUISITIONS IN RUSSIA AND GERMANY. On November 10, 1996, the Company
purchased 90% of the equity of UCAR Grafit, which operates a graphite electrode
business in Vyazma, Russia. The aggregate investment was $50 million.
Thereafter, the Company increased its ownership to 96% of such equity (at
December 31, 1997) for an additional investment of $7 million. On February 1,
1997, the Company, through a newly formed 70% owned subsidiary, UCAR Elektroden,
purchased the graphite electrode business of Elektrokohle Lichtenberg AG ("EKL")
in Berlin, Germany. The 30% minority interest in UCAR Elektroden is held by a
private company based in Germany and not engaged in the graphite electrode
industry. The aggregate purchase price paid by UCAR Elektroden for the EKL
assets was approximately $15 million, consisting of $3 million for equipment and
approximately $12 million for working capital. UCAR Elektroden and UCAR Grafit
work in tandem, with UCAR Elektroden manufacturing green electrodes and UCAR
Grafit baking, pitch impregnating, rebaking and graphitizing those electrodes.
The graphitized electrodes are then returned to UCAR Elektroden for machining
and distribution. In December 1997, machining equipment was installed in UCAR
Grafit to enable it to machine and ship product directly to customers without
the need to return the graphitized electrodes to UCAR Elektroden. Together, UCAR
Elektroden and UCAR Grafit have capacity to manufacture approximately 17,000
metric tons of finished graphite electrodes.
The Company acquired UCAR Grafit and UCAR Elektroden to expand
geographically. While the Company has been a supplier to Eastern Europe for over
25 years, the Company believes that these acquisitions will increase its
penetration of the large and potentially growing graphite electrode markets in
Eastern Europe, Russia and the other countries of the former Soviet Union, and
the Middle East. In addition, many of the EAF steel producers in these markets
consume lower quality graphite electrodes. Accordingly, sales by UCAR Grafit and
UCAR Elektroden of such types of electrodes are generally additive to sales made
by UCAR's other subsidiaries, which continue to export ultra-high-power graphite
electrodes to their existing customer base in these regions. While the Company
plans to use its process technology to improve operating efficiency and gross
profit margins at UCAR Grafit and UCAR Elektroden, the Company does not intend
to upgrade the quality of their products until demand for higher quality
products in these regions increases. The Company currently does not expect that
any significant capital expenditures will be required to achieve such planned
improvements.
ACQUISITION OF ALUMINUM INDUSTRY PRODUCT MANUFACTURING OPERATIONS. On
January 2, 1997, the Company acquired 70% of the outstanding shares of Carbone
Savoie, previously a wholly owned subsidiary of Pechiney S.A., for a purchase
price of $33 million. As a result of the acquisition of Carbone Savoie, which
has facilities in Notre Dame and Venissieux, France, the Company is the leading
worldwide manufacturer of cathodes, with the capacity to manufacture 40,000
metric tons annually. Cathodes are consumed in the production of aluminum. This
acquisition creates an alliance between the Company and Aluminium Pechiney S.A.,
a wholly owned subsidiary of Pechiney S.A., which is one of the world's leading
producers of aluminum and the leading supplier of smelting technology to the
aluminum industry. Aluminium Pechiney S.A. is developing the use of graphite
cathodes (instead of carbon cathodes) in its aluminum smelting technology, which
the Company believes allows for substantial improvement in process efficiency.
The new graphite cathodes will be used by Aluminium Pechiney S.A. in its own
plants and will be marketed to its licensees as well as to third parties. The
Company believes that joint development efforts combining Aluminium Pechiney
S.A.'s smelting technology and the Company's graphite technology and expertise
in high temperature industrial applications should result in improvements in
aluminum process efficiencies. In 1997, the Company had net sales of $82 million
to the aluminum industry.
RESTRUCTURING, RE-ENGINEERING AND OTHER PROJECTS. The Company has
implemented several successful restructuring and re-engineering projects since
the mid-1980s, which have eliminated work, improved operating
5
efficiency and reduced costs. In January 1995, UCAR's Board of Directors
approved an additional modernization project (the "Rationalization Project")
designed to close certain high-cost manufacturing operations and expand
lower-cost manufacturing operations at the Company's North American graphite
electrode plants. The Rationalization Project was completed in July 1996 and
yielded approximately $8 million in annual cost savings in 1995, $20 million in
1996 and $22 million in 1997 (in each case as compared to 1994).
The Company is currently evaluating and undertaking, with the assistance
of consultants, various projects to improve operating efficiency, further
integrate worldwide operations and generate earnings growth. The Company
currently estimates that costs associated with these projects will be $18
million over a two-year period ending mid-1999 and anticipates that such
projects will have a pay-back period of one or two years. The Company believes
that such projects will be accretive to earnings commencing in mid-1998. The
Company also intends to continue to implement total quality control techniques
and pursue other opportunities for cost savings.
MARKETS AND INDUSTRY OVERVIEW
The worldwide market for graphite and carbon electrodes was approximately
$3 billion in 1997, according to Company estimates. These products are sold
primarily to customers in the steel, silicon metal, ferronickel and thermal
phosphorous industries. Customers in these industries are located in virtually
every industrialized country in the world.
GRAPHITE ELECTRODES. The Company estimates that approximately two-thirds
of EAF steelmakers in the Free World and approximately 85% of EAF steelmakers in
the Home Markets purchased graphite electrodes from the Company in 1996. The
Company further estimates that, in each of 1996 and 1997, it supplied in excess
of 41% of all graphite electrodes purchased in the Home Markets and
approximately 31% of those purchased in the Free World. Sales of graphite
electrodes in the Home Markets accounted for 49% of the Company's net sales in
1997. The Company estimates that in 1997 (i) sales in the United States
accounted for 20% of the Company's total net sales of graphite electrodes and
(ii) the Company sold graphite electrodes in over 70 countries, with no other
country accounting for more than 10% of the Company's net sales of graphite
electrodes.
There are two primary technologies for steelmaking: basic oxygen furnace
("BOF") steel production and EAF steel production. EAF steelmakers are called
"market mills" or "mini-mills" because of their smaller capacity as compared to
BOF steelmakers. Graphite electrodes, which accounted for approximately 72% of
the Company's net sales in 1997, are consumed primarily in, and are essential
to, EAF steel production, and, to a lesser extent, are consumed in the refining
of steel using ladle furnaces.
Electric arc furnaces typically range in size from those which produce
approximately 25 metric tons of steel per production cycle (or "Heat") to those
which produce approximately 150 metric tons per Heat. Graphite electrodes act as
conductors of electricity in the furnace, generating sufficient heat to melt
scrap metal or other material used to produce steel. The graphite electrodes are
gradually consumed in the course of such production. Each of those furnaces
typically uses nine electrodes (in three columns of three electrodes each) at
one time. The size of those electrodes varies depending on the size of the
furnace, the size of the furnace's electric transformer and the planned
productivity of the furnace. In a typical furnace operating at a typical number
of Heats per day, one of those nine electrodes is fully consumed (requiring the
addition of a new electrode), on average, every eight to ten operating hours ("a
stick a shift"). The actual rate of consumption and addition of electrodes for a
particular furnace depend primarily on the efficiency and productivity of the
furnace. Graphite electrodes are currently the only products capable of
sustaining the high levels of heat required in an EAF and, therefore, the demand
for graphite electrodes is directly related to the amount of EAF steel produced.
EAF steel production has been for many years the growth sector of the
steel industry. There are currently in excess of 2,000 EAFs operating worldwide,
and worldwide EAF steel production has grown from 113 million metric tons
(approximately 18% of total steel production) in 1975 to 253 million metric tons
(approximately 34% of total steel production) in 1996, according to Company and
industry estimates. The Company estimates that EAF steel production was 270
million metric tons in 1997, a 7% increase over 1996. The Company estimates that
the net new EAF steel production capacity was approximately 24 million metric
tons in 1996 and approximately 21 million metric tons in 1997. The Company
estimates that it supplied all or a portion of the graphite electrodes consumed
by approximately 50% of the new EAFs which commenced operation during 1996 and
1997. As a result of recent
6
advances in EAF steel production, EAF steelmakers are capable of producing
nearly all of the product lines available from BOF steelmakers. Although
worldwide EAF steel production has experienced only two relatively minor
downturns over the past 20 years, the steel industry generally is cyclical and
experiences significant fluctuations, reflecting regional and global economic
conditions and other factors. Sales of the Company's graphite electrodes
historically have been somewhat adversely affected by weakness in the steel
industry. Although no assurance can be given that such will be the case, the
Company believes that EAF steel production will continue to be the growth sector
of the worldwide steel industry for at least the next several years.
The Company believes that the worldwide growth in EAF steel production has
been due primarily to the cost effectiveness and operating efficiency of EAF
steelmaking. Technological improvements in EAF steelmaking equipment design and
production processes (stemming from the now largely completed conversion of the
EAF base from a refractory lined system to a water cooled system which sharply
reduced the "burn rate" of electrodes in molten steel), use of higher quality
scrap metals and other raw materials and improvements in the size, strength and
quality of graphite electrodes (including improvements which were developed by
the Company) resulted, on average, in increased efficiency and lower costs in
EAF steel production. This improved efficiency resulted in a decrease in
Specific Consumption. Specific Consumption in the Free World declined from
approximately 6.4 kilograms of graphite electrodes per metric ton of steel
produced in 1974 to approximately 2.7 kilograms per metric ton in 1996,
according to Company estimates.
The rapid growth of EAF steel production through the 1970s led to an
expansion in capacity for the manufacture of graphite electrodes. Beginning in
the 1980s, there was significant excess graphite electrode manufacturing
capacity due to decreases in Specific Consumption and expansion of manufacturing
capacity in the late 1970s. From 1985 through mid-1992, concurrently with the
consolidation in the number of producers and reduction in capacity described
below, the decrease in Specific Consumption was offset by increased levels of
EAF steel production, which resulted in a relatively stable demand for graphite
electrodes. The Company believes that, since mid-1992, increased levels of EAF
steel production have more than offset the decrease in Specific Consumption,
which resulted in increased demand for graphite electrodes. The Company also
believes that, on average, as the costs (relative to the benefits) increase for
EAF steelmakers to achieve significant further efficiencies in EAF graphite
electrode consumption, the decline in Specific Consumption will continue at a
more gradual pace. The Company further believes that the rate of such decline in
the future will be impacted by the addition of net new EAF steelmaking capacity,
which has the effect of reducing industrywide graphite electrode consumption
rates due to the efficiency of new EAFs while at the same time creating
additional demand for graphite electrodes. There can be no assurance, however,
that such will be the case.
Since the mid-1980s, there has been a consolidation in the number of Free
World graphite electrode producers and a reduction of Free World graphite
electrode manufacturing capacity. The Company believes that, since the
mid-1990s, Free World capacity and demand have been in relative balance. The
Company is not aware of any construction of new graphite electrode manufacturing
facilities anywhere in the Free World. If, for any reason, demand for graphite
electrodes were to decline significantly or manufacturing capacity were to
materially exceed demand, the Company would be materially adversely affected. In
light of current antitrust investigations and related lawsuits and claims, no
assurance can be given as to what the market structure will be in the future in
meeting worldwide demand.
The excess graphite electrode manufacturing capacity and decreases in
Specific Consumption during the 1980s resulted in downward pressure on worldwide
pricing. The Company believes that, from 1982 to mid-1992, the average Free
World industry wide price (in U.S. dollars and net of changes in currency
exchange rates) for graphite electrodes declined by approximately one-third. The
Company believes that, from mid-1992 through 1997, there has been a significant
improvement in Free World pricing of graphite electrodes. The Company estimates
that the cost of graphite electrodes represents, on average, approximately 3% of
the cost of producing EAF steel in the Free World. There can be no assurance
that there will be continued improvement or stability in pricing of graphite
electrodes or that there will be no declines in such pricing.
Many of the EAF steel producers in the markets in which UCAR Grafit and
UCAR Elektroden sell graphite electrodes consume lower quality electrodes at
lower prices than those for the higher quality graphite electrodes sold by
UCAR's other subsidiaries. The Company believes that, as historically managed
economies, the changes in
7
manufacturing capacity, Specific Consumption and pricing described above were
not as significant factors in those markets as they were in the Free World.
CARBON ELECTRODES. The Company estimates that in 1997 it sold
approximately 36% of the carbon electrodes purchased in the Free World. Carbon
electrodes are used primarily to produce silicon metal, which is used in the
manufacture of aluminum. The Company believes that Free World demand for carbon
electrodes has been relatively stable over the past ten years at approximately
75,000 metric tons annually, and the Company expects demand to continue to be
relatively stable over the next several years. The Company is the only major
manufacturer of carbon electrodes in North and South America.
ALUMINUM INDUSTRY PRODUCTS. The Company estimates that in 1997 it sold
approximately 27% of the carbon and graphite cathodes sold in the Free World.
Cathodes are used primarily as lining for furnaces used to smelt aluminum and
are consumed in the smelting process. The Company believes that Free World
demand for such cathodes will grow over the long term at an annual growth rate
of approximately 3%, similar to the aluminum industry growth rate. The Company
also believes that the demand for graphite cathodes will exceed that of carbon
cathodes as new smelters are built and existing aluminum smelters are converted
from carbon to graphite cathodes.
OTHER PRODUCTS. The Company's other products include flexible graphite
(which is marketed under the tradename GRAFOIL(R)), graphite and carbon
specialty products and systems and components for steelmaking furnaces. Flexible
graphite is used in the manufacture of internal combustion engines for the
automotive and other industries and in the chemical and petrochemical
industries. Volume of flexible graphite sold has grown at an average annual rate
in excess of 10% over the past 10 years, due primarily to demand for a high
quality sealing material to replace asbestos and to a decline in prices
resulting from reduced manufacturing costs as a result of improvements in
manufacturing processes. The Company's graphite specialty products are used in
the metals, chemicals, transportation, energy, semiconductor and aerospace
industries.
OUTLOOK FOR GRAPHITE ELECTRODES INDUSTRY
Approximately 21 million metric tons of net new EAF steel production
capacity was added in 1997 and the Company is aware of another approximately 65
million metric tons of announced net new EAF steel production capacity that is
scheduled to start-up through the year 2000. Accordingly, the Company believes
that, over the next several years, worldwide EAF steel production will continue
to increase at the annual historical trendline growth rate of approximately 4%.
As a result, the Company believes that, over the long term, increased EAF steel
production will lead to continued increases in worldwide demand for graphite
electrodes at an average annual rate of 1% to 2%. There can be no assurance,
however, that the addition of such capacity will occur. In addition, the Company
believes that EAF steel production could be negatively affected in the near term
by the current economic turmoil in the Asia Pacific region, which has recently
resulted in a slow down in steel production in that region.
The Company believes that its worldwide manufacturing facilities have
positioned it to benefit from anticipated trends in the graphite electrode
industry and that it currently has adequate manufacturing capacity to meet
increased graphite electrode sales volume resulting from increased demand over
the near term, if any. Because of the recent nature of developments in antitrust
investigations and related lawsuits and claims and the uncertainty as to the
ultimate outcomes thereof, the Company has been unable to evaluate all of the
potential impacts which they could have on the market for graphite electrodes.
The Company currently believes, however, that the market will not change
materially over the long term due to, among other things, the fact that graphite
electrodes are essential to production of steel in an EAF and the Company's
belief that supply and demand for graphite electrodes are in relative balance,
that all producers of graphite electrodes are operating at or near capacity and
that it is not likely that there will be any new facilities for the manufacture
of graphite electrodes (other than as part of incremental expansion of existing
facilities). No assurance can be given, however, that such will be the case.
MANUFACTURING PROCESSES AND INTERNATIONAL OPERATIONS
The manufacture of graphite electrodes takes, on average, approximately
two months. Graphite electrodes range in size from three inches to 30 inches in
diameter and two feet to nine feet in length and weigh between 20 pounds and
4,800 pounds (2.2 metric tons).
8
The manufacture of graphite electrodes involves the six main processes
described below.
FORMING. Calcined petroleum coke is crushed, screened, sized and blended in
a heated vessel with coal tar pitch. The resulting plastic mass is extruded
through a forming press and cut into cylindrical lengths (called "green"
electrodes) before cooling in a water bath.
BAKING. The "green" electrodes are baked at approximately 1,700 degrees
Fahrenheit in specially designed furnaces to carbonize the pitch. After
cooling, the electrodes are cleaned, inspected and sample-tested.
IMPREGNATION. Baked electrodes are impregnated with a special pitch when
higher density, mechanical strength and capability to withstand higher
electric currents are required.
REBAKING. The impregnated electrodes are rebaked to carbonize the pitch,
thereby adding strength to the electrodes.
GRAPHITIZING. Using a process developed by the Company, the rebaked
electrodes are heated in longitudinal electric resistance furnaces at
approximately 5,000 degrees Fahrenheit to restructure the carbon to its
characteristically crystalline form, graphite. After this process, the
electrodes are gradually cooled, cleaned, inspected and sample-tested.
MACHINING. After graphitizing, the electrodes are machined to comply with
international specifications governing outside diameters, overall lengths
and joint details. Tapered sockets are machine-threaded at each end of the
electrode to permit the joining of electrodes in columns by means of
correspondingly double-tapered machine-threaded graphite nipples.
Carbon electrodes and graphite and carbon cathodes are manufactured by a
comparable process (excluding, in the case of carbon electrodes and cathodes,
impregnation and graphitization).
The Company uses robotics and statistical process controls in
manufacturing processes and has a total quality control program which involves
significant in-house training. The Company generally warrants to its customers
that its electrodes will meet the Company's specifications therefor, and
electrode returns and replacements have aggregated less than 1% of net sales in
each of the last three years. The Company utilizes "pipeline" or "just-in-time"
manufacturing systems at most of its electrode manufacturing facilities. These
controls, programs and systems have improved product quality, reduced waste in
the manufacturing process, resulted in more efficient utilization of
manufacturing personnel and equipment, improved efficiency in customer order
processing and reduced inventory requirements. The Company is implementing
similar controls, programs and systems, where practicable, with respect to
operations of the Acquired Companies.
Major maintenance on the Company's facilities is conducted on an ongoing
basis. The Company intends to conduct similar major maintenance programs at the
facilities of the Acquired Companies. In the near term, the Company may elect to
defer certain maintenance to maximize cash flow available to meet its
obligations, including its debt service and its obligations in connection with
antitrust investigations and related lawsuits and claims. Manufacturing
operations at any facility may be subject to curtailment due to new legislation
or governmental regulations. The Company currently has the capacity to
manufacture approximately 275,000 metric tons of graphite electrodes annually.
The Company has the capacity to manufacture approximately 40,000 metric tons of
carbon electrodes annually and 40,000 metric tons of cathodes annually. In 1997,
1996 and 1995, the Company sold 250,000 metric tons, 231,000 metric tons, and
244,000 metric tons, respectively, of graphite electrodes and 28,000 metric
tons, 30,000 metric tons and 27,000 metric tons, respectively, of carbon
electrodes.
The Company currently operates 17 manufacturing facilities and three
machine shops located in the United States, France, Germany, Italy, Spain,
England, Russia, Canada, Brazil, Mexico and South Africa. Graphite electrodes
are manufactured in each country (other than England) in which the Company has a
manufacturing facility. Carbon electrodes are manufactured in the United States.
Graphite and carbon cathodes are manufactured in France, Brazil and Canada.
Graphite specialty products, which are made by a process similar to the process
for manufacturing graphite electrodes but using different mixtures of raw
materials and different processing time periods, are manufactured in the United
States and France. Flexible graphite, which is made from mined natural
9
graphite flake that is acid treated, heat treated and rolled into sheets of
desired thickness and width, is manufactured in the United States.
As a result of its international operations, the Company is subject to
risks associated with operating in foreign countries, including devaluations and
fluctuations in currency exchange rates, imposition of limitations on conversion
of foreign currencies into U.S. dollars or remittance of dividends and other
payments by foreign subsidiaries, imposition or increase of withholding and
other taxes on remittances and other payments by foreign subsidiaries,
hyperinflation in certain foreign countries and imposition or increase of
investment and other restrictions or requirements by foreign governments and, in
the case of operations in Russia, nationalization and other risks which could
result from a change in government. Although such risks have not had a material
adverse effect on the Company within the past decade, no assurance can be given
that such risks will not have a material adverse effect on the Company in the
future.
PRODUCTS
ELECTRODES. The principal products manufactured by the Company are
graphite and carbon electrodes. Graphite electrodes are consumed primarily in
the production of steel in EAFs as well as in the refining of steel using ladle
furnaces. Carbon electrodes are consumed primarily in the production of silicon
metal and also in the production of ferronickel and thermal phosphorous. EAF
steel production requires significant heat (as high as 5,000 degrees Fahrenheit,
which the Company believes is the hottest operating temperature in any
industrial or commercial manufacturing process worldwide) to melt scrap metal,
iron ore or other raw materials for processing into ingots or semi-finished
continuously cast shapes. That heat is generated by graphite electrodes as
electricity (as much as 150,000 amps) passes through them and creates an
electric arc between the graphite electrodes and the raw materials. The graphite
electrodes are gradually consumed in the production process. The production of
silicon metal involves similar processes, but at lower temperatures. The Company
believes that it provides the broadest range of sizes in graphite electrodes and
that the quality of its graphite electrodes is equal to or better than that of
comparable products of any other manufacturer. The Company also believes that
there are presently no commercially viable substitutes for graphite electrodes
in EAF steelmaking.
OTHER PRODUCTS. The Company manufactures carbon and graphite cathodes
which are consumed in the production of aluminum. Cathodes are used primarily as
liners for, and act as conductors of electricity in, smelting furnaces. The
Company manufactures GRAFOIL(R) flexible graphite which is used primarily to
make gaskets foR internal combustion engines, pipe flanges and other industrial
applications. The Company also manufactures graphite specialty products for use
in the metals, chemicals, transportation, energy, semiconductor and aerospace
industries. The Company's graphite specialty products consist primarily of
molded and extruded graphite shapes sold to specialty machine shops and end
users for machining and, to a lesser extent, molds, insulation substrates and
other machined products. Most of these machined products are manufactured for
specific applications or to meet customer specifications.
The Company sells proprietary water spray cooling systems and components
for steelmaking furnaces, exhaust systems and other high temperature
applications. These systems and components, designed by the Company, were first
sold in 1986 and are fabricated by third party contractors in the United States
and various other countries. The Company believes that its systems represent a
significant improvement over prior technologies. The improvement results from
both the increased life of furnace components resulting from the improved
cooling processes and the reduction in maintenance down time resulting from
various design improvements.
RAW MATERIALS AND SUPPLIERS
The primary raw materials for graphite electrodes, graphite cathodes and
graphite specialty products are petroleum cokes (needle coke for electrodes and
regular grades for cathodes and specialty products), coal tar pitch and
petroleum pitch. The primary raw materials for carbon electrodes, carbon
cathodes and carbon specialty products are anthracite coal and coal tar pitch
and, in some instances, a petroleum coke-based material. The primary raw
material for flexible graphite is natural graphite flake. The Company purchases
its raw materials from a variety of sources and has no material long-term
purchase contracts with respect to any raw materials. Over the past several
decades, the Company has purchased a majority of its petroleum coke from
multiple plants of a single major petroleum company and, since 1988, has done so
pursuant to purchase contracts with one year terms. The Company
10
has a price agreement with one of its major suppliers over a three-year term
which was initiated in 1977. The Company believes that the quality of its raw
materials is the highest available and that, under current conditions, its raw
materials are available in adequate quantities at market prices. Electric power
or natural gas used in manufacturing processes is purchased from local suppliers
under short-term contracts or in the spot market. The availability and price of
raw materials and energy may be subject to curtailment or change due to
limitations which may be imposed under new legislation or governmental
regulations, suppliers' allocations to meet the demands of other purchasers
during periods of shortage (or, in the case of energy suppliers, extended cold
weather), interruptions in production by suppliers, and market and other events
and conditions. Over the past several years, the Company has mitigated the
effect of raw material and energy price increases on its results of operations
through a combination of improved operating efficiency, permanent on-going cost
savings and passing such price increases on to customers. However, there can be
no assurance that such measures will successfully mitigate future increases in
the price of petroleum coke or other raw materials or energy. A substantial
increase in raw material or energy prices which cannot be mitigated or passed on
to customers or a continued interruption in supply, particularly in the supply
of petroleum coke, would have a material adverse effect on the Company.
SALES AND CUSTOMER SERVICE; RESEARCH AND DEVELOPMENT
Sales of the Company's products are made primarily by the Company's direct
sales force, which operates from the Company's 21 sales offices and is supported
by the Company's customer technical service personnel, and, to a lesser extent,
by independent sales agents, most of whom have worked with the Company for many
years, in various countries outside the Home Markets. The Company has a global
business with a diversified customer base. Sales of the Company's products to
customers outside the United States accounted for 72% of the Company's net sales
in 1997. No single customer or group of affiliated customers accounted for more
than 3% of the Company's net sales in 1997. The Company has had, for many years,
a strong commitment to provide a high level of technical service to customers,
which supports the Company's sales activities. The Company employs approximately
60 engineers to provide technical assistance to customers in, among other
things, all areas of EAF design and operation, electrode specification and use
and related matters to maximize customer production and minimize customer costs.
This technical assistance includes periodically monitoring certain customers'
EAF efficiency levels via computer modem. The Company intends to integrate the
sales and customer service activities of EMSA, UCAR Grafit and UCAR Elektroden
into its overall sales and customer technical service programs. Carbone Savoie
has its own dedicated sales and customer service groups which work closely with
Aluminium Pechiney S.A.'s sales and customer service groups to maximize use of
their respective products and technologies.
The Company's sales of graphite electrodes fluctuate from quarter to
quarter due to such factors as scheduled plant shutdowns by customers, national
vacation practices, changes in customer production schedules in response to
seasonal changes in energy costs, weather conditions, strikes and work stoppages
at customer plants and changes in customer order patterns in response to the
announcement of price increases. The Company has experienced, and expects to
continue to experience, volatility with respect to demand for graphite
electrodes in various geographic areas as general economic conditions in such
areas fluctuate. These factors tend to affect the Company's quarterly as well as
annual results of operations. In addition, during the period prior to the
effective date of a price increase, customers tend to buy additional quantities
of graphite electrodes at the then lower pricing (known as "customer buy-ins"),
which add to the Company's net sales during that period. During the period
following the effective date of a price increase, customers tend to use those
additional quantities before placing further orders, which reduces the Company's
net sales during that period. Accordingly, results of operations for any quarter
are not necessarily indicative of the results of operations for a full year or
otherwise.
The Company conducts, at its dedicated technology center located in Parma,
Ohio and its manufacturing facilities throughout the world, a focused technology
program to improve product quality and manufacturing processes. This program,
which is conducted both independently and in conjunction with suppliers,
customers and others, was initiated in 1984. Approximately 80 technical
professionals are directly involved in this program in the United States. These
activities are integrated with the efforts of over 100 engineers at the
Company's manufacturing facilities who are focused on improving manufacturing
processes. Developments by the Company include larger and stronger electrodes
(increasing the Company's ability to supply various "supersized" electrodes),
new chemical additives to enhance raw materials used in graphite electrodes and
new applications for water spray cooling technology, resulting in the
development of safer, more cost-effective and more efficient EAF steel and
graphite electrode production. The Company has received recognition for the high
quality of its products under several
11
programs around the world and has been awarded preferred or certified supplier
status by many major steel and other manufacturing companies. In addition,
Carbone Savoie operates a dedicated cathode technology center in Notre Dame,
France employing approximately 20 professionals. The Company's research and
development expenses (other than certain expenses at the Company's manufacturing
facilities, which are included in cost of sales) in 1995, 1996 and 1997 were $8
million, $8 million and $9 million, respectively.
DISTRIBUTION
Customers generally place orders for electrodes three to six months prior
to the specified delivery date. Such orders are cancelable by the customer and,
therefore, the Company manufactures electrodes and manages electrode inventory
levels to meet rolling sales forecasts. Other products are generally
manufactured or fabricated to meet customer orders. Accordingly, the Company
does not maintain significant inventories of those finished products. Finished
products are generally stored at the Company's manufacturing facilities. The
Company ships its finished products to customers primarily by truck and ship,
using "just-in-time" techniques where practicable.
Proximity of manufacturing facilities to customers can provide a
competitive advantage in terms of cost of delivery of electrodes to customers.
The significance of these costs is affected by fluctuations in exchange rates,
methods of shipment, import duties and whether the manufacturing facilities are
located in the same economic trading region as the customer. The Company
believes that it is generally better positioned in terms of such proximity than
its major competitors (other than Japanese manufacturers supplying graphite
electrodes to Japanese customers) to supply graphite electrodes to the Free
World. The Company believes that UCAR Grafit and UCAR Elektroden will increase
the Company's proximity to graphite electrode customers in such large and
potentially growing markets as Eastern Europe, Russia and the other countries of
the former Soviet Union, and the Middle East and will enhance the Company's
distribution capability.
PATENTS AND TRADEMARKS
The Company owns and has obtained licenses to various domestic and foreign
patents, patent applications and trademarks related to its products, processes
and business. These patents expire at various times over the next 20 years.
While these patents and patent applications, and certain patents owned by
Carbone Savoie, in the aggregate are important to the Company's competitive
position, no single patent or patent application is material to the Company. The
tradename and trademark UCAR are owned by Union Carbide and licensed to the
Company on a royalty-free basis under a license expiring in 2015, which license
automatically renews for successive ten-year periods and permits non-renewal by
Union Carbide commencing after the first ten-year renewal period upon five
years' notice of non-renewal. In addition, the tradename and trademark CARBONE
SAVOIE is a registered trademark in Europe. Those names and marks, and the
trademark GRAFOIL(R), are important to the Company's business. No otheR
trademark or tradename is material to the Company.
COMPETITION
There are 10 manufacturers of graphite electrodes in the Free World. Of
these 10 manufacturers, the Company is the largest and SGL Carbon AG ("SGL"),
which operates manufacturing plants in North America and Europe, is the second
largest. The Company estimates that it supplied in excess of 41% of the graphite
electrodes purchased in the Home Markets in each of 1996 and 1997 and that it
supplied approximately 31% of those purchased in the Free World in 1996 and
1997. The Company estimates that SGL supplied approximately 28% of graphite
electrodes purchased in the Home Markets and approximately 23% of those
purchased in the Free World in 1996. Other manufacturers of graphite electrodes
include: The Carbide/Graphite Group, Inc., whose plants are located in the
United States (which the Company believes supplied approximately 6% of the
graphite electrodes purchased in the Free World in 1996); and four manufacturers
in Japan (which the Company believes collectively supplied approximately 26% of
the graphite electrodes purchased in the Free World in 1996), one of which,
Showa Denko Carbon, Inc., has a plant located in the United States.
Government-controlled and independent manufacturers in the non-Free World (the
"Non-Free World Manufacturers") generally provide less reliable delivery and
produce lower quality products (with higher rates of breakage and Specific
Consumption) for use in their respective countries and in countries which are
their traditional trading partners, most of which countries and partners are
generally net importers of graphite electrodes.
12
Although the Company has periodically increased electrode prices over the
past several years, there can be no assurance that the Company will be able to
increase prices in the future. In addition, further price increases by the
Company or price reductions by competitors, decisions by the Company with
respect to maintaining profit margins rather than market share, the ultimate
outcome of antitrust investigations and related lawsuits and claims or other
competitive or market factors or strategies could adversely affect the Company's
market share or results of operations. Such factors and strategies could also
affect the Company's ability to institute price increases or require the Company
to reduce prices or increase spending on research and development or marketing
and sales, all of which could adversely affect the Company.
There are two significant manufacturers of carbon electrodes in the world
(excluding the Non-Free World Manufacturers). The Company believes that it is
the largest of these two manufacturers and SGL is the second largest and that
together they supplied more than 80% of the carbon electrodes purchased in the
Free World in 1997.
There are eight manufacturers of cathodes in the world (excluding the
Non-Free World Manufacturers). The Company believes that it is the largest and
SGL is the second largest and that, together with two Japanese producers of
carbon and graphite products, Nippon Carbon Co. Ltd. and SEC Corp., they
supplied approximately 70% of the cathodes purchased in the Free World in 1997.
The manufacture of high quality graphite and carbon products is a mature,
capital intensive business which requires extensive process know-how developed
over years of experience working with the various raw materials and their
suppliers, furnace manufacturers and steel or aluminum producers or other end
users (including working on the specific applications for finished electrodes
and cathodes). It also requires high quality raw material sources and a
developed energy supply infrastructure. There have been no significant new
entrants in the manufacture of electrodes since 1950. Accordingly, while no
assurance can be given that such will be the case, the Company believes that it
is unlikely that there will be significant new entrants in the manufacture of
electrodes and cathodes in the next several years.
With respect to its other products, the Company competes with other
graphite and carbon product manufacturers as well as manufacturers of
non-graphite or carbon products used for similar purposes.
ENVIRONMENTAL MATTERS
Since the 1970s, a wide variety of federal, state, local and foreign laws
and regulations relating to the storage, handling, generation, treatment,
emission, release, discharge and disposal of certain substances and wastes have
been adopted. These laws and regulations (and the enforcement thereof) are
periodically changed. The Company is subject to many of these laws and
regulations. Certain of the Company's facilities have experienced some level of
regulatory scrutiny, have been required to take remedial action and have
incurred related costs in the past and may experience further regulatory
scrutiny, be required to take further remedial action and incur additional costs
in the future. Such costs could have a material adverse effect on the Company.
The principal United States laws and regulations to which the Company is
subject are described below. The Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, the Safe Drinking Water Act and similar
state or local laws regulate air emissions, water discharges and hazardous waste
generation, treatment, storage, handling, transportation and disposal. The
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Act of 1986
("Superfund"), and similar state laws provide for responses to and liability for
releases of hazardous substances into the environment. The Toxic Substances
Control Act and related laws are designed to assess the risk of new products to
health and to the environment at early developmental stages. In addition, laws
adopted or proposed in various states impose or may impose, as the case may be,
reporting or remediation requirements if operations cease or property is
transferred or sold.
The Company's manufacturing operations outside the United States are
subject to the laws and regulations of the countries in which those operations
are conducted. These laws and regulations primarily relate to pollution
prevention and the control of risks arising from industrial activities having
high potential impact on the environmental quality of the air, water and soil.
Regulated activities include, among other things: use of hazardous
13
substances; packaging, labeling and transportation of products; management and
disposal of toxic wastes; discharge of industrial and sanitary wastewater; and
emissions to the air.
The Company believes that it is currently in material compliance with the
federal, state, local and foreign environmental laws and regulations to which it
is subject. As a result of amendments to the Clean Air Act, enacted in 1990,
certain of the Company's facilities will be required to comply with new
standards for air emissions to be adopted by the United States Environmental
Protection Agency (the "USEPA") and state environmental protection agencies over
the next several years pursuant to regulations that are currently being drafted
or that have been promulgated. The regulations which have been promulgated will
necessitate the installation of additional controls and/or changes in certain
manufacturing processes in order for the Company to achieve compliance with
these regulations. Based on information currently available to it, the Company
believes that compliance with such regulations under the Clean Air Act will not
have a material adverse effect on the Company.
The Company, like other companies in the United States, has received and
continues periodically to receive notices from the USEPA or state environmental
protection agencies, as well as claims from others, alleging that the Company is
a potentially responsible party (a "PRP") under Superfund and similar state laws
for past and future remediation costs at hazardous substance disposal sites.
Although Superfund liability is joint and several, in general, final allocation
of responsibility at sites where there are multiple PRPs is made based on each
PRPs relative contribution of hazardous substances to the site. Based on
information currently available to it, the Company believes that any potential
liability associated with being named a PRP will not have a material adverse
effect on the Company.
The Company sold its Republic plant in Niagara Falls, New York in 1986.
Adjacent to the Republic plant is a solid waste landfill. Ownership of the
landfill was retained by the Company, and the landfill was closed by the Company
in 1987 in accordance with a New York State Department of Environmental
Conservation (the "DEC") closure plan. In early 1991, the DEC notified the
Company that it was investigating the landfill as a former inactive hazardous
waste site. In September 1997, the site was reclassified from a class 2a site (a
site for which the DEC has insufficient information to determine whether
hazardous wastes or substances are present) to a class 4 site (a site properly
closed and requiring continued management). To date, the costs associated with
this site have not been, and the Company does not anticipate that future costs
will be, material to the Company.
The Company has established and continues to establish accruals for
environmental liabilities where it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated. The
Company adjusts accruals as new remediation and other commitments are made and
as information becomes available which changes estimates previously made.
Estimates of future costs of environmental protection are necessarily
imprecise due to numerous uncertainties, including the impact of new laws and
regulations, the availability and application of new and diverse technologies,
the extent of insurance coverage, the identification of new hazardous substance
disposal sites at which the Company may be a PRP and, in the case of sites
subject to Superfund and similar state laws, the ultimate allocation of costs
among PRPs and the final determination of remedial requirements. Subject to the
inherent imprecision in estimating such future costs, but taking into
consideration the Company's experience to date regarding environmental matters
of a similar nature and facts currently known, the Company believes that costs
and capital expenditures (in each case, before adjustment for inflation) for
environmental protection will not increase materially over the next several
years. Expenses relating to environmental protection were approximately $15
million, $15 million and $14 million, in 1995, 1996 and 1997, respectively.
Capital expenditures relating to environmental protection were approximately $6
million, $14 million and $15 million, in 1995, 1996 and 1997, respectively.
INSURANCE
The Company's policy is to obtain insurance against civil liabilities
relating to personal injuries to third parties, for loss of or damage to
property, and for environmental matters to the extent that it is currently
available, which provides coverage that it believes is appropriate upon terms
and conditions and at a price that it considers fair and reasonable. The Company
believes that it has insurance for such coverage in amounts sufficient to meet
its current needs in light of pending, threatened and anticipated future claims.
There can be no assurance, however, that the Company will not incur losses
beyond the limits of, or outside the coverage of, its insurance. The Company
14
currently believes that recovery under its insurance, if any, would not
materially offset any liabilities which may become due in connection with
antitrust investigations or related lawsuits and claims.
EMPLOYEES
At December 31, 1997, the Company had approximately 5,563 employees, of
which approximately 1,389 were in the United States, 2,433 were in Europe
(including Russia), 1,022 were in Mexico and Brazil, 431 were in South Africa,
284 were in Canada and 4 were in the Asia Pacific region. At December 31, 1997,
the Company had approximately 3,999 hourly employees. Approximately 66% of the
Company's employees are covered by collective bargaining or similar agreements
which expire at various times in each of the next several years. At December 31,
1997, approximately 2,133, or 38%, of the Company's employees were covered by
such agreements which expire, or are subject to renegotiation, at various times
during the remainder of 1998 or the first quarter of 1999. The Company believes
that its relationships with its unions are satisfactory and that it will be able
to renew or extend its collective bargaining or similar agreements on reasonable
terms as they expire. There can be no assurance, however, that renewed or
extended agreements will be reached without a work stoppage or strike or will be
reached on terms satisfactory to the Company. A prolonged work stoppage at any
one of its manufacturing facilities could have a material adverse effect on the
Company. The Company (excluding the Acquired Companies prior to the acquisition
thereof) has not had any material work stoppages or strikes during the past
decade.
ITEM 2. PROPERTIES
The Company currently operates the following facilities, which are owned
or leased as indicated.
OWNED OR
LOCATION OF FACILITY PRIMARY USE LEASED
-------------------- ----------- --------
UNITED STATES
Irvine, California............. Machine Shop and Sales Office Leased
Danbury, Connecticut........... Corporate Headquarters and Sale s Office Leased
Niagara Falls, New York........ Coal Calcining Facility Owned
Lakewood, Ohio................. Flexible Graphite Manufacturing Facility and Sales Owned
Office
Parma, Ohio.................... Technology Center Owned
Clarksville, Tennessee......... Electrode Manufacturing Facility and Sales Office Owned
Columbia, Tennessee............ Electrode Manufacturing Facility and Sales Office Owned
Lawrenceburg, Tennessee........ Carbon Specialty Product Manufacturing Facility Owned
Clarksburg, West Virginia...... Graphite Specialty Product Manufacturing Facility Owned
and Sales Office
INTERNATIONAL
Salvador Bahia, Brazil......... Electrode and Cathode Manufacturing Facility Owned
Sao Paulo, Brazil.............. Sales Office Leased
Welland, Canada................ Electrode and Cathode Manufacturing Facility and Owned
Sales Office
Beijing, China................. Sales Office Leased
Hong Kong, China............... Sales Office Leased
Notre Dame, France............. Electrode and Graphite Specialty Product Owned
Manufacturing Facility and Sales Office
Notre Dame, France............. Cathode Manufacturing Facility and Sales Office Leased
Rungis, France................. Sales Office Leased
Venissieux, France............. Cathode Manufacturing Facility and Technology Owned
Center
Berlin, Germany................ Electrode Manufacturing Facility Leased
Caserta, Italy................. Electrode Manufacturing Facility Owned
15
OWNED OR
LOCATION OF FACILITY PRIMARY USE LEASED
-------------------- ----------- --------
Malonno, Italy................. Machine Shop Owned
Milano, Italy.................. Administration and Sales Office Leased
Monterrey, Mexico.............. Electrode Manufacturing Facility and Sales Office Owned
Moscow, Russia................. Sales Office Leased
Vyazma, Russia................. Electrode Manufacturing Facility Owned
Singapore...................... Sales Office Leased
Meyerton, South Africa......... Electrode Manufacturing Facility and Sales Office Owned
Pamplona, Spain................ Electrode Manufacturing Facility and Sales Office Owned
Gland, Switzerland............. Sales Office and European Headquarters Leased
Sheffield, United Kingdom...... Machine Shop and Sales Office Owned
The Company believes that its facilities, which are of varying ages and
types of construction, are in good condition, are suitable for the Company's
operations and generally provide sufficient capacity to meet the Company's
requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
PUERTO RICAN FACILITY LITIGATION. In 1978, a lawsuit entitled ORTIZ ET AL.
V. UNION CARBIDE GRAFITO, INC. was commenced in the Superior Court of Puerto
Rico by persons residing near the Company's Yabucoa, Puerto Rico facility
alleging property damage and personal injury due to air emissions and noise from
the facility. The defendant, Union Carbide Grafito, Inc. ("Grafito"), is a
wholly owned subsidiary of the Company. The Yabucoa facility ceased operations
in 1989 and was demolished in 1994. Grafito had no other operations. In 1986,
the complaint was dismissed as to approximately two-thirds of the 759 plaintiffs
for failure to provide discovery. In 1987, the complaint was dismissed as to the
remaining plaintiffs for failure to prosecute the lawsuit. Certain of the
plaintiffs thereafter retained new counsel and filed a motion to set aside the
1986 and 1987 dismissals. That motion was denied by the trial court and an
appeal was taken to the Supreme Court of Puerto Rico (the "Supreme Court"). In
1992, the Supreme Court remanded the case to the Superior Court for a hearing on
whether the dismissals should be vacated on the ground that plaintiffs' former
counsel had allowed the dismissals to occur due to fraud. The hearing was held
in March and June 1995, and a decision was rendered in favor of Grafito. On
March 8, 1996, the plaintiffs filed a writ of appeal with the Circuit Court of
Appeals; such writ of appeal was dismissed on procedural grounds. On June 14,
1996, the plaintiffs filed a petition for certiorari to the Supreme Court of
Puerto Rico seeking review of the dismissal of such writ of appeal. The Supreme
Court issued a writ of certiorari to review the dismissal. Such writ of
certiorari is still pending before the Supreme Court. The Company believes that
the ultimate disposition of this lawsuit will not have a material adverse effect
on the Company. Pursuant to the Recapitalization Agreement, Union Carbide and
Mitsubishi have agreed to indemnify UCAR and Blackstone for any liabilities in
excess of $20 million arising out of the lawsuit.
ANTITRUST PROCEEDINGS. On June 5, 1997, the Company was served with
subpoenas issued by the United States District Court for the Eastern District of
Pennsylvania (the "District Court") to produce documents to a grand jury
convened by attorneys for the DOJ and a related search warrant in connection
with an investigation as to whether there has been any violation of federal
antitrust laws by producers of graphite electrodes. Concurrently,
representatives of Directorate General IV of the European Union, the antitrust
enforcement authorities of the European Union (the "EU authorities"), visited
offices of the Company's French subsidiary for purposes of gathering information
to determine whether there has been any violation of Article 85-1 of the Treaty
of Rome, the antitrust law of the European Union. In addition, on June 5, 1997,
one of the Company's competitors in the graphite electrode industry, The
Carbide/Graphite Group, Inc. ("C/G"), announced that the DOJ had granted it the
opportunity to participate in the DOJ's Corporate Leniency Program and that it
was cooperating with the government. Subsequently, the Company was served with
subpoenas in the United States to produce documents relating to, among other
things, its carbon electrode and bulk graphite businesses. In December 1997,
UCAR's Board of Directors appointed a special committee of outside directors,
consisting of John R. Hall and R. Eugene Cartledge, to exercise the power and
authority of UCAR's Board of Directors in connection with antitrust
investigations and related lawsuits and claims. On February 23, 1998, the DOJ
announced that it had charged Showa Denko Carbon, Inc. ("SDC"), a U.S.
subsidiary of Showa Financing K.K., a Japanese firm, and unnamed
16
co-conspirators with participating from 1993 until January 1997 in an
international conspiracy involving meetings and conversations in the Far East,
Europe and the United States resulting in agreements to fix prices and allocate
market shares worldwide, to restrict co-conspirators' capacity and to restrict
non-conspiring producers' access to manufacturing technology for graphite
electrodes. The DOJ further announced that SDC has agreed to plead guilty, pay a
fine of $29 million and cooperate in its investigation and that other cases were
likely to be filed.
On April 7, 1998, pursuant to an agreement with the DOJ, UCAR agreed to
plead guilty to a one count charge of violating federal antitrust laws in
connection with the sale of graphite electrodes. Additionally, UCAR has agreed
to pay a non-interest-bearing fine in the aggregate amount of $110 million,
payable in six annual installments. Under the plea agreement, which is subject
to approval by the District Court, the Company will be required to make annual
payments of $20 million, $15 million, $15 million, $18 million, $21 million and
$21 million, respectively, commencing 90 days after the Company is sentenced by
the District Court (if such sentence is issued in accordance with the plea
agreement). Under the plea agreement, the Company will not be subject to
prosecution by the DOJ with respect to any antitrust violations occurring prior
to the date the plea agreement is approved. The fine payable pursuant to the
plea agreement is within the amounts used by the Company for purposes of
determining the $340 million charge described below. The plea agreement has been
submitted for court approval. Although UCAR does not expect such an outcome, it
is possible that the District Court could reject the plea agreement. In such
event, it is possible that UCAR could be required to either defend any charges
which could be brought or enter into a less favorable plea agreement. Regardless
of whether the plea agreement is accepted by the District Court, the plea
agreement makes it more difficult to defend against antitrust civil lawsuits.
The Company has become aware that the Canadian Competition Bureau has
commenced a criminal investigation under the Canadian Competition Act (the
"Canadian Act"). Under Section 45 of the Canadian Act, the maximum fine for the
Company would be ten million Canadian dollars. It is possible that Section 46 of
the Canadian Act may be implicated in this matter. Under Section 46, the amount
of the fine is discretionary, and there is no maximum. The Company, through its
counsel, is cooperating with the DOJ and the EU authorities in their continuing
investigations. It is possible that other antitrust investigations could be
initiated by authorities in other jurisdictions.
On June 17, 1997, UCAR was served with a complaint commencing a putative
class action lawsuit in the United States District Court for the Western
District of Pennsylvania. Subsequently, the Company was served with four
additional complaints commencing similar lawsuits in the District Court. UCAR,
SGL Carbon Corporation ("SGL Carbon"), a U.S. subsidiary of SGL Carbon AG
("SGL"), a German firm, and C/G, are named as defendants in each complaint. SGL
is named as a defendant in each of the four subsequently served complaints. The
plaintiff named in the first served complaint was Erie Forge and Steel, Inc.,
and the plaintiffs named in the other complaints respectively were: Kentucky
Electric Steel Corporation, Koppel Steel Corporation and Newport Steel
Corporation; Al Tech Specialty Steel Corporation; Caparo Steel Company; and
Cascade Steel Rolling Mills, Inc. In each complaint, the plaintiffs alleged that
the defendants violated federal antitrust laws. Each complaint sought, among
other things, an award of treble damages resulting from such alleged violations.
On August 5, 1997, the four complaints filed in the District Court were
consolidated into a single complaint in the District Court entitled IN RE:
GRAPHITE ELECTRODES ANTITRUST LITIGATION. In the consolidated litigation, the
proposed class consists of all persons who purchased graphite electrodes in the
United States directly from the defendants during the period from January 1,
1992 through August 15, 1997. On August 21, 1997, the first served complaint was
withdrawn without prejudice to refile. UCAR filed a motion to dismiss the
consolidated complaint, which was denied in November 1997 with leave to renew
such motion after discovery is completed. Discovery and depositions relating to
class certification have begun. The District Court, however, has ordered a stay
of non-class depositions and certain other discovery until July 1998.
Accordingly, the consolidated lawsuit is still in its early stages. UCAR intends
to vigorously defend against the consolidated lawsuit. UCAR may at any time,
however, settle the lawsuit and any related possible unasserted claims. UCAR has
had discussions in this regard with plaintiffs' counsel, with those members of
the proposed class who have indicated that they intend to opt out of any class
which is certified as well as other potential plaintiffs.
On each of March 30, 1998 and April 3, 1998, UCAR was served with
complaints commencing civil lawsuits in the District Court. UCAR, C/G, SGL
Carbon, SGL and SDC are named as defendants in each complaint. Additionally,
Showa Denko K.K., UCAR Global Enterprises Inc., UCAR Carbon Company Inc., Union
Carbide and Mitsubishi are named as defendants in the complaint served on March
30, 1998. The plaintiffs named in the complaint served on March 30, 1998 are
Ameristeel Corporation, Atlantic Steel Industries, Inc., Auburn Steel
17
Company, Inc., Austeel Lemont Company, Inc., Birmingham Southeast, L.L.C.,
Birmingham Steel Corporation, Charter Manufacturing Co., Inc., Citisteel USA,
Inc., Ipsco Steel Inc., Keystone Consolidated Industries Company, d/b/a Keystone
Steel and Wire Company, Laclede Steel Company, Latrobe Steel Company, The Marion
Steel Company, North Star Steel Company, North Star Steel Texas, Inc., North
Star Steel, L.L.C., Oregon Steel Mills, Inc., Owen Electric Steel Company of
South Carolina, d/b/a SMI South Carolina, Sheffield Steel Corporation, SMI Steel
Inc., Structural Metals, Inc., Tamco and The Timken Company. The plaintiffs
named in the complaint served on April 3, 1998 were Nucor Corporation and
Nucor-Yamato Steel Corporation. In each complaint, the plaintiffs allege that
the defendants violated federal antitrust laws. Additionally, in the complaint
served on April 3, 1998, the plaintiffs allege that Union Carbide and Mitsubishi
violated applicable state fraudulent transfer laws. Each complaint seeks, among
other things, an award of treble damages resulting from such alleged antitrust
violations. The complaint served on April 3, 1998 also seeks to have payments
made by UCAR to Union Carbide and Mitsubishi in connection with the
Recapitalization declared to be fraudulent conveyances and returned to UCAR for
purposes of enabling UCAR to satisfy any judgments resulting from such alleged
antitrust violations. The Company has not responded to either of these lawsuits
and intends to vigorously defend against these lawsuits. These lawsuits are in
their earliest stages. The Company may at any time, however, settle such
lawsuits and any related possible unasserted claims. The Company has had
discussions in this regard with certain of the plaintiffs and their counsel. The
Company anticipates that other lawsuits could be commenced against the Company.
The Company anticipates that additional antitrust lawsuits seeking, among
other things, to recover damages, could be commenced against the Company in the
United States and in other jurisdictions.
SHAREHOLDER DERIVATIVE LAWSUIT. On March 4, 1998, UCAR was served with a
complaint commencing a shareholder derivative lawsuit in the Connecticut
Superior Court (Judicial District of Danbury). Robert P. Krass, former Chairman
of the Board, President and Chief Executive Officer, Robert J. Hart, former
Senior Vice President and Chief Operating Officer, William P. Wiemels, then Vice
President and Chief Financial Officer, Peter B. Mancino, General Counsel, Vice
President and Secretary, and Fred C. Wolf, then Vice President, Administration
and Strategic Projects, together with Robert D. Kennedy, and Messrs. Cartledge
and Hall, current directors, and Glenn H. Hutchins, Howard A. Lipson, Peter G.
Peterson and Stephen A. Schwarzman, former directors, are named as defendants.
The Company is named as a nominal defendant. On March 13, 1998, effective
immediately, Messrs. Krass and Hart retired and Mr. Krass resigned as a
director. On March 18, 1998, Mr. Kennedy was elected Chairman of the Board and
Chief Executive Officer, Mr. Wiemels became Vice President and Chief Operating
Officer and Mr. Wolf became Vice President and Chief Financial Officer. The
plaintiff named in the complaint is David Jaroslawicz. The complaint alleges
that the defendants breached their fiduciary duties in connection with alleged
non-compliance by the Company and its employees with antitrust laws. The
complaint also alleges that certain of the defendants sold common stock while in
possession of materially adverse non-public information relating to such
non-compliance with antitrust laws. The complaint seeks recovery for UCAR of
damages to the Company resulting from such alleged breaches and sales. The
complaint does not contain specific allegations of the factual basis underlying
such allegations and appears to be based on the existence of the previously
announced grand jury investigation, the related consolidated civil lawsuit and
the Company's public announcements and filings with the Commission. This lawsuit
is in its earliest stages. UCAR has not yet responded to the complaint.
Accordingly, no evaluation of potential liability has been made with respect to
this lawsuit.
SECURITIES CLASS ACTION LAWSUIT. On April 1, 1998, a complaint commencing
a securities fraud class action lawsuit was filed in the United States District
Court for the District of Connecticut. UCAR, David A. Stockman, a former
director, and each of Messrs. Krass, Hart, Mancino, Wiemels, Wolf, Cartledge,
Hall, Hutchins, Kennedy, Lipson, Peterson and Schwarzman are named as
defendants. The plaintiff named in the complaint is Solomon Eisenberg. The
proposed class consists of all persons who purchased UCAR common stock during
the period from August 15, 1995 through March 13, 1998. The complaint alleges
that during such period the defendants violated securities laws by failing to
disclose alleged violations of antitrust laws. The complaint seeks, among other
things, to recover damages resulting from such alleged violations. UCAR has not
yet responded to this lawsuit. This lawsuit is in its earliest stages.
Accordingly, no evaluation of potential liability has been made with respect to
this lawsuit.
OTHER. The Company is involved in various other legal proceedings
incidental to the conduct of its business. While it is not possible to determine
the ultimate disposition of each of these other proceedings, the Company
believes that the ultimate disposition of such other proceedings will not have a
material adverse effect on the Company.
18
EARNINGS CHARGE. The Company recorded a charge of $340 million ($310
million after tax) against results of operations for 1997 for potential
liabilities and expenses in connection with antitrust investigations and related
lawsuits and claims. While such charge reflects the Company's best estimate as
to the amount of such potential liabilities and expenses as of the date of
filing of this Annual Report on Form 10-K with the Commission, actual
liabilities and expenses could be materially higher or lower than such estimate.
In addition, due to the fact such lawsuits are in the earliest stages and no
evaluation of liability can yet be made, no amounts have been accrued with
respect to the shareholder derivative and securities fraud class action
lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The common stock is listed on the New York Stock Exchange under the
trading symbol "UCR." The closing sale price of the common stock was $39 15/16
on December 31, 1997, the last trading day of the Company's last fiscal year.
The following table sets forth, for the periods indicated, the high and low
closing sales prices for the common stock as reported by the New York Stock
Exchange:
HIGH LOW
---- ---
1996:
First Quarter.................... $39 1/2 $31
Second Quarter................... $44 7/8 $39
Third Quarter.................... $41 7/8 $34 3/4
Fourth Quarter................... $41 1/8 $32 5/8
1997:
First Quarter..................... $45 $36 7/8
Second Quarter.................... $49 1/8 $38
Third Quarter..................... $48 11/16 $42 1/2
Fourth Quarter.................... $50 1/4 $36 13/16
As of December 31, 1997, there were 63 record holders of common stock. The
Company estimates that approximately 13,000 stockholders are represented by
nominees.
In August 1997, the common stock was added to Standard & Poor's 400 Mid-Cap
Index.
DIVIDEND POLICY
It is the current policy of UCAR's Board of Directors to retain earnings
to finance operations, meet obligations and repay debt. Any declaration and
payment of cash dividends will be subject to the discretion of UCAR's Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, cash requirements and future prospects, the limitations contained
in the Senior Bank Facilities and the Subordinated Note Indenture and other
factors deemed relevant by UCAR's Board of Directors. There can be no assurance
that any cash dividends will be declared or paid.
19
UCAR is a holding company that derives all of its cash flow from Global,
the common stock of which constitutes UCAR's only material asset. Consequently,
UCAR's ability to pay dividends is dependent upon the earnings of Global and its
subsidiaries and the distribution of those earnings by Global to UCAR.
Under the Senior Bank Facilities, Global and UCAR are permitted to pay
dividends to their respective stockholders only in an aggregate amount equal to
a percentage, ranging from 50% to 65% based on certain financial tests, of
cumulative adjusted consolidated net income, as defined therin (provided that,
in any event, dividends aggregating up to $15 million are permitted to be paid
in any twelve-month period). In addition, Global is permitted to pay dividends
to UCAR (i) in respect of UCAR's administrative fees and expenses and (ii) for
the specific purpose of the purchase or redemption by UCAR of capital stock held
by present or former officers of the Company up to $5 million per year or $25
million in the aggregate. In general, amounts which are permitted to be paid as
dividends in a year but are not so paid may be paid in subsequent years. As a
result of the $340 million charge and stock repurchases, UCAR does not
anticipate paying any dividends in the near term.
The Subordinated Note Indenture restricts the payment of dividends by
Global to UCAR if (a) at the time of such proposed dividend, Global is unable to
meet certain indebtedness incurrence and income tests or (b) the total amount of
the dividends paid exceeds specified aggregate limits based on consolidated net
income, net proceeds from asset and stock sales and certain other transactions.
Such restrictions are not applicable to dividends paid to UCAR (i) in respect of
UCAR's administrative fees and expenses and (ii) for the specific purpose of the
purchase or redemption by UCAR of capital stock held by present or former
officers of the Company in the amount of up to $5 million per year or $25
million in the aggregate.
ITEM 6. SELECTED FINANCIAL DATA
The following selected annual consolidated financial data (excluding the
"quantity of graphite electrodes sold") have been derived from the Consolidated
Financial Statements at the dates and for the periods indicated, which have been
audited by KPMG Peat Marwick LLP as indicated in their reports thereon. The
selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements at December
31, 1997 and 1996 and for each of the years in the three-year period ended
December 31, 1997 and the related notes thereto included elsewhere herein.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $1,097 $ 948 $ 901 $ 758 $ 740
Gross profit..................................... 411 365 345 243 203
Selling, administrative and other expenses....... 115 90 115 79 203
Restructuring costs(a)........................... - - 30 - 33
Antitrust investigations
and related lawsuits and claims(b)......... 340 - - - -
Operating profit (loss)(c)....................... (58) 268 189 162 80
Interest expense................................. 64 61 93 19 21
Income (loss) before extraordinary charge and
cumulative effect of changes in accounting
principles(c).................................. (160) 145 25 100 50
Extraordinary charge, net of tax(d).............. - - 37 - -
Cumulative effect of changes in accounting
principles.................................... - 7 - - (20)
Net income (loss)................................ (160) 152 (12) 100 30
20
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
Earnings (loss) per common share(e):
Basic: Income (loss) before cumulative
effect of change in accounting
principles........................... $(3.49) $3.15 $1.98
Cumulative effect on prior years of
change in accounting for
inventories(f)..................... - 0.15 -
--------- ------ -------
Net income (loss).................... $(3.49) $3.30 $1.98
========= ====== =======
Weighted average common shares
outstanding (in thousands)(g)...... 45,963 46,274 45,960
Diluted:Income (loss) before cumulative
effect of change in accounting
principles........................... $(3.49) $3.00 $1.87
Cumulative effect on prior years of
change in accounting for
inventories (f) ................... - 0.15 -
------ ------ ------
Net income (loss).................... $(3.49) $3.15 $1.87
======= ====== ======
Weighted average common shares
outstanding (in thousands)(g)...... 45,963 48,469 48,763
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents........................ $ 58 $ 95 $ 53 $ 60 $ 54
Total assets..................................... 1,233 988 864 778 831
Total debt....................................... 732 635 668 247 268
Stockholders' equity (deficit)................... (246) (2) (167) 192 188
Working capital.................................. 64 234 175 195 30
OTHER DATA:
Gross profit margin............................. 37.5% 38.5% 38.3% 32.1% 27.4%
Operating profit (loss) margin.................. (5.3) 28.3 21.0 21.4 10.8
Depreciation and amortization................... $ 49 $ 36 $ 38 $ 39 $ 39
Capital expenditures............................ 79 62 65 34 26
EBITDA(h)....................................... (9) 304 249 201 147
Cash flow from operations....................... 172 172 130 174 64
Cash flow used in investing..................... (221) (104) (116) (56) (25)
Quantity of graphite electrodes sold
(thousands of metric tons)(i)(j)........... 242 205 217 196 217
- ------------------------
(a) Represents costs recorded in connection with closing or downsizing
operations at certain locations as part of the Company's restructuring and
re-engineering projects. These costs consisted primarily of write-offs of
fixed assets and other shut down costs.
(b) Represents estimated potential liabilities and expenses in connection with
antitrust investigations and related lawsuits and claims.
(c) Includes, in 1995, non-recurring charges related to the Recapitalization
of $8 million related to payments for a senior subordinated credit facility
which was available but not used and payments under the Long Term Incentive
Compensation Plan and non-recurring expenses related to the Initial
Offering of $18 million for compensation expense related to accelerated
vesting of performance stock options and restricted matching stock.
Includes, in 1997, a $12 million non-cash charge for the accelerated
vesting of outstanding 1998 performance stock options and $4 million of
consulting fees associated with projects that the Company is undertaking to
further improve operating efficiency, integrate worldwide operations and
generate earnings growth.
21
(d) Resulted from early extinguishment of debt in connection with the
Redemption and the Refinancing.
(e) For 1995, unaudited pro forma per share data are presented assuming that
the Recapitalization, Initial Offering, the Redemption and the Refinancing
had occurred as of January 1, 1995. Historical per share data for 1995
have been omitted as the historical capitalization of the Company was not
indicative of the Company's then current capital structure.
(f) Effective January 1, 1996, the Company changed its method of determining
LIFO inventories. The new methodology provides specifically identified
parameters for defining new items within the LIFO pool, which the Company
believes improves the accuracy of costing those items. The Company
recorded income of $7 million (after related taxes of $4 million) as the
cumulative effect on prior years of this change in accounting for
inventories. The Company believes this change will not materially impact
the Company's ongoing results of operations.
(g) Reflects common shares and potential common shares outstanding after the
Initial Offering, including potential common shares calculated in
accordance with the "treasury stock method," wherein the net proceeds from
the exercise of potential common shares are assumed to be used to
repurchase common shares at the average price for such year.
(h) EBITDA, for this purpose, means operating profit (loss) plus depreciation,
amortization and the portion of restructuring costs applicable to fixed
asset write-offs. The amount of restructuring costs applicable to fixed
asset write-offs for 1993 and 1995 were $28 million and $22 million,
respectively. The Company believes that EBITDA is generally accepted as
providing useful information regarding a company's ability to service
and/or incur debt. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from continuing operations or other
consolidated income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's profitability
or liquidity.
(i) Excludes graphite electrodes sold by EMSA, before it became a wholly owned
subsidiary on April 21, 1997, of 25,000 metric tons, 24,000 metric tons,
27,000 metric tons, 26,000 metric tons and 8,000 metric tons in 1993, 1994,
1995, 1996 and 1997, respectively.
(j) The quantity of graphite electrodes sold in the first quarter of 1994 was
impacted by customer buy-ins during the fourth quarter of 1993 in advance
of price increases effective in January 1994 and the quantity of graphite
electrodes sold in the fourth quarter of 1997 was impacted by customer
buy-ins in advance of price increases effective in January 1998.
The following quarterly selected consolidated financial data have been
derived from the Consolidated Financial Statements for the periods indicated,
which have not been audited. The selected quarterly consolidated financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements at December 31, 1997 and 1996 and for each of the years in
the three-year period ended December 31, 1997 and the related notes thereto
included elsewhere herein.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(Dollars in millions, except per share data)
1997:
Net sales.................................. $ 238 $ 290 $ 278 $ 291
Gross profit............................... 88 110 104 109
Net income (loss)(a)....................... 37 42 37 (276)
Basic net income (loss) per share.......... 0.79 0.93 0.80 (6.07)
Diluted net income (loss) per share........ 0.76 0.89 0.77 (6.07)
22
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(Dollars in millions, except per share data)
1996:
Net sales.................................. 243 241 227 237
Gross profit............................... 93 96 86 90
Income before cumulative effect of change
in accounting principles............... 35 38 35 37
Net income................................. 42(b) 38 35 37
Basic income per share before cumulative
effect of change in accounting principles 0.77 0.82 0.75 0.81
Cumulative effect per share on prior years
of change in accounting for
inventories.............................. 0.15 -- -- --
------ ----- ----- -----
Basic net income per share................. $0.92 $0.82 $0.75 $0.81
====== ===== ===== =====
Diluted income per share before cumulative
effect of change in accounting principles $0.73 $0.78 $0.72 $0.77
Cumulative effect per share on prior years 0.15 -- -- --
------ ----- ----- -----
of change in accounting for inventories..
Diluted net income per share............... $0.88 $0.78 $0.72 $0.77
====== ===== ===== =====
- ----------------
(a) Includes a charge of $2 million ($1 million after tax) and $338 million
($309 million after tax) in the third quarter and fourth quarter,
respectively, associated with estimated potential liabilities and expenses
in connection with antitrust investigations and related lawsuits and
claims.
(b) Includes a cumulative effect on prior years of $7 million (after taxes)
related to a change in method of determining LIFO inventories.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
BACKGROUND. In 1995, UCAR International Inc. ("UCAR" and, together with
its subsidiaries, the "Company") consummated a leveraged recapitalization (the
"Recapitalization"), an initial public offering (the "Initial Offering"), a
redemption (the "Redemption") of a portion of the subordinated notes (the
"Subordinated Notes") issued in connection with the Recapitalization and a
refinancing of the senior bank credit facilities established in connection with
the Recapitalization (the "Refinancing"). In 1995, the Company also acquired
substantially all of the shares of its Brazilian subsidiary owned by public
shareholders in Brazil.
RECENT EVENTS. In 1996, the Company acquired 90% of the equity of UCAR
Grafit OAO ("UCAR Grafit"). Thereafter, the Company increased its ownership to
96% (at December 31, 1997) of such equity. In 1997, the Company acquired 70% of
the equity of Carbone Savoie S.A.S. ("Carbone Savoie") and, through a newly
formed 70% owned subsidiary, UCAR Elektroden GmbH ("UCAR Elektroden"), acquired
the graphite electrode business of Elektrokohle Lichtenberg AG ("EKL") in
Berlin, Germany. The Company also acquired the outstanding shares of EMSA (Pty.)
Ltd. ("EMSA") held by the Company's former 50% joint venture partner in EMSA.
The acquisitions of UCAR Grafit, Carbone Savoie, EMSA and the graphite electrode
business of EKL (collectively, the "Acquired Companies") were accounted for as
purchases The Company currently has no plans to make any further acquisitions in
the near term.
In 1997, UCAR's Board of Directors authorized a program to repurchase up
to $200 million of common stock at prevailing prices from time to time in the
open market or otherwise depending on market conditions and other factors,
without any established minimum or maximum time period or number of shares.
Through December 31, 1997, UCAR purchased an aggregate of $92 million of common
stock under such program (including 1,300,000
23
shares repurchased for $48 million concurrently with a secondary public offering
of common stock by stockholders affiliated with Blackstone Capital Partners II
Merchant Banking Fund L.P. and its affiliates (collectively "Blackstone")). UCAR
does not currently expect to continue to repurchase common stock under this
program. In addition, on December 8, 1997, UCAR's Board of Directors approved
the accelerated vesting of the outstanding performance stock options associated
with 1998 performance targets.
In 1997, Western Europe began to recover from the economic downturn that
commenced in 1996. In addition, an economic downturn in the Asia Pacific region
began in 1997 which is still continuing. Although the Company is a global
company, its exposure in the Asia Pacific region approximates 10% of total net
sales. The Company believes its net sales to Asia Pacific region customers will,
at least during the first half of 1998, be negatively impacted as a result of
the decline in such region's steel production rates and the resultant delay in
such customers' orders for graphite electrodes. The Company serves every
geographic market worldwide and, accordingly, it is always impacted in varying
degrees, both positively and negatively, as country or regional market
conditions fluctuate.
In 1997, the Company was served with subpoenas, search warrants and
information requests by antitrust authorities in the United States and the
European Union in connection with investigations as to whether there has been
any violation of antitrust laws by producers of graphite electrodes.
Subsequently, several antitrust class action civil lawsuits were commenced
against UCAR and certain other producers of graphite electrodes in the United
States. These lawsuits have been consolidated into a single lawsuit, although
additional similar lawsuits have been subsequently commenced. As a result of
recent developments, the Company recorded a charge against results of operations
for 1997 in the amount of $340 million ($310 million after tax) for estimated
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims. Although the $340 million charge represents the
Company's best estimate as to the amount of such potential liabilities and
expenses as of the date of filing this Annual Report on Form 10-K with the
Commission, actual liabilities and expenses could be materially higher or lower
than such estimate. UCAR has also been named as a defendant in a shareholder
derivative lawsuit and a securities class action lawsuit, each of which is
based, in part on the subject matter of such antitrust investigations. It is
possible that additional antitrust civil lawsuits seeking, among other things,
to recover damages could be commenced against the Company in the United States
and in other jurisdictions. It is also possible that antitrust investigations in
other jurisdictions could be commenced. In April 1998, pursuant to an agreement
with the DOJ, UCAR agreed to plead guilty to a one count charge of violating
antitrust laws in the sale of graphite electrodes. Additionally, UCAR agreed to
pay a non-interest-bearing fine in the aggregate amount of $110 million, payable
in six annual installments. Under the plea agreement, UCAR will not be subject
to prosecution by the DOJ with respect to any antitrust violations occurring
prior to the date on which the agreement receives court approval. The fine
payable pursuant to the plea agreement is within the amounts used by the Company
for purposes of determining the $340 million charge. The plea agreement has been
submitted for court approval. Although UCAR does not expect such an outcome, it
is possible that the court could reject the plea agreement. In such event, UCAR
would be required to either defend any charges which could be brought or enter
into a less favorable plea agreement. Regardless of whether the plea agreement
is accepted by the court, the plea agreement makes it more difficult to defend
against antitrust civil lawsuits. In addition, due to the fact such lawsuits are
in the earliest stages and no evaluation of liability can yet be made, no
amounts have been accrued with respect to the shareholder derivative and
securities fraud class action lawsuits.
CURRENCY MATTERS. The Company sells its products in multiple currencies
but seeks to price its products based on U.S. dollar equivalent target prices
for each country or regional market. These target prices are based on
evaluations of the relevant exchange rates, the relationship between all of the
target prices and other factors, if any, which the Company may deem appropriate.
Each subsidiary then seeks to institute price increases to achieve target prices
when, as and if local conditions permit. A subsidiary may rescind a price
increase or grant price discounts if required by local conditions. The impact on
net sales of any price increase in foreign countries can be mitigated or
exaggerated by changes in currency exchange rates. The Company has entered into
hedging transactions to reduce its exposure to changes in currency exchange
rates.
While most of the Company's sales are made to customers in markets where
local currencies are readily convertible into U.S. dollars, the Company makes
sales to customers in other markets, particularly countries in the former Soviet
Union, Eastern Europe, the Middle East and the Asia Pacific region. When the
Company deems it
24
appropriate, the terms of sale to customers in these markets require payment in
U.S. dollars, Deutsche Marks or Yen and may additionally require prepayment or
delivery of a bank letter of credit or equivalent security for payment.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Consolidated Statements of Operations and the increase or decrease
(expressed as a percentage of such item in the comparable prior period) of such
items:
PERCENTAGE
FOR THE YEAR ENDED INCREASE
DECEMBER 31, (DECREASE)
------------ ---------
1996 TO 1995 TO
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
(Dollars in millions)
Net sales...................................... $1,097 $948 $901 16% 5%
Cost of sales.................................. 686 583 556 18 5
------- ----- -----
Gross profit................................... 411 365 345 13 6
Selling, administrative and other expenses..... 115 90 115 27.8 (21.7)
Restructuring costs............................ -- -- 30 -- N/M
Antitrust investigations
and related lawsuits and claims........... 340 -- -- N/M --
Operating profit (loss)........................ (58) 268 189 (122) 42
- ----------------------
N/M: Not Meaningful
The following table sets forth, for the periods indicated, the percentage
(rounded to the nearest tenth) of net sales represented by certain items in the
Consolidated Statements of Operations:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
Net sales............................................... 100.0% 100.0% 100.0%
Cost of sales........................................... 62.5 61.5 61.7
------ ------ ------
Gross profit............................................ 37.5 38.5 38.3
Selling, administrative and other expenses.............. 10.5 9.5 12.8
Restructuring costs..................................... -- -- 3.3
Antitrust investigations
and related lawsuits and claims.................... 31.0 -- --
Operating profit (loss)................................. (5.3) 28.3 21.0
1997 COMPARED TO 1996. Net sales in 1997 were $1,097 million, an increase
of $149 million, or 16%, from net sales of $948 million in 1996. The increase in
net sales was primarily attributable to the Acquired Companies, which added net
sales of $140 million after taking into account inter-company sales to the
Acquired Companies which would have been classified as third party sales prior
to their respective acquisitions. The Company's raw material sales were reduced
by $13 million in 1997. Net sales of the Company's products outside the United
States accounted for 72% of total net sales in 1997 and 68% of total net sales
in 1996. Net sales of graphite electrodes accounted for 72% of total net sales
in 1997 as compared to 73% of total net sales in 1996. Excluding the Acquired
Companies, the volume of graphite electrodes sold increased 9,700 metric tons,
or 4.7%, to 214,700 metric tons in 1997 from 205,000 metric tons in 1996, which
added $31 million of net sales in 1997. This increase in the volume of graphite
electrodes sold was primarily due to the economic recovery in Western Europe,
including purchases by certain customers in advance of announced price increases
effective January 1, 1998, or "customer buy-ins," and increased export shipments
to the Asia Pacific and Middle East regions. Excluding the Acquired Companies,
increases in the average selling price (in U.S. dollars and net of changes in
currency exchange rates) of graphite electrodes added approximately $38 million
to net sales in 1997. The Western European currencies weakened considerably in
1997 against the U.S. dollar. Accordingly, these price increases were more than
offset by the
25
negative impact of currency translation on net sales of graphite electrodes,
which amounted to approximately $43 million. The non-graphite electrode
businesses, excluding the Acquired Companies, remained relatively stable on a
combined basis in 1997 as compared to 1996.
Gross profit in 1997 was $411 million (37.5% of net sales), a 13% increase
over the gross profit of $365 million (38.5% of net sales) in 1996. Excluding
the Acquired Companies, the gross margin would have been 39.1% in 1997, an
improvement of 60 basis points over 1996. The improvement resulted primarily
from an increase in capacity utilization and cost savings, partially offset by
increases in the cost of raw materials.
Operating loss in 1997 was $58 million ((5.3%) of net sales), a decrease
of $326 million, or 122%, from operating profit of $268 million (28.3% of net
sales) in 1996. Operating profit in 1997 was primarily impacted by the $340
million charge for estimated potential liabilities and expenses in connection
with antitrust investigations and related lawsuits and claims, a $12 million
non-cash charge for the vesting of outstanding 1998 performance stock options
and $4 million of consulting fees associated with projects that the Company is
undertaking to improve operating efficiency, integrate worldwide operations and
generate earnings growth. Excluding the $340 million charge and the Acquired
Companies, operating profit in 1997 would have been $261 million (27.7% of net
sales) in 1997.
Selling, administrative and other expenses were $115 million in 1997, an
increase of $25 million, or 27.8%, from $90 million in 1996. Selling,
administrative and other expenses in 1997 included the $12 million non-cash
charge for the vesting of outstanding 1998 performance stock options.
Additionally, the Acquired Companies had selling, administrative and other
expenses amounting to $16 million in 1997.
Other (income) expense (net) was expense of $5 million in 1997 as compared
to income of $1 million in 1996. The change resulted primarily from $4 million
of consulting fees associated with projects that the Company is undertaking to
further improve operating efficiency, integrate worldwide operations and
generate earnings growth.
Interest expense increased to $64 million in 1997 from $61 million in
1996. In 1997, the average outstanding total debt balance was $726 million and
the average annual interest rate was 8.9% as compared to an average outstanding
total debt balance of $643 million and an average annual interest rate of 9.4%
in 1996. The decline in the average annual interest rate is primarily
attributable to decreases in interest rates resulting from the amendment of the
Company's senior bank credit facilities (the "Senior Bank Facilities") in March
1997. The increase in outstanding debt resulted primarily from $124 million of
investments in acquisitions, $92 million for repurchase of common stock and $79
million for capital expenditures, offset by net cash flow from operations of
$172 million.
Provision for income taxes was $39 million in 1997 as compared to $68
million in 1996. In 1997, the provision for income taxes was significantly
higher than the amount computed by applying the United States Federal income tax
rate primarily due to the fact that a majority of the charge in connection with
antitrust investigations and related lawsuits and claims will not be deductible,
offset to a much lesser extent by the Company's tax exemption in Brazil, tax
credits in the United States associated with research and development expenses
and tax benefits recognized in Italy and Spain associated with capital
expenditures and fixed asset revaluations, respectively.
UCAR's share of net income from its company carried at equity, EMSA, was
$2 million during the period from January 1, 1997 to April 21, 1997 as compared
to $7 million for all of 1996. In April 1997, the Company acquired the
outstanding shares of EMSA held by its former 50% joint venture partner.
Following the acquisition, EMSA's results of operations were consolidated with
the Company's results of operations and no additional equity income was
recorded.
1996 COMPARED TO 1995. Net sales in 1996 were $948 million, an increase of
5% from $901 million in 1995. This increase was led by the Company's graphite
specialties and carbon specialties businesses, which both had net sales
increases of 13% in 1996 as compared to 1995. The average selling prices (in
U.S. dollars and net of changes in currency exchange rates) for products of
these businesses increased approximately 8% in 1996 as compared to 1995. The
carbon specialties business had increased volume in carbon refractory products,
which are sold primarily to the steel industry. The graphite specialties
business had increased volume in "superfine grain" products, which are used in
the semiconductor industry, and increased volume in graphite cathodes, which are
used in the aluminum industry. Net sales of the Company's core graphite
electrodes business, which accounted for 73% of total net sales
26
in 1996, increased approximately 3% to $696 million in 1996 as compared to $675
million in 1995. The average selling price (in U.S. dollars and net of changes
in currency exchange rates) of graphite electrodes sold increased approximately
6% to $3,185 per metric ton in 1996 as compared to $3,000 per metric ton in
1995. The volume of graphite electrodes sold in 1996 declined by approximately
5% in 1996 as compared to 1995. Graphite electrode sales volume in Western
Europe declined 18% in 1996 as compared to 1995 as a result of lower economic
activity as members of the European Union continued to work toward a unified
monetary system. Net sales for the Company's products outside of the United
States amounted to $642 million, or approximately 68% of total net sales, in
1996.
Gross profit in 1996 was $365 million, an increase of $20 million, or 6%,
from gross profit of $345 million in 1995. Price increases on all products sold,
together with cost savings, offset the decline in graphite electrode sales
volume and allowed for an increase in gross margin to 38.5% in 1996 as compared
to 38.3% in 1995.
Operating profit in 1996 was $268 million (28.3% of net sales), an
increase of $79 million, or 42%, from operating profit of $189 million (21.0% of
net sales) in 1995. Excluding restructuring costs of $30 million, non-recurring
expense of $6 million associated with a senior subordinated credit facility
available but not used in connection with the Recapitalization, $18 million of
non-recurring compensation expense included in selling, administrative and other
expenses as a result of accelerated vesting of performance stock options and
restricted matching stock in connection with the Initial Offering and $2 million
of other expenses due to payments under the Long Term Incentive Compensation
Plan accelerated as a result of the Recapitalization, operating profit in 1995
would have been $245 million (27.2% of net sales).
Selling, administrative and other expenses were $90 million in 1996, a
decrease of $25 million, or 22%, from $115 million in 1995. Selling,
administrative and other expenses in 1995 included $18 million in non-recurring
compensation expenses associated with the accelerated vesting of performance
stock options and restricted matching stock in connection with the Initial
Offering and $4 million associated with scheduled vesting of performance stock
options.
Restructuring costs of $30 million were incurred in 1995 in connection
with the Rationalization Project. No restructuring costs were incurred in 1996.
Other (income) expense (net) was income of $1 million in 1996 as compared
to expense of $3 million in 1995. The change resulted primarily from a $14
million decrease in interest income (primarily due to a reduction in short-term
investments by the Company's Brazilian subsidiary), a $9 million reduction in
expense from foreign currency adjustments (including reduced translation losses
from Brazilian operations and U.S. dollar-denominated debt of the Company's
foreign subsidiaries) and a non-recurring expense of $7 million associated with
bank fees due to the Recapitalization which were incurred in 1995 but not in
1996.
Interest expense decreased to $61 million in 1996 from $93 million in
1995. In 1996, the average outstanding total debt balance was $643 million and
the average annual interest rate was 9.4% as compared to an average outstanding
total debt balance of $820 million and an average annual interest rate of 11.5%
in 1995.
Provision for income taxes was $68 million in 1996 as compared to $74
million in 1995. In 1995, income tax expense was higher than the amount computed
by applying the United States federal income tax rate primarily due to
non-recurring taxes of approximately $37 million associated with the
Recapitalization.
Minority stockholders' share of income of the Company's Brazilian
subsidiary decreased to $1 million in 1996 from $4 million in 1995 due to an
increase in the Company's ownership of that subsidiary. Substantially all of the
minority interest of the Brazilian subsidiary was purchased by the Company in
1995. The Company's share of net income of EMSA remained stable at $7 million in
1996 and 1995.
The following table sets forth a summary of the results of operations for
1995, as adjusted for certain non-recurring expenses, taxes and costs:
27
OPERATING NET
PROFIT INCOME
--------- -------
(Dollars in millions,
except per share data)
As reported in the Consolidated Financial Statements..................... $189 $(12)
Non-recurring expenses, taxes and costs:
Compensation expense due to accelerated vesting of performance stock options
and restricted matching stock in connection with the
Initial Offering.............................................. 18 12
Senior subordinated credit facility expense and Long Term
Incentive Compensation Plan payments in connection with the
Recapitalization............................................... 8 5
Extraordinary charge for early extinguishment of debt................ -- 37
Taxes associated with the Recapitalization........................... -- 37
Pro forma interest adjustment to give effect to the Recapitalization,
the Initial Offering, the Redemption and the Refinancing as
if they occurred on January 1, 1995....................... (1) 12
------- ------
Pro forma operating profit/net income.................................... $214 $ 91
======= ======
EFFECTS OF INFLATION
In general, the Company's cost of sales is affected by the inflation in
each country in which it has a manufacturing facility. During the past three
years, the effects of inflation in the United States and foreign countries
(except for highly inflationary countries) have been offset by a combination of
improved operating efficiency, improved pricing and permanent, on-going cost
savings and, accordingly, have not been material to the Company. The cost of
petroleum coke, a principal raw material used by the Company, and natural gas,
which is used by the Company in its electrode, cathode and graphite specialties
baking operations, may fluctuate widely for various reasons, including fuel
shortages and cold weather. Changes in such costs were not material to the
Company during the three years ended December 31, 1997. No assurance can be
given that future increases in the Company's cost of sales or other expenses
will not exceed the rate of inflation or the amounts by which the Company is
able to increase its prices.
The Company maintains operations in Brazil and Russia, countries which
historically have had highly inflationary economies. The financial statements of
these foreign operations have been remeasured as if the respective functional
currencies of the Brazilian and Russian economic environments were the U.S.
dollar. Accordingly, translation gains and losses were included in the
Consolidated Statements of Operations for each of the years in the three-year
period ended December 31, 1997. The Company also maintains operations in Mexico.
Because of significant increases in the rate of inflation in Mexico, Mexico is
considered to have a highly inflationary economy and, effective January 1, 1997,
the Company changed its functional currency in Mexico to the U.S. dollar.
Effective January 1, 1998, Brazil is no longer considered to be a highly
inflationary economy. If this change had occurred effective January 1, 1997, the
effect on results of operations and financial condition would not have been
material.
EFFECTS OF CHANGES IN CURRENCY EXCHANGE RATES
The Company produces and sells its products in multiple currencies. In
general, the Company's results of operations are affected by changes in currency
exchange rates. When the local currencies of foreign countries in which the
Company has a manufacturing facility decline (or increase) in value relative to
the U.S. dollar, this has the effect of reducing (or increasing) the U.S. dollar
equivalent cost of sales and other expenses with respect to those facilities.
This effect is, however, partially offset by the cost of petroleum coke, a
principal raw material used by the Company, which is denominated in U.S.
dollars. The Company prices products manufactured at such facilities in local
currencies and adjusts those prices (to the extent permitted by local market
conditions) to attempt to maintain a U.S. dollar equivalent target price.
Accordingly, when the local currencies increase (or decline) in value relative
to
28
the U.S. dollar, this has the effect of increasing (or reducing) net sales. The
result of these effects is to increase or decrease operating profit and net
income.
Net sales of graphite electrodes were approximately $43 million, or 6%,
lower in 1997 as a result of the impact of negative currency translation. The
Western European currencies weakened considerably in 1997 against the U.S.
dollar. In an effort to mitigate the effects of exchange rate changes, price
increases were announced in certain of the Western European countries which
became effective on January 1, 1998. During 1998, the currencies in many of the
countries in which the Company sells its products have continued to weaken
against the U.S. dollar. The Company believes that it is likely that such
exchange rate changes will adversely affect its net sales despite its efforts to
mitigate the effects of such changes. To further manage exposure to general
economic and specific financial market risks caused by currency exchange rate
changes, the Company engages in hedging activities and uses various off-balance
sheet financial instruments. The amount of currency exchange contracts used by
the Company to minimize these risks was $353 million at December 31, 1997, $350
million at December 31, 1996 and $269 million at December 31, 1995.
In connection with the Recapitalization, certain of the Company's foreign
subsidiaries borrowed $343 million of U.S. dollar-denominated debt. In November
1995, the Company repatriated U.S. dollar-denominated debt of its Mexican
subsidiary by replacing it with debt of UCAR Global Enterprises Inc. ("Global").
At December 31, 1997, total outstanding U.S. dollar-denominated debt of the
Company's foreign subsidiaries (excluding the Company's subsidiaries in Russia
and Brazil, which used the U.S. dollar as their functional currency because they
operate in highly inflationary economies) was $214 million. Changes in the
exchange rates between the U.S. dollar and the currencies in the countries in
which these subsidiaries are located result in foreign currency gains and losses
that are reported in other (income) expense (net) in the Consolidated Statements
of Operations. While changes in currency exchange rates did not materially
affect the Company in the three years ended December 31, 1997, there can be no
assurance that such changes will not have a material adverse effect on the
Company in the future. Since November 1995, the Company's foreign subsidiaries
with U.S. dollar-denominated debt have entered into foreign currency contracts
to protect against exchange rate changes. The amount of such contracts was $214
million at December 31, 1997, $169 million at December 31, 1996 and $198 million
at December 31, 1995. The Company believes that the repatriation of the U.S.
dollar-denominated debt from its Mexican subsidiary and such contracts reduce
the Company's exposure to exchange rate changes related to such borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds have consisted principally of invested
capital, cash flow from operations and debt financing. The Company's uses of
those funds (other than for operations) have consisted principally of debt
reduction (including the Redemption with proceeds from the Initial Offering),
capital expenditures, distributions to stockholders (including repurchases of
common equity), acquisition of controlling interests in new companies or
businesses and acquisition of minority stockholders' shares of consolidated
subsidiaries. Since 1995, acquisitions and repurchases under UCAR's stock
repurchase program have been financed from existing cash balances, cash flow
from operations, short-term borrowings and borrowings under its revolving credit
facilities.
GENERAL EFFECTS OF INDEBTEDNESS AND LIABILITIES. The Company is highly
leveraged. The Company's indebtedness is expected to increase and its liquidity
is expected to decrease in connection with liabilities arising out of antitrust
investigations and related lawsuits and claims. At December 31, 1997, the
Company had an aggregate of $732 million of outstanding indebtedness and a
stockholders' deficit of $246 million as compared to $635 million of outstanding
indebtedness and a stockholders' deficit of $2 million at December 31, 1996.
The Company's substantial indebtedness and obligations in connection with
antitrust investigations and related lawsuits and claims could have important
consequences, including the following: (i) the Company's ability to restructure
its existing debt or obtain additional debt financing for working capital,
capital expenditures, settlements, judgments or other obligations in connection
with antitrust investigations or related lawsuits or claims, or general
corporate or other purposes may be impaired in the future; (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to debt
service obligations and obligations in connection with antitrust investigations
and related lawsuits and claims, thereby reducing the funds available to the
Company for other purposes; (iii) the Company may be substantially more
leveraged than certain of its competitors, which may place the Company at a
competitive disadvantage; (iv) the Company's substantial degree of leverage may
hinder its ability to adjust rapidly
29
to changing market conditions or other events; and (v) the Company's substantial
degree of leverage makes it more vulnerable to insolvency, bankruptcy or other
adverse effects in the event of a downturn in general economic conditions or its
business or in the event that obligations in connection with antitrust
investigations and related lawsuits and claims are greater than expected.
The Company's ability to service its debt and meet its other obligations,
including obligations associated with antitrust investigations and related
lawsuits and claims, as they come due will depend on its future financial and
operating performance, which, in turn, is subject to, among other things,
changes in the graphite and carbon industry, prevailing economic conditions and
certain financial, business and other factors beyond its control, including
interest rates. The Company believes that obligations associated with antitrust
investigations and related lawsuits and claims has had a material adverse impact
on its working capital, and will have a material adverse impact on its cash flow
and liquidity. If the Company's cash flow and capital resources are insufficient
to enable the Company to meet its debt service and other obligations as they
become due, the failure to meet such obligations could have a material adverse
effect on the Company, up to and including bankruptcy.
CASH FLOW AND PLANS TO MANAGE LIQUIDITY. For at least the past five years,
the Company has had positive annual cash flow from operations. Typically, the
first quarter of each year results in neutral or negative cash flow from
operations (after deducting cash used for capital expenditures) due to various
factors. These factors include interest payments on the Subordinated Notes,
rebuilding inventory levels related to the effect of customer buy-ins in the
fourth quarter of the prior year in response to price increases to be effective
in the first quarter of the current year, and the payment during the first
quarter of each year of variable compensation with respect to the immediately
preceding year. Typically, the other three quarters result in significant
positive cash flow from operations (after deducting cash used for capital
expenditures), although the third quarter tends to produce relatively less
positive cash flow primarily as a result of interest payments on the
Subordinated Notes due in that quarter. The Company believes that the current
year will follow the historical pattern. In addition, to minimize interest
expense, the Company (other than its Brazilian subsidiary) typically operates on
a "zero-cash" basis, using funds available under the revolving credit facility
as its primary source of liquidity. Accordingly, in the absence of borrowing
capability under the revolving credit facility, the Company would have limited
funds available to meet its debt service obligations and obligations in
connection with antitrust investigations and related lawsuits and claims. In
April 1998, the Company obtained a limited waiver of certain covenants of the
Senior Bank Facilities and, in connection therewith, borrowed $35 million under
the revolving credit facility. The Company believes that the $35 million,
together with cash flow from operations (after deducting cash used for capital
expenditures) will enable it to meet its debt service, trade and other
obligations when due in the ordinary course of business during the second
quarter of 1998, including currently anticipated obligations in connection with
antitrust investigations and related lawsuits and claims. In this regard, the
Company believes that the plea agreement with the DOJ will assist it in its
efforts to meet its obligations as they become due since the plea agreement
permits the Company to pay the $110 million non-interest-bearing fine in six
annual installments. There can be no assurance, however, that obligations in
connection with antitrust investigations and related lawsuits and claims will
not be greater than expected.
The Company is in the process of evaluating the potential impacts from the
$340 million charge, antitrust investigations and related lawsuits and claims.
Although the ultimate outcome of these matters is uncertain, the Company expects
the potential liabilities, expenses and other impacts of antitrust
investigations and related lawsuits and claims to be material and adverse. No
assurance can be given that the Company's cash flow from operations and capital
resources will be sufficient to enable the Company to meet its debt service and
other obligations and respond to such impacts. Such impacts could require that
the Company limit or discontinue, temporarily or permanently, certain of its
business plans, activities or operations, further reduce or delay capital
expenditures, sell certain of its assets or businesses, restructure or refinance
some or all of its debt or incur additional debt, or sell additional common
stock or other securities. No assurance can be given that the Company will be
able to take any of such actions on favorable terms or at all. Further, such
impacts may ultimately require that the Company seek protection under applicable
bankruptcy laws.
The Company's current plan is to continue its long-term strategy of being
a low-cost producer of high quality products and provider of superior services
to customers. Consistent with this strategy and in order to maximize funds
available to meet its obligations, the Company is focusing significant efforts
on reducing operating expenses, capital expenditures and other cash requirements
and commitments, while maintaining necessary and appropriate business
operations. The Company believes that the long-term fundamentals of its business
continue to be sound.
30
Accordingly, although no assurance can be given that such will be the case, the
Company believes, based on its expected cash flow from operations and taking
into account its efforts to maximize funds available to meet its obligations, it
will be able to restructure its capitalization and manage its working capital
and cash flow to permit it to meet its obligations as they become due.
OVERVIEW OF DEBT FINANCING AND DESCRIPTION OF WAIVER. Upon consummation of
the Recapitalization, the Company established recapitalization bank credit
facilities which provided for borrowings of up to $685 million, of which $585
million was used in connection with the Recapitalization. On October 19, 1995,
the Company refinanced such facilities with the Senior Bank Facilities at more
favorable interest rates and with more favorable covenants. The Senior Bank
Facilities initially provided for borrowings of up to $620 million, of which
$520 million was used in connection with the Refinancing. On March 19, 1997, the
Senior Bank Facilities were amended to reduce the interest rates on amounts
outstanding thereunder, to increase the amount available under the revolving
credit facility to $250 million from $100 million and to change certain
covenants to allow greater flexibility in uses of free cash flow for
acquisitions, capital expenditures and restricted payments. In April 1998, the
Company obtained a waiver of a breach, if any, of certain of the covenants
contained in the Senior Bank Facilities relating to the Company's compliance
with laws prior to March 13, 1998 and the Company's obligation to deliver to the
lenders under the Senior Bank Facilities certain financial information within 90
days of the end of the prior year. In connection with the waiver, the Company
agreed to grant a security interest in substantially all, to the extent
possible, of its assets and amend certain provisions of the Senior Bank
Facilities. Such amendments are likely to result in an increase in the interest
rates applicable to the indebtedness outstanding under the Senior Bank
Facilities. In addition, in connection with the waiver, on April 13, 1998, the
Company borrowed an additional $35 million under the revolving credit facility.
The waiver is not effective for any additional borrowings and will terminate on
the earlier to occur of July 10, 1999, the occurrence of any other event of
default under the Senior Bank Facilities or a date on which the lenders notify
the Company that the lenders believe that there has been, since December 31,
1997, a material adverse change in UCAR's assets, business, properties,
financial condition, results of operations or prospects.
DESCRIPTION OF SENIOR BANK FACILITIES. The Senior Bank Facilities consist
of: (a) a Tranche A Facility (the "Tranche A Facility") in the amount of $270
million consisting of (i) a Tranche A Letter of Credit Facility providing for
the issuance of up to $225 million of U.S. dollar-denominated letters of credit
for the purpose of supporting either U.S. dollar-denominated or foreign-currency
denominated loans, and interest and the impact of currency exchange rate
fluctuations thereon, to certain foreign subsidiaries of Global (together with
Global, a wholly owned subsidiary of UCAR, the "Credit Parties") under
facilities arranged with local lending institutions, (ii) a Tranche A Term Loan
Facility providing for term loans of $45 million to Global and (iii) a Tranche A
Reimbursement Loan Facility in respect of drawings under such letters of credit
or to refinance such loans to foreign subsidiaries; (b) a Tranche B Term Loan
Facility (the "Tranche B Facility") providing for term loans of $120 million to
Global; and (c) a Revolving Credit Facility (the "Revolving Facility") providing
for revolving and swingline loans to Global and the issuance of U.S.
dollar-denominated letters of credit for the account of Global or other
designated credit parties in an aggregate principal and stated amount at any
time not to exceed $250 million. The Revolving Facility terminates on December
31, 2001.
The Tranche A Facility (including the letters of credit issued thereunder)
amortizes in quarterly installments over four years, commencing March 31, 1998,
with installments ranging from $50 million in 1998 to $85 million in 2001, with
the final installment payable on December 31, 2001. The Tranche B Facility
amortizes over five years, commencing March 31, 1998, with nominal quarterly
installments during the first four years, and quarterly installments aggregating
$116 million in 2002, with the final installment payable on December 31, 2002.
The Company's next required installment payments for the tranche A and tranche B
portions of the Senior Bank Facilities of $50 million and $1 million,
respectively, occur during 1998. During 1996, the Company made payments in
advance of installments due on the Tranche A Facility and Tranche B Facility, of
$25 million and $30 million, respectively ($60 million and $25 million,
respectively, during 1995). The Company did not make any voluntary prepayments
during 1997.
The Company enters into agreements with financial institutions which limit
the Company's exposure to the incurrence of additional interest expense due to
increases in variable interest rates. During 1995, the Company purchased
interest rate caps on up to $375 million of debt, limiting interest expense on
this debt to 8.5% through 1997. During 1997, the Company purchased interest rate
caps on $250 million of debt, limiting interest expense on
31
this debt to a weighted average rate of 8.2% for the period commencing February
1998 and continuing through various dates ending February 2001. Fees related to
these agreements are charged to interest expense over the term of the
agreements. Use of these interest rate risk instruments satisfies requirements
under the Senior Bank Facilities.
The Credit Parties are required to make mandatory prepayments of loans,
and letters of credit are mandatorily reduced, subject to certain exceptions, in
the amount of (a) either 50% or 25% (depending on the ratio of debt to EBITDA
(as defined) of UCAR and its subsidiaries) of consolidated excess cash flow (as
defined) of Global and its subsidiaries (after giving effect to debt service on
the Senior Bank Facilities and the Subordinated Notes) less voluntary
prepayments previously made during a specified annual period, (b) 100% of the
net proceeds of certain dispositions of assets or stock of subsidiaries or
incurrence of certain indebtedness by UCAR, Global or any of their subsidiaries
and (c) 50% of the net proceeds of the issuance of any equity securities by
UCAR. No mandatory prepayments were required in 1997.
The obligations of the Credit Parties under the Senior Bank Facilities are
unconditionally and irrevocably guaranteed by UCAR and each of its direct or
indirect domestic subsidiaries (collectively, the "Guarantors"). In addition,
the Senior Bank Facilities and such guarantees are secured by first priority or
equivalent security interests in substantially all capital stock of Global and
the Guarantors, including all the capital stock of, or other equity interests
in, each other direct or indirect domestic subsidiary of Global and 65% of the
capital stock of, or other equity interests in, each direct foreign subsidiary
of Global or any Guarantor or, in any case in which Global or any Guarantor
holds directly less than 65% of such stock or equity interests in any foreign
subsidiary, all such stock or equity interests held by Global or such Guarantor
(to the extent permitted by applicable contractual and legal provisions).
Certain of the foreign subsidiaries have agreed to provide additional credit
support for obligations of foreign Credit Parties in respect of the Tranche A
Facility in the form of collateral and/or cross guarantees. In connection with
the waiver, each of UCAR and the Credit Parties agreed to grant, to the lenders
under the Senior Bank Facilities in the case of Global and the Guarantors, and,
to the extent legally permitted, to each local facility lender in the case of
the direct and indirect foreign subsidiaries of Global, a first priority
security interest in substantially all of the respective assets of UCAR and the
Credit Parties.
At Global's option, the interest rates applicable to the Tranche A
Facility and Revolving Facility are either adjusted LIBOR (as defined) plus a
margin ranging from 0.35% to 1.50% (depending on the ratio of debt to EBITDA (as
defined) of UCAR and its subsidiaries) or the alternate base rate. The interest
rate applicable to the Tranche B Facility is either adjusted LIBOR plus 1.50% or
the alternate base rate plus 0.50%. The alternate base rate is the higher of
Chase Manhattan Bank's prime rate or the federal funds effective rate plus
0.50%. At the relevant foreign Credit Party's option, the interest rate
applicable to its loans is either adjusted LIBOR plus 0.25%, an alternate base
rate (which varies from loan to loan) or, in the case of local
currency-denominated loans, the local interbank offered rate plus 0.25%. In
connection with the waiver, the Company agreed to amend certain provisions of
the Senior Bank Facilities related to interest rate changes for borrowings under
the Tranche A Facility and the Revolving Facility. Such amendments are likely to
result in an increase in the interest rate applicable to the indebtedness
outstanding under the Senior Bank Facilities because the definition of EBITDA
has been modified, for purposes of determining certain applicable interest
rates, to include any payments made with respect to antitrust investigations and
related lawsuits and claims.
Global pays a per annum fee ranging from 0.35% to 1.50% (depending on the
ratio of debt to EBITDA (as defined) of UCAR and its subsidiaries) of the
aggregate face amount of outstanding letters of credit under the Tranche A
Facility and under the Revolving Facility and a per annum fee ranging from
0.125% to 0.30% (depending on the ratio of debt to EBITDA (as defined) of UCAR
and its subsidiaries) on the undrawn portion of the commitments in respect of
the Senior Bank Facilities.
The Senior Bank Facilities contain a number of significant covenants that,
among other things, restrict the ability of Global and its subsidiaries to
dispose of assets, incur additional indebtedness, repay or refinance other
indebtedness or amend other debt instruments, create liens on assets, enter into
leases, investments or acquisitions, engage in mergers or consolidations, make
capital expenditures, engage in certain transactions with subsidiaries or pay
dividends or make other restricted payments and that otherwise restrict
corporate activities. In addition, under the Senior Bank Facilities, Global is
required to comply with specified minimum interest coverage and maximum leverage
ratios.
32
The Senior Bank Facilities prohibit modification of the indenture related
to the Subordinated Notes (the "Subordinated Note Indenture") in any manner
adverse to the lenders under the Senior Bank Facilities and limit Global's
ability to refinance the Subordinated Notes without the consent of such lenders.
In addition to the failure to pay principal and interest on amounts
outstanding under, and fees in respect of letters of credit outstanding and
undrawn commitments under the Senior Bank Facilities, events of default under
the Senior Bank Facilities include failure to comply with the covenants in the
Senior Bank Facilities, 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. For this purpose, a change in control
occurs on the date on which UCAR ceases to own 100% of the outstanding capital
stock of Global, any person (other than Blackstone and Company management)
beneficially owns more than 25% of the total voting power of UCAR at any time
when Blackstone and Company management beneficially own less than a majority of
such voting power, a majority of the directors of UCAR then serving are
individuals who were neither nominated by Blackstone and Company management or
by a majority of the directors of UCAR (or by directors so nominated) then
serving or a change in control of UCAR or Global occurs under the indenture or
agreement governing any other indebtedness exceeding $7.5 million. There can be
no assurance that Global will have the financial resources necessary to repay
amounts due under the Senior Bank Facilities upon an event of default
thereunder.
DESCRIPTION OF SUBORDINATED NOTES. In connection with the
Recapitalization, Global issued $375 million aggregate principal amount of
Subordinated Notes pursuant to the Subordinated Note Indenture, $175 million of
which were redeemed in connection with the Redemption. Interest on the
Subordinated Notes is payable semiannually on January 15 and July 15 of each
year at the rate of 12% per annum. The Subordinated Notes mature on January 15,
2005. Except as described below, Global may not redeem the Subordinated Notes
prior to January 15, 2000. On or after such date, Global may redeem the
remaining Subordinated Notes, in whole or in part, at specified redemption
prices beginning at 104.5% of the principal amount of the Subordinated Notes
redeemed for the year commencing January 15, 2000 and reducing to 100% of such
principal amount for the years January 15, 2003 and thereafter, in each case
together with accrued and unpaid interest thereon. Upon the occurrence of a
change of control, (i) Global will have the option to redeem the then
outstanding Subordinated Notes in whole but not in part at a redemption price
equal to 100% of the principal amount thereof, plus a specified premium, plus
accrued and unpaid interest thereon and (ii) if Global does not so redeem the
Subordinated Notes, Global will be required to make an offer to repurchase the
Subordinated Notes at a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest thereon. For this purpose, a change in
control occurs on (i) the date on which any person other than Blackstone and
Company management beneficially owns more than 35% of the total voting power of
UCAR and Blackstone and Company management beneficially own a lesser percentage
of such voting power and do not have the right or ability to elect or designate
for election a majority of UCAR's Board of Directors or (ii) the date, at the
end of any two-year period, on which individuals, who at the beginning of such
period were directors of UCAR (or individuals nominated or elected by a vote of
66 2/3% of such directors or directors previously so elected or nominated),
cease to constitute a majority of UCAR's Board of Directors.
The Subordinated Notes are unsecured and subordinated to all existing and
future senior indebtedness of Global. The Subordinated Notes will rank pari
passu with any future senior subordinated indebtedness of Global and senior to
all other subordinated indebtedness of Global. The Subordinated Notes are
unconditionally guaranteed on a senior subordinated basis by UCAR.
The Subordinated Note Indenture contains various covenants which, among
other things and in each case subject to significant specified exceptions, limit
the ability of the Company to incur additional indebtedness, limit the ability
of Global and its subsidiaries to pay dividends, make investments and other
restricted payments, create or permit to exist restrictions on distributions
from such subsidiaries, or sell assets and subsidiary stock unless the net cash
proceeds are used to repay debt, invest in assets or repurchase Subordinated
Notes, restrict transactions with affiliates, prohibit UCAR from engaging in any
business activities other than holding the stock of Global and certain permitted
investments and limit the ability of Global to sell any capital stock of its
subsidiaries or enter into certain mergers and consolidations. In addition,
under the Subordinated Note Indenture, Global is required to comply with
specified ratios.
33
In addition to the failure to pay principal and interest on, or repurchase
when required, the Subordinated Notes, events of default under the Subordinated
Note Indenture include failure to comply with certain covenants in the
Subordinated Note Indenture, failure to pay at maturity or acceleration of other
indebtedness exceeding $25 million, judgment defaults in excess of $25 million
to the extent not covered by insurance and certain events of bankruptcy. The
Subordinated Note Indenture also contains provisions as to legal defeasance and
covenant defeasance. There can be no assurance that Global will have the
financial resources necessary to purchase the Subordinated Notes upon a change
in control, pay amounts due in connection with any legal or covenant defeasance
or to pay amounts due under the Subordinated Note Indenture upon an event of
default.
OTHER IMPACTS OF RECENT DEVELOPMENTS. The Senior Bank Facilities and the
Subordinated Note Indenture contain a number of significant financial and
restrictive covenants and other provisions, which have been impacted as a result
of the $340 million charge for potential liabilities and expenses in connection
with antitrust investigations and related lawsuits and claims. In April 1998,
the Company obtained a limited waiver of certain covenants of the Senior Bank
Facilities and, in connection therewith, borrowed $35 million under the
revolving credit facility. From January 1, 1998 through April 12, 1998, the
Company increased its borrowings under the revolving credit facility by $26
million. As of April 13, 1998, after giving effect to outstanding letters of
credit and $35 million borrowed under the revolving credit facility, $76 million
was available for borrowing under the revolving credit facility. In order to
make additional borrowings thereunder, the Company would need to, among other
things, make certain representations, including representations as to the
absence of material adverse changes in the business, financial condition or
results of operations of the Company and the absence of material legal
proceedings. In light of antitrust investigations and related lawsuits and
claims, no assurance can be given that the Company will be able to make those
representations or make additional borrowings thereunder. In addition, even if
the Company is able to make additional borrowings thereunder, such ability may
be limited by certain covenants contained in the Subordinated Note Indenture.
Under the Subordinated Note Indenture, subject to certain exceptions, the
Company may not incur additional indebtedness if its consolidated coverage ratio
(as defined) is less than certain specified ratios. As a result of the $340
million charge, the Company's consolidated coverage ratio (as defined) is less
than those specified ratios. As a result, under the Subordinated Note Indenture,
the Company cannot incur additional indebtedness except under the exceptions
referred to above.
In the absence of the waiver, the Company could have been in breach of the
covenants contained in the Senior Bank Facilities. In addition, under the
covenants contained in the Senior Bank Facilities and the Subordinated Note
Indenture, the Company's ability to borrow under the revolving credit facility
in the future may be extremely limited or non-existent. As a result, the Company
may not have sufficient funds to meet its debt service obligations and its
obligations in connection with antitrust investigations and related lawsuits and
claims as well as pay its operating and other expenses when due. Further, the
waiver does not restrict the lenders under the Senior Bank Facilities from
declaring that there has been a breach, after giving effect to the $340 million
charge, of material adverse change representations made in the past. Any or a
combination of these circumstances and other circumstances described in this
Annual Report on Form 10-K could result in the occurrence of an event of default
under the Senior Bank Facilities. The occurrence of an event of default, which
is not waived, would permit the lenders thereunder to, among other things,
accelerate all indebtedness outstanding thereunder by declaring all amounts
borrowed thereunder to be immediately due and payable, together with accrued and
unpaid interest. In addition, the lenders could foreclose upon collateral
pledged to secure repayment of such indebtedness and the commitments of the
lenders to make further extensions of credit under the Senior Bank Facilities
would be terminated. Under the cross-acceleration provisions of the Subordinated
Note Indenture, the holders of Subordinated Notes would thereupon likewise be
able to accelerate all indebtedness outstanding under the Subordinated Notes.
Further, even if such indebtedness is not accelerated, the occurrence of an
event of default, which is not waived, could require the Company to reclassify
some or all of its long-term debt to current debt. Such reclassification of the
debt could result in the inclusion of an explanatory paragraph in any audit
report, which refers to substantial doubt about the ability of the Company to
continue as a going concern, which could itself constitute a separate event of
default thereunder. Such actions by the lenders would have material and adverse
impacts on the Company. Such impacts could require that the Company limit or
discontinue, temporarily or permanently, certain of its business plans,
activities or operations, further reduce or delay capital expenditures, sell
certain of its assets or businesses, some or all of its debt or incur additional
debt, or sell additional common stock or other securities. No assurance can be
given that the Company will be able to take any of such actions on favorable
terms or at all. Further, such impacts may ultimately require that the Company
seek protection under applicable bankruptcy laws.
34
INVENTORY LEVELS, WORKING CAPITAL AND OTHER LONG-TERM OBLIGATIONS. During
1997, working capital decreased by $170 million. Excluding the Acquired
Companies, working capital decreased by $214 million during 1997. Notes and
accounts receivable increased $20 million mainly due to increased non-trade
receivables for foreign exchange gains, tax incentive grants and other taxes,
partially offset by the impact of currency translation resulting from the
continued strengthening of the U.S. dollar against other currencies. Accounts
payable, accrued income and other taxes and other accrued liabilities increased
by $140 million. The increase was principally a result of other accrued
liabilities of $174 million, representing the estimated current portion of the
$340 million charge for estimated potential liabilities and expenses in
connection with antitrust investigations and related lawsuits and claims, offset
primarily by the impact of currency translation. Short-term debt and payments
due within one year on long-term debt increased by $23 million and $51 million,
respectively. These increases were the result of increased short-term borrowings
by certain foreign subsidiaries to meet local cash needs and current installment
payments due in 1998 under the Senior Bank Facilities. Inventory levels declined
by $18 million partially as a result of currency translation. Inventory levels
at any specified date are affected by, among other things, changes in
inventories of raw materials to meet anticipated changes in sales of finished
products, customer buy-ins and other factors affecting net sales from quarter to
quarter. Prepaid expenses increased by $15 million due to deferred tax assets
associated with the deductible portion of the accrued liabilities and expenses
associated with antitrust investigations and related lawsuits and claims. Cash,
cash equivalents and short-term investments were $17 million lower at December
31, 1997 than at December 31, 1996.
Other long-term obligations increased $175 million during 1997. The
increase was primarily due to accrued liabilities of $163 million representing
the estimated long-term portion of the $340 million charge for estimated
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims.
CAPITAL EXPENDITURES. Capital expenditures aggregated $79 million, $62
million and $65 million in 1997, 1996 and 1995, respectively. The Company
currently expects capital expenditures in 1998 to total approximately $50
million to $55 million. Ongoing projects include net capital expenditures of $13
million in 1997 and 1998 associated with a project to modernize the Company's
manufacturing facility in Caserta, Italy and aggregate capital expenditures of
$18 million in 1996, 1997, 1998 and 1999 associated with the Focused Factory
Project. Capital expenditures of $27 million associated with a modernization
project designed to close certain high cost manufacturing operations and expand
lower cost manufacturing operations at the Company's North American graphite
electrode plants (the "Rationalization Project") were incurred in 1995 and 1996.
Except for the Focused Factory Project, most of the Company's capital
expenditures have been, and are expected to be, made to maintain existing
facilities and equipment, achieve cost savings and improve product quality and
operating efficiency.
CASH DISTRIBUTIONS AND RESTRICTIONS ON DIVIDENDS OR DISTRIBUTIONS
On January 26, 1995, in connection with the Recapitalization, the Company
repurchased and cancelled all of the common equity then held by Mitsubishi
Corporation for $406 million and paid to Union Carbide Corporation a dividend of
$347 million. The Company also made additional net cash distributions to Union
Carbide Corporation and Mitsubishi Corporation of $3 million in 1995.
Under the Senior Bank Facilities, UCAR and Global are generally permitted
to pay dividends to their respective stockholders only in an annual amount up to
the greater of $15 million or a specified percentage of adjusted consolidated
net income. In general, amounts which are permitted to be paid as dividends in a
year but are not so paid may be paid in subsequent years. The Subordinated Note
Indenture also limits the payment of dividends by Global to UCAR. As a result of
the $340 million charge and stock repurchases, UCAR does not anticipate paying
any dividends in the near term.
CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1996, the Company changed its method of determining
LIFO inventories. The new methodology provides specifically identified
parameters for defining new items within the LIFO pool which the Company
believes improves the accuracy of costing those items. The Company recorded
income of $7 million (after related income taxes of $4 million) as the
cumulative effect on prior years of this change in accounting for
35
inventories. The new method of accounting resulted in charging lower inventory
costs to cost of goods sold during 1996 which reduced cost of goods sold by $4
million (and increased net income by $2 million).
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. SFAS 131 addresses presentation
and disclosure matters and will have no impact on the Company's financial
position, results of operations or cash flow. The Company is in the process of
determining its business segments.
In February 1997, FASB issued SFAS 128, "Earnings Per Share," which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. SFAS 128 requires presentation of basic and diluted per
share amounts for income from continuing operations and for net income for all
periods presented.
In October 1995, FASB issued SFAS 123, "Accounting for Stock-Based
Compensation" which is effective for years beginning after December 15, 1995.
SFAS 123 permits a fair value based method of accounting for employee stock
compensation plans. It also allows a company to continue to use the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Companies electing to
continue to use the accounting prescribed by APB 25 must make pro forma
disclosures of net income and net income per share as if the fair value based
method of accounting defined in SFAS 123 had been applied. The Company has
elected to continue the accounting prescribed by APB 25. Accordingly, the
adoption of SFAS 123 had no effect on the Company with the exception of expanded
disclosures required under SFAS 123.
YEAR 2000
The Year 2000 issue is the result of computer programs written using two
rather than four digits to define the applicable year. Any computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in processing errors,
miscalculations or failures causing disruptions of operations, including, among
other things, a temporary inability to process transactions or otherwise engage
in similar normal business activities.
The Company is correcting the Year 2000 issue by both replacing and/or
modifying its existing computer systems. The Company is reviewing the balance of
its internal processes, including hardware, software and control systems, both
domestic and international. The Company presently believes that, with such
modifications, the Year 2000 issue will not pose significant operational
problems for the Company.
The Company expects to complete the modifications by mid-1999, which is
prior to any anticipated impact on its systems. The cost of the modifications,
which will be expensed as incurred, is not expected to be material to the
Company.
COSTS RELATING TO PROTECTION OF THE ENVIRONMENT
The Company has been and is subject to increasingly stringent
environmental protection laws and regulations. In addition, the Company has an
on-going commitment to rigorous internal environmental protection standards.
Expenses relating to environmental protection were approximately $14 million,
$15 million and $15 million in 1997, 1996 and 1995, respectively. Capital
expenditures relating to environmental protection were approximately $15
million, $14 million and $6 million in 1997, 1996 and 1995, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not currently applicable to the Company.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
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Independent Auditors' Report........................................ 38
Consolidated Balance Sheets......................................... 39
Consolidated Statements of Operations............................... 40
Consolidated Statements of Cash Flows............................... 41
Consolidated Statements of Stockholders' Equity (Deficit)........... 42
Notes to Consolidated Financial Statements.......................... 43
All schedules are omitted because they are not required or are not
applicable or because the information is included in the Consolidated Financial
Statements or the notes thereto.
37
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
UCAR International Inc.:
We have audited the accompanying Consolidated Balance Sheets of UCAR
International Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related Consolidated Statements of Operations, Cash Flows and Stockholders'
Equity (Deficit) for each of the years in the three-year period ended December
31, 1997. These Consolidated Financial Statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
Consolidated Financial Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above present
fairly, in all material respects, the financial position of UCAR International
Inc. and Subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in note 2 to the Consolidated Financial Statements, in 1996 the
Company changed its method of determining LIFO inventories.
/s/ KPMG PEAT MARWICK LLP
Stamford, Connecticut
April 13, 1998
38
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
AT DECEMBER 31,
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 58 $ 95
Short-term investments.......................................................... 20 --
Notes and accounts receivable................................................... 242 185
Inventories:
Raw materials and supplies.................................................... 50 39
Work in process............................................................... 125 100
Finished goods................................................................ 31 37
--------- ---------
206 176
Prepaid expenses................................................................ 40 27
--------- ---------
Total current assets.......................................................... 566 483
-------- --------
Property, plant and equipment...................................................... 1,289 1,087
Less: accumulated depreciation.................................................... 724 653
-------- --------
Net fixed assets.............................................................. 565 434
-------- --------
Company carried at equity.......................................................... -- 18
Other assets....................................................................... 102 53
-------- --------
Total assets.................................................................. $1,233 $ 988
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................ $ 76 $ 67
Short-term debt................................................................. 76 53
Payments due within one year on long-term debt.................................. 52 1
Accrued income and other taxes.................................................. 36 37
Other accrued liabilities....................................................... 262 91
--------- ---------
Total current liabilities..................................................... 502 249
--------- ---------
Long-term debt..................................................................... 604 581
Other long-term obligations........................................................ 313 138
Deferred income taxes.............................................................. 47 16
Minority stockholders' equity in consolidated entities............................. 13 6
Stockholders' equity (deficit):
Preferred stock, par value $.01, 10,000,000 shares authorized, none issued...... -- --
Common stock, par value $.01, 100,000,000 shares authorized,
47,330,570 shares issued at December 31, 1997;
46,614,724 shares issued at December 31, 1996................................. -- --
Additional paid-in capital...................................................... 520 498
Cumulative foreign currency translation adjustment.............................. (130) (116)
Retained earnings (deficit)..................................................... (544) (384)
Less: cost of common stock held in treasury, 2,402,427 shares
at December 31, 1997.......................................................... (92) --
--------- --------
Total stockholders' equity (deficit).......................................... (246) (2)
--------- --------
Total liabilities and stockholders' equity (deficit).......................... $1,233 $ 988
========= ========
See accompanying Notes to Consolidated Financial Statements.
39
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Net sales.............................................................. $ 1,097 $ 948 $ 901
Cost of sales.......................................................... 686 583 556
-------- ---------- ---------
Gross profit........................................................ 411 365 345
Research and development............................................... 9 8 8
Selling, administrative and other expenses............................. 115 90 115
Restructuring costs.................................................... -- -- 30
Antitrust investigations and related lawsuits and claims............... 340 -- --
Other (income) expense (net)........................................... 5 (1) 3
-------- ----------- ----------
Operating profit (loss)............................................. (58) 268 189
Interest expense....................................................... 64 61 93
-------- ---------- ---------
Income (loss) before provision for income taxes..................... (122) 207 96
Provision for income taxes............................................. 39 68 74
-------- ---------- ---------
Income (loss) of consolidated entities.............................. (161) 139 22
Less: minority stockholders' share of income.......................... 1 1 4
Plus: UCAR share of net income from company carried at equity......... 2 7 7
-------- ----------- ----------
Income (loss) before extraordinary charge and cumulative
effect of change in accounting principles......................... (160) 145 25
Extraordinary charge, net of tax....................................... -- -- 37
-------- --------- ---------
Income (loss) before cumulative effect of change
in accounting principles.......................................... (160) 145 (12)
Cumulative effect on prior years of change
in accounting for inventories....................................... -- 7 --
-------- ----------- --------
Net income (loss)................................................. $ (160) $ 152 $ (12)
======== ========= =========
Earnings (loss) per common share (pro forma in 1995):
BASIC:
-----
Income (loss) before cumulative effect of change in
accounting principles........................................ $ (3.49) $$ 3.15 $ 1.98
Cumulative effect on prior years of change in
accounting for inventories.................................... -- .15 --
--------- --------- ----------
Net income (loss) per share....................................... $ (3.49) $ 3.30 $ 1.98
========= ======== =========
DILUTED:
-------
Income (loss) before cumulative effect of change in accounting
principles.................................................... $ (3.49) $ 3.00 $ 1.87
Cumulative effect on prior years of change in
accounting for inventories.................................... -- .15 --
------------ --------- ---------
Net income (loss) per share....................................... $ (3.49) $ 3.15 $ 1.87
============ ========= =========
See accompanying Notes to Consolidated Financial Statements.
40
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Cash flow from operating activities:
Net income (loss)................................................... $ (160) $ 152 $ (12)
Extraordinary charge, net of tax.................................... -- -- 37
Cumulative effect on prior years of change in
accounting for inventories...................................... -- (7) --
Non-cash (credits) charges to net income (loss):
Depreciation and amortization..................................... 49 36 38
Deferred income taxes............................................. (38) 19 (18)
Restructuring costs............................................... -- -- 30
Accelerated vesting of performance stock options.................. 12 -- 19
Other non-cash charges............................................ 7 10 11
Working capital*.................................................... (40) (45) 14
Antitrust investigations and related lawsuits and claims............ 337 -- --
Long-term assets and liabilities.................................... 5 7 11
--------- --------- --------
Net cash provided by operating activities........................ 172 172 130
--------- --------- --------
Cash flow from investing activities:
Capital expenditures................................................ (79) (62) (65)
Purchase of subsidiaries............................................ (124) (45) (55)
Purchases of short-term investments................................. (59) -- --
Maturities of short-term investments................................ 39 -- --
Redemption/sale of assets........................................... 2 3 4
--------- --------- -----------
Net cash used in investing activities............................. (221) (104) (116)
--------- --------- -----------
Cash flow from financing activities:
Short-term debt borrowings (reductions)............................. 23 22 (11)
Long-term debt borrowings........................................... 178 2 1,480
Long-term debt reductions........................................... (104) (58) (1,088)
Financing costs..................................................... (2) -- (70)
Purchase of treasury stock.......................................... (92) -- --
Sale of common stock, net of loans to management.................... 5 4 427
Tax benefit arising from exercise of employee stock options......... 5 4 --
Cash distribution to stockholders................................... -- -- (756)
--------- -------- --------
Net cash provided by (used in) financing activities............... 13 (26) (18)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents................... (36) 42 (4)
Effect of exchange rate changes on cash and cash equivalents........... (1) -- (3)
Cash and cash equivalents at beginning of period....................... 95 53 60
-------- -------- ---------
Cash and cash equivalents at end of period............................. $ 58 $ 95 $ 53
======== ======== =========
Supplemental disclosures of cash flow information:
Net cash paid during the year for:
Interest expense.................................................. $ 62 $ 54 $ 79
Income taxes...................................................... 72 45 30
*Net change in working capital by component
(excluding cash and cash equivalents, short-term
investments, deferred income taxes and debt, liabilities
associated with antitrust investigations and related
lawsuits and claims, and net of effects from purchases
of subsidiaries):
(Increase) decrease in current assets:
Notes and accounts receivable:
Sale of receivables.......................................... $ 1 $ 3 $ --
Other changes................................................ (31) (9) (25)
Inventories....................................................... 5 (29) (16)
Prepaid expenses.................................................. (1) 6 (5)
Increase (decrease) in payables and accruals........................ (14) (16) 60
-------- -------- --------
Working capital.............................................. $ (40) $ (45) $ 14
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
41
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in millions)
COMMON ADDITIONAL CUMULATIVE RETAINED TREASURY TOTAL
STOCK PAID-IN FOREIGN EARNINGS STOCK STOCKHOLDERS'
CAPITAL CURRENCY (DEFICIT) EQUITY
TRANSLATION (DEFICIT)
ADJUSTMENT
Balance at December 31, 1994................. $-- $139 $(109) $162 $-- $192
Sale of common stock.................... -- 424 -- -- -- 424
Vesting of performance stock options.... -- 19 -- -- -- 19
Repurchase and cancellation of
common stock.......................... -- (70) -- (336) -- (406)
Dividends paid.......................... -- -- -- (350) -- (350)
Transaction fees........................ -- (9) -- -- -- (9)
Transfer of pension liability from
Union Carbide Corporation............. -- (18) -- -- -- (18)
Translation adjustments................. -- -- (7) -- -- (7)
Net loss................................ -- -- -- (12) -- (12)
----- ----- ------- ------- ----- -------
Balance at December 31, 1995................. -- 485 (116) (536) -- (167)
Exercise of employee stock options...... -- 5 -- -- -- 5
Tax benefit arising from exercise of
employee stock options................ -- 4 -- -- -- 4
Reclassification of:
Common stock subject to "puts"........ -- 8 -- -- -- 8
Related loans to management........... -- (3) -- -- -- (3)
Cost of secondary offering.............. -- (1) -- -- -- (1)
Net income.............................. -- -- -- 152 -- 152
----- ----- ------- ------- ----- ------
Balance at December 31, 1996................. -- 498 (116) (384) -- (2)
Exercise of employee stock options...... -- 6 -- -- -- 6
Tax benefit arising from exercise of
employee stock options................ -- 5 -- -- -- 5
Repurchase of common stock.............. -- -- -- -- (92) (92)
Vesting of performance stock options.... -- 12 -- -- -- 12
Translation adjustments................. -- -- (14) -- -- (14)
Cost of secondary offering.............. -- (1) -- -- -- (1)
Net loss................................ -- -- -- (160) -- (160)
----- ----- ------- ------ ----- -------
Balance at December 31, 1997................. $-- $520 $(130) $(544) $(92) $ (246)
===== ===== ======= ====== ===== =======
See accompanying Notes to Consolidated Financial Statements.
42
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DISCUSSION OF BUSINESS AND STRUCTURE
UCAR International Inc. ("UCAR") and its subsidiaries (collectively with
UCAR, the "Company") operates in one business segment. The Company is involved
in the development, manufacturing and marketing of graphite and carbon products
for the steel, ferroalloy, aluminum, chemical, aerospace and transportation
industries. Its principal products are graphite electrodes, carbon electrodes,
specialty graphite, cathode blocks and flexible graphite.
LEVERAGED RECAPITALIZATION
On January 26, 1995, the Company consummated a leveraged recapitalization
(the "Recapitalization") pursuant to the Recapitalization and Stock Purchase and
Sale Agreement dated as of November 14, 1994 among UCAR, Union Carbide
Corporation ("Union Carbide"), Mitsubishi Corporation ("Mitsubishi") and a
Delaware corporation owned by Blackstone Capital Partners II Merchant Banking
Fund L.P., Blackstone Offshore Capital Partners II L.P. and an affiliate
(collectively, "Blackstone").
The principal elements of the Recapitalization included the following:
o The repurchase and cancellation of all shares of common stock of UCAR
held by Mitsubishi (50% of the then outstanding shares) for cash of
$406 million.
o The payment of a cash dividend on the remaining shares of common stock
of UCAR (all held by Union Carbide) in the amount of $347 million.
o The sale of newly issued shares of common stock of UCAR for cash of
$203 million to Blackstone, certain members of management of the
Company and Chase Equity Associates.
o The repayment of existing indebtedness of the Company consisting of (a)
$69 million of outstanding loans under its then existing credit
agreements, (b) $175 million of senior notes and (c) $6 million of
other indebtedness.
o The borrowing by UCAR Global Enterprises Inc., a direct wholly owned
subsidiary of UCAR ("Global"), and certain of its foreign subsidiaries
of $585 million under a new $695 million senior bank credit facility
obtained by Global from a syndicate of banks led by Chase Manhattan
Bank, as agent (the "Recapitalization Bank Facilities"). The
Recapitalization Bank Facilities were refinanced in October 1995 (the
"Refinancing") with a new $630 million senior bank credit facility (the
"Senior Bank Facilities").
o The issuance by Global of $375 million of 12% Senior Subordinated Notes
due 2005 (the "Recapitalization Notes"), which were sold in an offering
exempt from registration with the Securities and Exchange Commission
(the "Commission"). UCAR and Global filed with the Commission a
registration statement with respect to an offer to exchange the
Recapitalization Notes for a series of notes (the "Subordinated Notes")
of Global with terms substantially identical to the Recapitalization
Notes, which registration statement became effective on May 11, 1995.
The exchange was consummated in June 1995. $175 million of Subordinated
Notes were redeemed in September 1995 at a redemption price of 110% of
the principal amount thereof plus accrued interest thereon of $4
million (the "Redemption").
43
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(1) DISCUSSION OF BUSINESS AND STRUCTURE - (CONTINUED)
Total financing fees and legal, accounting and other related costs of the
Recapitalization amounted to approximately $62 million. $6 million of these
costs ($4 million after income tax) were charged to other (income) expense (net)
at the date of the Recapitalization. Costs of $7 million associated with the
sale and redemption of common stock have been charged to additional paid-in
capital. Financing costs of $49 million associated with the Recapitalization
Bank Facilities and the Subordinated Notes were deferred. The unamortized
portion of fees and costs associated with the Recapitalization Bank Facilities
were written off in the fourth quarter of 1995 in connection with the
Refinancing. A portion of such fees associated with the Subordinated Notes was
written off in connection with the Redemption. In addition, tax expense of
approximately $37 million was incurred as a result of the repatriation to the
U.S. of funds borrowed by certain foreign subsidiaries as part of the
Recapitalization.
Retirement, death and disability benefits related to employee service
through February 25, 1991 are covered by the Union Carbide retirement plan.
Benefits paid by the Union Carbide retirement plan are based on final average
pay through February 25, 1991 plus salary increases (not to exceed 6% per year)
until January 26, 1995 when Union Carbide ceased to own at least 50% of the
equity of UCAR. The Company's projected benefit obligation increased, and Union
Carbide's projected benefit obligation decreased, by approximately $28 million
($18 million after income taxes) attributable to such estimated future salary
increases upon consummation of the Recapitalization. The increase in the
Company's projected benefit obligation was charged to additional paid-in
capital.
On January 20, 1995, UCAR paid a dividend to stockholders of $10 million
and, on March 29, 1995, approximately $6.5 million was refunded to UCAR as part
of the Recapitalization.
STOCK SPLITS
On January 26, 1995, UCAR's Board of Directors increased the authorized
shares of common stock of UCAR to 1,170,000 shares and approved a 1,000-for-one
stock split. On July 17, 1995, UCAR's Board of Directors approved an increase in
the authorized shares of common stock of UCAR to 100 million shares and a
35.507-for-one stock split effective August 3, 1995. All share and per share
amounts have been adjusted to reflect both stock splits.
INITIAL PUBLIC OFFERING
On July 17, 1995, UCAR's Board of Directors approved: (i) the filing of a
registration statement to proceed with an initial public offering of common
stock (the "Initial Offering"); (ii) the Redemption, with proceeds of the
Initial Offering, of up to $175 million principal amount of Subordinated Notes
at a redemption price of 110% of the principal amount thereof, plus accrued
interest thereon; and (iii) an amendment to the Management Stock Option Plan to
provide for the immediate vesting, upon the closing of the Initial Offering, of
performance options for 1,190,292 shares of common stock which were scheduled to
vest in 1995, 1996 and 1997 if EBITDA (as defined) for those years was equal to
or exceeded target amounts. Upon consummation of the Initial Offering, UCAR
recognized compensation expense of $18 million in connection with the
accelerated vesting of performance stock options and matching restricted stock.
On August 9, 1995, UCAR's registration statement became effective and, on
August 15, 1995, 10,120,000 shares were sold by UCAR and 8,876,750 shares were
sold by Union Carbide at a price to the public of $23.75 per share. After the
closing of the Initial Offering, Blackstone and Union Carbide beneficially owned
53.5% and none, respectively, of the outstanding shares of common stock.
44
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) DISCUSSION OF BUSINESS AND STRUCTURE - (CONTINUED)
The net proceeds to UCAR from the Initial Offering were $227 million,
after deducting underwriting discounts paid by UCAR. UCAR contributed sufficient
net proceeds from the Initial Offering to Global to redeem $175 million
aggregate principal amount of Subordinated Notes (the maximum amount permitted
to be redeemed under the applicable indenture) at a redemption price equal to
110% of the aggregate principal amount thereof plus accrued interest thereon of
approximately $4 million. The balance of the net proceeds were used for general
corporate purposes and to reduce other outstanding indebtedness. UCAR did not
receive any of the proceeds from the sale of shares by Union Carbide.
SECONDARY OFFERINGS AND STOCK REPURCHASE PROGRAM
On March 6, 1996, certain stockholders of UCAR sold an aggregate of
16,675,000 shares of common stock in a secondary public offering (the "1996
Secondary Offering"). In the 1996 Secondary Offering, Blackstone, Chase Equity
Associates and certain members of management sold approximately 15,449,000
shares, 826,000 shares and 400,000 shares, respectively. After the 1996
Secondary Offering, Blackstone owned approximately 20% of the outstanding shares
of common stock. UCAR did not sell any shares in the 1996 Secondary Offering and
did not receive any proceeds from the shares sold by the selling stockholders.
Approximately 193,000 of the shares sold by management consisted of shares
issued upon the exercise of vested stock options concurrently with the 1996
Secondary Offering and the Company received proceeds of approximately $1.5
million from the exercise of such options.
On February 10, 1997, UCAR's Board of Directors authorized a program to
repurchase up to $100 million of common stock at prevailing prices from time to
time in the open market or otherwise depending on market conditions and other
factors without any established minimum or maximum time period or number of
shares.
On April 3, 1997, Blackstone and its affiliates sold 6,411,227 shares of
common stock in a secondary offering (the "1997 Secondary Offering"). UCAR did
not sell any shares in or receive any proceeds from the 1997 Secondary Offering.
Concurrent with the 1997 Secondary Offering, as part of the program mentioned in
the preceding paragraph, UCAR repurchased 1,300,000 shares of common stock from
Blackstone for $48 million. After the 1997 Secondary Offering and the repurchase
of shares, Blackstone ceased to be a principal stockholder of UCAR.
On December 8, 1997, UCAR's Board of Directors increased the maximum
amount of common stock which may be purchased from $100 million to $200 million.
Through December 31, 1997, UCAR purchased an aggregate of $92 million of common
stock (including the shares repurchased from Blackstone) under such program.
ACQUISITION OF SUBSIDIARIES
On September 11, 1995, pursuant to a tender offer, the Company acquired a
substantial percentage of the shares of its Brazilian subsidiary, UCAR Carbon
S.A., that had been owned by public shareholders in Brazil. The aggregate
purchase price through December 31, 1995 was $52 million, plus expenses of $3
million. Thereafter, the Company acquired additional shares from such
shareholders for $3 million.
On November 10, 1996, the Company purchased the controlling interest in
Graphite PLC, which operated a graphite electrode business in Vyazma, Russia.
The Company acquired 90% of Graphite PLC through a tender offer to its major
shareholders, which included members of the board of directors and employees of
Graphite PLC. The aggregate investment was $50 million. Thereafter, the Company
increased its ownership to 96% (at December 31, 1997) of such equity for an
additional investment of $7 million.
45
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) DISCUSSION OF BUSINESS AND STRUCTURE - (CONTINUED)
On January 2, 1997, the Company acquired 70% of the outstanding shares of
Carbone Savoie, a wholly owned subsidiary of a competitor, for a purchase price
of $33 million. Carbone Savoie is the leading manufacturer of carbon cathode
blocks which are consumed in the production of aluminum.
On February 1, 1997, the Company, through its newly formed 70%-owned
subsidiary, UCAR Elektroden GmbH ("UCAR Elektroden"), purchased the graphite
electrode business of Elektrokohle Lichtenberg AG ("EKL") in Berlin, Germany.
The 30% minority interest in UCAR Elektroden is held by a private German
company. UCAR Elektroden and UCAR Grafit OAO ("UCAR Grafit") work in tandem,
with UCAR Elektroden manufacturing newly formed green electrodes and UCAR Grafit
baking, pitch impregnating, rebaking and graphatizing those electrodes. The
aggregate purchase price paid by UCAR Electroden for the EKL assets was $15
million.
On April 22, 1997, the Company purchased the shares of its then 50%-owned
joint venture affiliate, EMSA (Pty) Ltd. ("EMSA"), held by the Company's joint
venture partner. EMSA operates a graphite electrode manufacturing facility and
sales office in South Africa. The purchase price was $75 million.
These acquisitions were accounted for as purchases and, accordingly, the
purchase prices have been allocated to the assets purchased and liabilities
assumed based upon the fair values at the dates of purchase. The Company
recorded $20 million and $6 million of goodwill in connection with the
acquisitions of EMSA and UCAR Grafit, respectively. The Consolidated Financial
Statements have not been restated to reflect the increased ownership of the
Brazilian or South African subsidiaries at any date or for any period prior to
the dates of purchase.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements present the consolidated financial
position and results of operations of the Company for all periods presented. All
significant intercompany transactions have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents are considered to be all highly liquid investments that
are readily convertible to known amounts of cash and so near to maturity that
they present insignificant risk of changes in value because of changes in
interest rates.
SHORT-TERM INVESTMENTS
Investment securities at December 31, 1997 consisted of government
securities and other debt securities. The Company classifies these securities as
held-to-maturity and, accordingly, has recorded them at amortized cost.
INVENTORIES
Inventories are stated at cost or market, whichever is lower. Cost is
determined generally on the "last-in, first-out" ("LIFO") method in the United
States. The "average cost" method is used elsewhere.
Effective January 1, 1996, the Company changed its method of determining
LIFO inventories. The new methodology provides specifically identified
parameters for defining new items within the LIFO pool which the Company
believes improves the accuracy of costing those items. During 1996, the Company
recorded income of $7 million (after related income taxes of $4 million) as the
cumulative effect on prior years of this change in accounting for inventories.
The new method of accounting resulted in charging lower inventory costs to cost
of goods sold during 1996 which reduced cost of goods sold by $4 million (and
increased net income by $2 million).
46
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Approximately 33% of inventory amounts before application of the LIFO
method at December 31, 1997 and 1996 has been valued on the LIFO basis. If
inventories had been valued at current costs, they would have been approximately
$28 million and $29 million higher at December 31, 1997 and 1996, respectively.
FIXED ASSETS AND DEPRECIATION
Fixed assets are carried at cost. Expenditures for replacements are
capitalized and the replaced items are retired. Gains and losses from the sale
of property are included in other (income) expense (net).
Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets. The Company generally uses accelerated depreciation
methods for tax purposes, where appropriate. Depreciation expense was $48
million in 1997 ($36 million in 1996 and $38 million in 1995).
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 20 years. When circumstances warrant, the
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risk and specific financial market risk caused by
currency fluctuations.
The Company enters into foreign exchange contracts to manage exposure to
foreign exchange fluctuations. These foreign exchange contracts, which include
forward exchange contracts, purchased currency options and currency option
collars, hedge primarily U.S. dollar denominated debt held by several of the
Company's foreign subsidiaries, and identifiable foreign currency receivables,
payables and commitments held by the Company's foreign and domestic
subsidiaries. Forward exchange contracts are agreements to exchange different
currencies at a specified future date and at a specified rate. Purchased foreign
currency options are instruments which give the holder the right, but not the
obligation, to exchange different currencies at a specified rate at a specified
date or over a range of specified dates. Currency option collars are financial
arrangements for simultaneous purchases and sales of currency options having the
same maturity and the same principal amount. The result is the creation of a
range in which a best and worst price is defined, while minimizing option cost.
Premiums and discounts on forward exchange contracts are amortized over the life
of the contracts. Net premiums on options purchased (or sold under currency
collar strategies) are amortized over the life of the options. Forward exchange
contracts, purchased currency options and currency option collars are carried at
market value. Gains and losses due to revaluation of these contracts or option
positions are recognized currently as other (income) expense (net) and are
intended to mitigate income or expense caused by the accounting revaluation of
the Company's foreign and domestic subsidiaries' net foreign exchange positions.
47
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company enters into agreements with financial institutions which
limit, or cap, the Company's exposure to the incurrence of additional interest
expense due to increases in variable interest rates. Fees related to these
interest rate cap agreements, as well as proceeds received under their
provisions, are charged to interest expense over the terms of the agreements.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date.
STOCK-BASED COMPENSATION PLANS
The Company accounts for stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). As such, compensation
expense is recorded on the date of grant only if the market price of the
underlying stock exceeded the exercise price. The total amount of compensation
expense recognized for an award of stock-based employee compensation is based on
the number of instruments that eventually vest. No compensation expense is
recognized for forfeited awards, failure to satisfy a service requirement or
because the Company does not achieve a performance condition. The Company's
accruals of compensation expense for awards subject to performance conditions
are based on the Company's assessment of the probability of achieving the
performance conditions.
RETIREMENT PLAN
The cost of pension benefits under the Company's retirement plans is
determined by independent actuarial firms using the "projected unit credit"
actuarial cost method. Contributions to the U.S. plan are made in accordance
with the requirements of the Employee Retirement Income Security Act of 1974.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The estimated cost of future medical and life insurance benefits is
determined by independent actuarial firms using the "projected unit credit"
actuarial cost method. Such costs are recognized as employees render the service
necessary to earn the postretirement benefits. Benefits have been accrued, but
not funded.
POSTEMPLOYMENT BENEFITS
The Company accrues postemployment benefits expected to be paid before
retirement, principally severance, over employees' active service periods.
48
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
FOREIGN CURRENCY TRANSLATION
Generally, except for subsidiaries in Brazil and Russia (and Mexico,
effective January 1, 1997), unrealized gains and losses resulting from
translating foreign subsidiaries' assets and liabilities into U.S. dollars are
accumulated in an equity account on the balance sheet until such time as a
subsidiary is sold or substantially or completely liquidated. Translation gains
and losses relating to operations of subsidiaries in those three countries,
where high inflation exists, are included in income in the Consolidated
Financial Statements.
(3) UCAR GLOBAL ENTERPRISES INC.
UCAR has no material assets, liabilities or operations other than those
that result from its ownership of 100% of the outstanding common stock of
Global. Separate financial statements of Global are not presented because they
would not be material to holders of the Subordinated Notes.
The following is a summary of the consolidated assets and liabilities of
Global and its subsidiaries at December 31, 1997 and 1996 and its consolidated
results of operations for the three years ended December 31, 1997:
AT DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Assets:
Current assets......................................... $ 566 $ 483 $ 403
Non-current assets..................................... 667 505 461
-------- ------ --------
Total assets.................................. $1,233 $988 $ 864
======== ====== ========
Liabilities:
Current liabilities................................ $ 502 $ 249 $ 228
Non-current liabilities............................ 964 735 793
--------- ------ --------
Total liabilities............................ $1,466 $ 984 $ 1,021
========= ====== ========
Minority stockholders' equity in consolidated entities. $ 13 $ 6 $ 5
========= ====== ========
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Net sales...................................................... $1,097 $ 984 $ 901
Gross profit................................................... 411 365 345
Income (loss) before extraordinary charge and cumulative
effect of change in accounting principles..................... (160) 145 25
Net income (loss).............................................. (160) 152 (12)
49
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risk and specific financial market risk caused by
currency fluctuations.
FOREIGN CURRENCY CONTRACTS
The amount of foreign exchange contracts used by the Company to minimize
foreign currency exposure was $353 million at December 31, 1997 ($350 million at
December 31, 1996 and $269 million at December 31, 1995). At December 31, 1997,
$214 million of these contracts hedged U.S. dollar-denominated debt held by the
Company's foreign subsidiaries ($169 million at December 31, 1996 and $198
million at December 31, 1995). Of the total $353 million, approximately $93
million (26%) of these contracts were offsetting at December 31, 1997 ($144
million (41%) at December 31, 1996 and $11 million (4%) at December 31, 1995).
The remaining contracts hedged existing assets and liabilities.
SALE OF RECEIVABLES
Certain of the Company's foreign subsidiaries sold receivables of $16
million in 1997 ($15 million in 1996 and $10 million in 1995) without recourse
and sold receivables of $74 million in 1997 ($65 million in 1996 and $42 million
in 1995) with recourse to banking institutions. At December 31, 1997, $16
million ($15 million at December 31, 1996 and $13 million at December 31, 1995)
of the receivables sold with recourse remained uncollected from customers.
INTEREST RATE RISK MANAGEMENT
The Company enters into agreements with financial institutions which limit
the Company's exposure to the incurrence of additional interest expense due to
increases in variable interest rates. During 1995, the Company purchased
interest rate caps on $375 million of debt, limiting interest expense on this
debt to 8.5%, expiring at various dates through 1997. During 1997, the Company
purchased interest rate caps on $250 million of debt, limiting interest expense
on this debt to a weighted average rate of 8.2% for the period commencing
February 1998 and continuing through various dates ending February 2001. Fees
related to these agreements are charged to interest expense over the terms of
the agreements.
FAIR MARKET VALUE DISCLOSURES
Statement of Financial Accounting Standards ("SFAS") 107, "Disclosure
about Fair Market Value of Financial Instruments" defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties. Such fair values must often be
determined by using one or more methods that indicate value based on estimates
of quantifiable characteristics as of a particular date. Values were estimated
as follows:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, SHORT-TERM RECEIVABLES,
ACCOUNTS PAYABLE AND OTHER CURRENT PAYABLES--The carrying amount approximates
fair value because of the short maturity of these instruments.
50
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(4) FINANCIAL INSTRUMENTS-(CONTINUED)
DEBT--Fair values of debt and related interest rate risk agreements
approximate carrying value at December 31, 1997 and 1996, except for the
Subordinated Notes which are carried at $200 million and had an estimated fair
value at December 31, 1997 of $224 million ($230 million at December 31, 1996).
FOREIGN CURRENCY CONTRACTS--Foreign currency contracts are carried at market
value.
(5) GEOGRAPHIC SEGMENT DATA
The following is a summary of net sales, operating profit and total assets
by geographic area:
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Net sales:
U.S. ...................................................... $ 393 $ 388 $ 354
Canada and Mexico.......................................... 152 133 118
Brazil..................................................... 64 61 55
Europe and Russia.......................................... 435 366 374
South Africa............................................... 53 -- --
-------- ------- ------
Total................................................ $1,097 $ 948 $ 901
======== ======= ======
Operating profit (loss):
U.S........................................................ $ 48 $ 66 $ 17
Canada and Mexico.......................................... 71 63 43
Brazil..................................................... 33 25 14
Europe and Russia.......................................... 107 114 115
South Africa............................................... 23 -- --
Antitrust investigations
and related lawsuits and claims.......................... (340) -- --
------ ------- -------
Total................................................ $ (58) $ 268 $ 189
====== ======= =======
Operating profit (loss) shown above includes the following costs:
Restructuring:
U.S......................................................... $-- $-- $ 29
Europe and Russia........................................... -- -- 1
Accelerated vesting of performance stock options - U.S......... 12 -- 22
Global integration project consulting fees-U.S................. 4 -- --
--------- -------- -------
Total............................................... $ 16 $ -- $ 52
======== ======== =======
Inter-company transfers between geographic segments were as follows:
U.S....................................................... $ 141 $ 122 $ 103
Canada and Mexico......................................... 58 50 37
Brazil.................................................... 33 28 12
Europe and Russia......................................... 10 8 10
South Africa.............................................. 1 -- --
-------- ------- -------
Total............................................... $ 243 $ 208 $ 162
======== ======= =======
Finished products are transferred between segments at estimated market
price less a reseller's commission and unfinished products are transferred at
cost plus a mark-up to allow for a fair profit at the manufacturing location.
51
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(5) GEOGRAPHIC SEGMENT DATA--(CONTINUED)
AT DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Total assets:
U.S.................................................... $ 442 $ 360 $ 351
Canada and Mexico...................................... 162 146 134
Brazil.............................................. 182 161 135
Europe and Russia................................... 520 412 324
South Africa........................................ 138 -- --
Inter-segment eliminations.......................... (211) (91) (80)
--------- -------- ---------
Total....................................... $ 1,233 $ 988 $ 864
========= ======== =========
(6) COMPANY CARRIED AT EQUITY
On April 21, 1997, the Company purchased the 50% interest in EMSA that it
did not already own for $75 million, plus expenses. Commencing April 22, 1997,
EMSA's assets, liabilities and results of operations are included in the
Consolidated Financial Statements. The following is a financial summary of EMSA
during the period it was a 50%-owned company carried at equity:
FOR THE PERIOD
JANUARY 1 TO FOR THE YEAR ENDED
APRIL 21, DECEMBER 31,
1997 1996 1995
-------------- ---- ----
(Dollars in millions)
Net sales................................................ $ 21 $ 65 $ 68
Cost of sales............................................ 12 39 42
Selling, administrative and other expenses............... 1 4 4
Other (income) expense (net)............................. 2 (1) (1)
Income taxes............................................. 2 9 10
------- ------ -------
Net income.................................. $ 4 $ 14 $ 13
======= ====== =======
UCAR share of net income................................. $ 2 $ 7 $ 7
======= ====== =======
AT DECEMBER 31,
1996 1995
---- ----
(Dollars in millions)
Current assets........................................... $ 40 $ 34
Non-current assets....................................... 16 18
------ ------
Total assets................................ 56 52
------ ------
Current liabilities...................................... 16 10
Non-current liabilities.................................. 4 5
------ ------
Total liabilities.......................... 20 15
------ ------
Net assets................................. $ 36 $ 37
====== ======
UCAR share of net assets................................ $ 18 $ 18
====== ======
The Company recorded net sales to EMSA of $3 million from January 1, 1997
to April 21, 1997 and $22 million and $11 million in 1996 and 1995,
respectively.
52
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) LONG-TERM DEBT
The following table presents the long-term debt of the Company:
AT DECEMBER 31,
1997 1996
---- ----
(Dollars in millions)
Senior Bank Facilities:
Tranche A Letter of Credit Facility......................... $214 $189
Tranche A Term Loan......................................... 45 40
Tranche B Facility.......................................... 120 120
Revolving Facility.......................................... 65 30
----- -----
Total Senior Bank Facilities.............................. 444 379
Subordinated Notes............................................... 200 200
Italian lire loans and obligations............................... 2 3
Deutsche Mark loans.............................................. 10 --
------ ------
Subtotal.................................................... 656 582
Less: payments due within one year.............................. 52 1
------- --------
Total..................................................... $ 604 $ 581
====== ======
SENIOR BANK FACILITIES
On October 19, 1995, UCAR refinanced the Recapitalization Bank Facilities
with the Senior Bank Facilities which provided improved terms and conditions.
The Senior Bank Facilities were negotiated through Chase Manhattan Bank, as
agent, and had an original aggregate principal amount of $630 million (of which
$620 million could be used as debt principal). On March 19, 1997, the Senior
Bank Facilities were amended to reduce the interest rates on amounts outstanding
thereunder, to increase the amount available under the revolving credit facility
to $250 million from $100 million and to change certain covenants to allow
greater flexibility in uses of free cash flow for acquisitions, capital
expenditures and restricted payments.
The Senior Bank Facilities, as amended, have an aggregate principal amount
of $640 million, which consist of: (a) a Tranche A Facility (the "Tranche A
Facility") in an amount of $270 million consisting of (i) a Tranche A Letter of
Credit Facility, providing for the issuance of up to $225 million of U.S.
dollar-denominated letters of credit for the purpose of supporting either U.S.
dollar-denominated or foreign currency denominated loans, interest and the
impact of currency exchange rate fluctuations thereon, to certain foreign
subsidiaries of Global under facilities arranged with local lending
institutions, (ii) a Tranche A Term Loan Facility (the "Tranche A Term Loan
Facility") providing for term loans of $45 million to Global and (iii) a Tranche
A Reimbursement Loan Facility in respect of drawings under Tranche A letters of
credit or to refinance Tranche A loans to foreign subsidiaries; (b) a Tranche B
Term Loan Facility ("the Tranche B Facility") providing for term loans of $120
million to Global; and (c) a Revolving Credit Facility (the "Revolving
Facility") providing for revolving and swingline loans to Global and the
issuance of U.S. dollar-denominated letters of credit for the account of Global
or other designated credit parties (collectively, the "Credit Parties") in an
aggregate principal and stated amount at any time not to exceed $250 million.
The Revolving Facility terminates on December 31, 2001.
53
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) LONG-TERM DEBT--(CONTINUED)
The Tranche A Facility (including the letters of credit issued thereunder)
amortizes in quarterly installments over four years, commencing March 31, 1998,
with installments ranging from $50 million in 1998 to $85 million in 2001 and
with the final installment payable on December 31, 2001. The Tranche B Facility
amortizes over five years, commencing March 31, 1998, with nominal quarterly
installments during the first four years, quarterly installments aggregating
$116 million in 2002, with the final installment payable on December 31, 2002.
The Company's next required installment payments for the tranche A and tranche B
portions of the Senior Bank Facilities of $50 million and $1 million,
respectively, occur during 1998. During 1996, the Company made voluntary
prepayments on the Tranche A Facility and Tranche B Facility, of $25 million and
$30 million, respectively ($60 million and $25 million, respectively during
1995). The Company did not make any voluntary prepayments during 1997.
The Credit Parties are required to make mandatory prepayments of loans,
and letters of credit are mandatorily reduced, subject to certain exceptions, in
the amount of (a) either 50% or 25% (depending on the debt to EBITDA (as
defined) ratio of UCAR and its subsidiaries) of consolidated excess cash flow
(as defined) of Global and its subsidiaries (after giving effect to debt service
on the Senior Bank Facilities and the Subordinated Notes) less voluntary
prepayments previously made during a specified annual period, (b) 100% of the
net proceeds of certain dispositions of assets or stock of subsidiaries or
incurrence of certain indebtedness by UCAR, Global or any of their subsidiaries
and (c) 50% of the net proceeds of the issuance of any equity securities by
UCAR. No mandatory prepayments were required for 1996 and 1997.
The obligations of the Credit Parties under the Senior Bank Facilities are
fully and unconditionally guaranteed by UCAR and each of its domestic
subsidiaries (collectively, the "Guarantors"). In addition, the Senior Bank
Facilities and such guarantees are secured by first priority or equivalent
security interests in substantially all capital stock of Global and the
Guarantors, including all capital stock of, or other equity interests in, each
direct or indirect domestic subsidiary of Global and up to 65% of the capital
stock of, or other equity interests in, each direct foreign subsidiary of
Global, or any Guarantor, or in any case in which Global or any Guarantor holds
directly less than 65% of such stock or equity interests in any foreign
subsidiary, all such stock or equity interests held by Global or such Guarantor
(to the extent permitted by applicable contractual and legal provisions).
Certain of the foreign subsidiaries have agreed to provide additional credit
support for obligations of foreign credit parties in respect of the Tranche A
Facility in the form of collateral and/or cross guarantees.
At Global's option, the interest rates applicable to the Tranche A
Facility and Revolving Facility are either adjusted LIBOR (as defined) plus a
margin ranging from 0.35% to 1.50% (depending on the ratio of debt to EBITDA (as
defined) of UCAR and its subsidiaries) or the alternate base rate. The interest
rate applicable to the Tranche B Loans is either adjusted LIBOR plus 1.50% or
the alternate base rate plus 0.50%. The alternate base rate is the higher of
Chase Manhattan Bank's prime rate or the federal funds effective rate plus
0.50%. At the relevant foreign base rate (which varies from loan to loan), or,
in the case of local currency-denominated loans, the local interbank offered
rate plus 0.25%. The weighted average interest rate on the Senior Bank
Facilities during 1997, 1996 and 1995 was 7.38%, 7.93% and 8.22%, respectively.
Global pays a per annum fee of 0.35% to 1.50% of the aggregate face amount
of outstanding letters of credit under the letter of credit facility, and a per
annum fee equal to 0.125% to 0.30% on the undrawn portion of the commitments in
respect of, the Senior Bank Facilities. Both fees are dependent on the ratio of
debt to EBITDA (as defined) of UCAR and its subsidiaries.
In accordance with the terms of the Senior Bank Facilities, Global has
purchased certain interest rate caps for the Tranche A Facility. The interest
rate caps ensure that adjusted LIBOR for the Tranche A Facility will not exceed
8.50% through February 1998. Subsequent interest rate caps ensure that adjusted
LIBOR for at least 40% of the outstanding Tranche A Facility will not exceed a
weighted average annual rate of 8.2% for the period commencing February 1998
through various dates ending February 2001.
54
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) LONG-TERM DEBT--(CONTINUED)
The Senior Bank Facilities contain a number of significant covenants that,
among other things, restrict the ability of UCAR, Global and their subsidiaries
to dispose of assets, incur additional indebtedness, repay or refinance other
indebtedness or amend other debt instruments, pay dividends or make any
restricted payments, create liens on assets, enter into leases, investments or
acquisitions, engage in mergers or consolidations, make capital expenditures in
excess of a predetermined amount or engage in certain transactions with
subsidiaries and affiliates, and that otherwise restrict corporate activities.
In addition, under the Senior Bank Facilities, Global is required to comply with
specified financial ratios and tests, including minimum interest coverage and
maximum leverage ratios.
The Senior Bank Facilities and the Subordinated Note Indenture contain a
number of significant financial and restrictive covenants and other provisions,
which have been impacted as a result of the $340 million charge (see Note 16
herein) for potential liabilities and expenses in connection with antitrust
investigations and related lawsuits and claims. In April 1998, the Company
obtained a limited waiver of certain covenants of the Senior Bank Facilities
and, in connection therewith, borrowed $35 million under the Revolving Facility
on April 13, 1998. From January 1, 1998 through April 12, 1998, the Company
increased its borrowings under the Revolving Facility by $26 million. As of
April 13, 1998, after giving effect to outstanding letters of credit and $35
million borrowed under the revolving credit facility, $76 million was available
for borrowing under the Revolving Facility. In order to make additional
borrowings thereunder, the Company would need to, among other things, make
certain representations, including representations as to the absence of material
adverse changes in the business, financial condition or results of operations of
the Company and the absence of material legal proceedings. In light of antitrust
investigations and related lawsuits and claims, no assurance can be given that
the Company will be able to make those representations or make additional
borrowings thereunder. In addition, even if the Company is able to make
additional borrowings thereunder, such ability may be limited by certain
covenants contained in the Subordinated Note Indenture. Under the Subordinated
Note Indenture, subject to certain exceptions, the Company may not incur
additional indebtedness if its consolidated coverage ratio (as defined) is less
than certain specified ratios. As a result of the $340 million charge, the
Company's consolidated coverage ratio (as defined) is less than those specified
ratios. As a result, under the Subordinated Note Indenture, the Company cannot
incur additional indebtedness except under the exceptions referred to above.
The waiver does not restrict the lenders under the Senior Bank Facilities
from declaring that there has been a breach, after giving effect to the $340
million charge, of material adverse change representations made in the past. Any
or a combination of these circumstances and other circumstances described in
this Annual Report on Form 10-K could result in the occurrence of an event of
default under the Senior Bank Facilities. The occurrence of an event of default,
which is not waived, would permit the lenders thereunder to, among other things,
accelerate all indebtedness outstanding thereunder by declaring all amounts
borrowed thereunder to be immediately due and payable, together with accrued and
unpaid interest. In addition, the lenders could foreclose upon collateral
pledged to secure repayment of such indebtedness and the commitments of the
lenders to make further extensions of credit under the Senior Bank Facilities
would be terminated. Under the cross-acceleration provisions of the Subordinated
Note Indenture, the holders of Subordinated Notes would thereupon likewise be
able to accelerate all indebtedness outstanding under the Subordinated Notes.
Under the Senior Bank Facilities, Global and UCAR are permitted to pay
dividends to their respective stockholders only in an annual amount up to the
greater of $15 million or a percentage, ranging from 50% to 65% based on certain
financial tests, of adjusted consolidated net income (as defined), where any
such amount not used may be accumulated on an ongoing basis. In addition, Global
is permitted to pay dividends to UCAR (i) in respect of UCAR's administrative
fees and expenses and (ii) for the specific purpose of the purchase or
redemption by UCAR of capital stock held by present or former officers of the
Company up to $5 million per year or $25 million in the aggregate. As a result
of the $340 million charge and stock repurchases, UCAR does not anticipate
paying any dividends in the near term.
SUBORDINATED NOTES
The Subordinated Notes are unsecured, senior subordinated obligations of
Global which will mature on January 15, 2005 and bear interest payable
semiannually at a rate per annum of 12%. The Subordinated Notes are fully and
unconditionally guaranteed on an unsecured, senior subordinated basis by UCAR.
None of Global's subsidiaries has guaranteed the Subordinated Notes.
55
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) LONG-TERM DEBT--(CONTINUED)
As permitted by the applicable indenture, Global redeemed, during
September 1995, $175 million principal amount of Subordinated Notes with
proceeds of the Initial Offering at a redemption price of 110% of the principal
amount thereof plus accrued interest thereon of $4 million.
Except as described below, the remaining Subordinated Notes are not
redeemable at the option of Global prior to January 15, 2000. On and after such
date, subject to certain restrictions, the Subordinated Notes are redeemable, at
Global's option, in whole or in part, at specified redemption prices commencing
at 104.5% of principal amount and declining annually to 100% of principal amount
on and after January 15, 2003. The Subordinated Notes are also redeemable as a
whole at the option of Global upon the occurrence of a change of control at a
redemption price equal to 100% of principal amount plus a specified premium. If
Global does not so redeem the Subordinated Notes, Global will be required to
make an offer to repurchase the Subordinated Notes at a price equal to 101% of
principal amount.
The indenture relating to the Subordinated Notes restricts the payment of
dividends by Global to UCAR if (a) at the time of such proposed dividend, Global
is unable to meet certain indebtedness incurrence and income tests set forth
therein or (b) the total amount of dividends paid exceeds specified aggregate
limits based on consolidated net income, net proceeds from asset and stock sales
and certain other transactions. Such restrictions are not applicable to
dividends (i) in respect of UCAR's administrative fees and expenses and (ii) for
the specific purpose of the purchase or redemption by UCAR of capital stock held
by present or former officers of the Company up to $5 million per year or $25
million in the aggregate.
DEUTSCHE MARK LOANS
In order to consummate the purchase by UCAR Elektroden of net working
capital assets from EKL (approximate U.S. dollar equivalent of $12 million),
UCAR Elektroden arranged a bank facility with BHF - Bank Aktiengesellschaft,
Berlin.
The facility consists of a committed term loan of Deutsche Mark 20 million
(U. S. dollar equivalent of approximately $12 million at establishment in March
1997), and a revolving line of credit for Deutsche Mark 5 million (U.S. dollar
equivalent of approximately $3 million at establishment in March 1997).
The term portion of the facility is committed through December 2000.
Required Deutsche Mark payments of the term loan are to be made by December of
each year as follows: 2 million in 1997; 6 million in 1998; 6 million in 1999;
and 6 million in 2000. The revolving portion of the facility is committed for
one year, with an option to renew annually.
Credit support is provided by Global's guarantee of UCAR Elektroden's
obligations under the facility. The facility requires that Global remain in
compliance with the Senior Bank Facilities and that the facility not be
subordinate to the obligations of the Senior Bank Facilities. It also restricts
the withdrawal of capital from UCAR Elektroden.
56
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) LONG-TERM DEBT--(CONTINUED)
EXTRAORDINARY CHARGE
During 1995, the Company recorded an extraordinary charge of $37 million
related to early extinguishment of debt (net of tax benefit of $20 million)
resulting from the prepayment of $175 million of Senior Notes, the Redemption
and the Refinancing. The extraordinary charge consisted of a premium of $18
million paid on the redemption of the Subordinated Notes and the write-off of
deferred debt issuance costs of $39 million.
OTHER
At December 31, 1997, payments due on long-term debt in the four years
after 1998 are: $64 million in 1999; $79 million in 2000; $86 million in 2001;
and $116 million in 2002.
The Company's weighted average interest rate on short-term borrowings
outstanding at December 31, 1997 and 1996 was 7.2% and 9.0%, respectively.
At December 31, 1997, $2 million ($3 million and $4 million in 1996 and
1995, respectively) of foreign assets were pledged as security for short- and
long-term debt and certain tax liabilities.
(8) INCOME TAXES
Total income taxes were allocated as follows:
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Income from operations........................................ $39 $68 $74
Extraordinary charge.......................................... -- -- (20)
Cumulative effect on prior years of change
in accounting for inventories............................ -- 4 --
Stockholders' equity (deficit)................................ (5) (4) (10)
---- ---- ----
$34 $68 $44
==== ==== ====
The income taxes credited to stockholders' equity (deficit) in 1997 and
1996 relate to the tax benefit arising from the exercise of employee stock
options and in 1995 relate to the increased projected benefit obligation of
approximately $28 million resulting from the Recapitalization.
57
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) INCOME TAXES--(CONTINUED)
The following is a summary of U.S. and non-U.S. components of income
(loss) before provision for income taxes:
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
U.S........................................................... $(275) $ 43 $ (45)
Non-U.S....................................................... 153 164 141
---- ---- ----
$(122) $ 207 $ 96
====== ===== =====
Income tax expense attributable to income from operations consists of:
CURRENT DEFERRED TOTAL
------- -------- -----
(Dollars in millions)
Year ended December 31, 1997:
U.S. federal income taxes.......................... $ 11 $ (41) $ (30)
Non-U.S. income taxes.............................. 66 3 69
----- ------ -----
$ 77 $(38) $ 39
==== ===== =====
Year ended December 31, 1996:
U.S. federal income taxes.......................... $ (1) $ 16 $ 15
Non-U.S. income taxes.............................. 50 3 53
----- ----- -----
$ 49 $ 19 $ 68
==== ==== ====
Year ended December 31, 1995:
U.S. federal income taxes.......................... $ 33 $(28) $ 5
Non-U.S. income taxes.............................. 59 10 69
----- ----- -----
$ 92 $(18) $ 74
==== ===== ====
In December 1992, the Company obtained an income tax exemption from the
Brazilian government on income generated from graphite electrode production
through 1999. The exemption reduced 1997, 1996 and 1995 income tax expense by $6
million, $4 million and $2 million, respectively.
Income tax expense attributable to income from operations differed from
the amounts computed by applying the U.S. Federal income tax rate of 35 percent
to pretax income from operations as a result of the following:
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Tax at statutory U.S. federal rate...................... $(43) $ 72 $ 34
Nondeductible portion of estimated liabilities associated
with antitrust investigations and related lawsuits and
claims............................................... 90 -- --
Foreign earnings taxed at different rates............... 4 3 3
Brazilian tax exemption................................. (6) (4) (2)
Net taxes related to the Recapitalization............... -- -- 37
Net taxes related to foreign dividends and -- 4 5
other remittances..................................
Adjustments to deferred tax asset valuation allowance... -- (8) (12)
Other................................................... (6) 1 9
------ ----- -----
$ 39 $ 68 $ 74
====== ===== =====
58
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) INCOME TAXES--(CONTINUED)
The significant components of deferred income tax expense attributable to
income from operations are as follows:
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Deferred tax expense (exclusive of the effects
of other components below)......................... $(38) $ 27 $ (5)
Decrease in beginning-of-the-year balance
of the valuation allowance for deferred tax assets. -- (8) (13)
---- ----- ------
$(38) $19 $ (18)
==== ===== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:
AT DECEMBER 31,
1997 1996
---- ----
(Dollars in millions)
Deferred tax assets:
Depreciation...................................................... $ 9 $ 7
Estimated liabilities associated with antitrust investigations
and related lawsuits and claims................................ 28 --
Sales and product allowances...................................... 1 1
Compensation and benefit plans.................................... 55 53
Excess foreign tax credits........................................ 18 5
Inventory adjustments............................................. 2 3
Provision for scheduled plant closings and other restructurings... 1 10
AMT tax credit carryforwards...................................... 1 --
Debt issuance costs............................................... 4 5
Other............................................................. 6 6
--------- --------
Total gross deferred tax assets................................. 125 90
Less: valuation allowance...................................... (3) (3)
--------- --------
Net deferred tax assets....................................... 122 87
-------- -------
Deferred tax liabilities:
Depreciation...................................................... 87 56
Compensation and benefit plans.................................... 1 1
Inventory adjustments............................................. 6 7
Other............................................................. 11 13
-------- -------
Total gross deferred tax liabilities............................ 105 77
------- -------
Net deferred tax asset........................................ $ 17 $ 10
======= ======
Deferred income tax assets and liabilities are classified on a net current
and noncurrent basis within each tax jurisdiction. Deferred income tax assets
are included in prepaid expenses in the amount of $30 million at December 31,
1997 ($16 million at December 31, 1996) and other assets in the amount of $43
million at December 31, 1997 ($20 million at December 31, 1996). Deferred tax
liabilities are also included in accrued income and other taxes in the amount of
$9 million at December 31, 1997 ($10 million at December 31, 1996).
59
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) INCOME TAXES--(CONTINUED)
The net change in the total valuation allowance for the years ended
December 31, 1996 and 1995 was a decrease of $8 million and $12 million,
respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment.
At December 31, 1997, the Company had excess foreign tax credit
carryforwards of $18 million. Of these tax credit carryforwards, $2 million
expire in 1998, $1 million expire in 1999, $1 million expire in 2000, $4 million
expire in 2001 and $10 million expire in 2002. The Company used $51 million of
foreign tax credits to reduce U.S. current tax liabilities in 1997 ($30 million
in 1996 and $95 million in 1995, including $89 million related to the
Recapitalization). Based upon the level of historical taxable income and
projections for future taxable income over the periods during which these
credits are utilizable, management believes it is more likely than not the
Company will realize the benefits of these deferred tax assets net of the
existing valuation allowances at December 31, 1997.
The Company used the remaining $2 million of net operating loss
carryforwards from prior years to offset non-U.S. taxable income for 1996 ($25
million for 1995) resulting in a reduction of $1 million in current tax
liabilities ($9 million in 1995).
Provision has not been made for U.S. taxes on the excess of the financial
reporting amounts over the tax bases of the Company's investments in foreign
subsidiaries that are essentially permanent in duration. Such excess amounted to
approximately $61 million at December 31, 1997. Determination of the deferred
tax liability related to this excess is not practicable. Management believes
that the tax liabilities resulting from the reversal of this excess can be
substantially mitigated with effective tax planning strategies.
(9) OTHER (INCOME) EXPENSE (NET)
The following is an analysis of other (income) expense (net):
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Foreign currency adjustments............................ $ 3 $ (1) $ 8
Interest income......................................... (9) (9) (23)
Loss on sales and disposals of assets................... -- 1 1
Global integration project consulting fees.............. 4 -- --
Amortization of goodwill................................ 1 -- --
Bank fees due to the Recapitalization................... -- -- 7
Discount on sales of receivables........................ -- -- 1
Other................................................... 6 8 9
------ ----- ------
$ 5 $ (1) $ 3
====== ===== =====
60
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(10) INTEREST EXPENSE
The following is an analysis of interest expense:
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Interest incurred on debt............................... $62 $59 $88
Amortization of debt issuance costs..................... 2 2 6
Capitalized interest.................................... -- -- (1)
--- --- ----
Total interest expense............................. $64 $61 $93
==== === ===
(11) SUPPLEMENTARY BALANCE SHEET DETAIL
AT DECEMBER 31,
1997 1996
---- ----
(Dollars in millions)
Notes and accounts receivable:
Trade............................................................. $ 220 $ 174
Affiliates........................................................ -- 7
Other............................................................. 28 10
------- ---------
248 191
Allowance for doubtful accounts................................... (6) (6)
------- ---------
$ 242 $ 185
======= =========
Property, plant and equipment:
Land and improvements............................................. $ 45 $ 36
Buildings......................................................... 231 182
Machinery and equipment........................................... 949 830
Construction in progress and other................................ 64 39
------- ---------
$1,289 $1,087
======= =========
Other assets:
Goodwill (net).................................................... $ 25 $ --
Deferred income taxes............................................. 43 20
Benefits protection trust......................................... 10 2
Other............................................................. 24 31
------- ---------
$ 102 $ 53
======= =========
Accounts payable:
Trade............................................................. $ 63 $ 54
Other............................................................. 13 13
--------- ---------
$ 76 $ 67
========= =========
Other accrued liabilities:
Accrued accounts payable.......................................... $ 26 $ 26
Payrolls.......................................................... 8 6
Restructuring..................................................... 2 7
Employee compensation and benefits................................ 47 40
Estimated liabilities associated with
antitrust investigations and
related lawsuits and claims.................................... 174 --
Other............................................................. 5 12
---------- ---------
$ 262 $ 91
========== =========
61
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) SUPPLEMENTARY BALANCE SHEET DETAIL--(CONTINUED)
AT DECEMBER 31,
1997 1996
---- ----
(Dollars in millions)
Other long-term obligations:
Postretirement benefits........................................... $ 83 $ 80
Employee severance costs.......................................... 16 17
Pension and related benefits...................................... 22 18
Estimated liabilities associated with antitrust investigations and
related lawsuits and claims.................................. 163 --
Other............................................................. 29 23
-------- ---------
$ 313 $ 138
======== =========
The following is an analysis of the allowance for doubtful accounts:
AT DECEMBER 31,
1997 1996
---- ----
(Dollars in millions)
Balance at beginning of year........................................... $ 6 $ 11
Charged to costs and expenses.......................................... -- --
Deductions............................................................. -- (5)
--- ----
Balance at end of year................................................. $ 6 $ 6
=== ====
(12) LEASES
Lease commitments under noncancelable operating leases extending for one
year or more will require the following future payments:
(DOLLARS IN MILLIONS)
1998......................................... $5
1999......................................... 4
2000......................................... 2
2001......................................... 1
2002......................................... 1
After 2002................................... 4
Total lease and rental expenses under noncancelable operating leases
extending one month or more were $5 million in 1997 ($4 million in 1996 and
1995).
(13) BENEFITS PLANS
RETIREMENT PLANS
Until February 25, 1991, the Company participated in the U.S. retirement
plan of Union Carbide. Effective February 26, 1991, the Company formed its own
U.S. retirement plan which covers substantially all U.S. employees. Retirement
and death benefits related to employee service through February 25, 1991 are
covered by the Union Carbide plan. Benefits paid by the Union Carbide plan will
be based on final average pay through February 25, 1991, plus salary increases
(not to exceed 6% per year) until January 26, 1995 when Union Carbide ceased to
own at least 50% of the equity of UCAR. All Company employees who retired prior
to February 25, 1991 are covered under the Union Carbide plan.
62
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) BENEFITS PLANS--(CONTINUED)
Pension benefits under the Company plan are based primarily on years of
service and compensation levels prior to retirement. Net pension costs for the
U.S. retirement plan were $6 million in 1997 ($6 million in 1996 and 1995).
Pension coverage for employees of foreign subsidiaries is provided, to the
extent deemed appropriate, through separate plans. Obligations under such plans
are systematically provided for by depositing funds with trustees, under
insurance policies or by book reserves. Net pension costs for plans of foreign
subsidiaries amounted to $1 million in 1997 ($1 million in both 1996 and 1995).
The components of net pension cost for 1997, 1996 and 1995 are as follows:
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Service cost-benefit earned during the period.................... $ 7 $ 7 $ 7
Interest costs on projected benefit obligation................... 12 9 8
Actual return on plan assets..................................... (20) (14) (10)
Net amortization and deferral.................................... 8 5 2
-- -- --
Net pension cost............................................ $ 7 $ 7 $ 7
=== === ===
Pension fund assets are invested primarily in equity investments and fixed
income investments. At December 31, 1997, these investments represented 46% and
31% of the total plan assets at fair value, respectively. At December 31, 1997,
the remainder of the pension fund assets consisted of cash, cash equivalents and
insurance contracts held with various financial institutions.
At December 31, 1997, the assets of each of the Company's retirement plans
exceeded the actuarially determined accumulated benefit obligation and,
accordingly, such plans were considered fully funded for purposes of
contribution requirements. The funded status of the Company's retirement plans
at December 31, 1997 and 1996 is as follows:
AT DECEMBER 31,
1997 1996
---- ----
(Dollars in millions)
Actuarial present value of benefit obligations:
Vested benefits................................................... $ (102) $ (68)
Non-vested benefits............................................... (17) (13)
--------- ----------
Accumulated benefit obligation......................................... (119) (81)
Effect of projected future salary increases............................ (54) (59)
-------- ----------
Projected benefit obligation........................................... (173) (140)
Fair value of plan assets.............................................. 165 126
------- --------
Plan assets less than projected benefit obligation..................... (8) (14)
Unamortized net asset at transition.................................... (8) (2)
Unamortized prior service cost......................................... 3 3
Unrecognized net (gain)................................................ (7) (8)
--------- ---------
Accrued pension cost................................................... $ (20) $ (21)
========= =========
63
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) BENEFITS PLANS--(CONTINUED)
The actuarial assumptions used in determining the net pension cost and
pension liability shown above were as follows:
FOR THE YEAR ENDED DECEMBER 31,
1997 1996
---- ----
Weighted-average discount rate for determining projected
benefit obligation....................................... 7.48% 7.82%
Weighted-average rate of increase in compensation levels..... 5.12% 5.64%
Expected long-term weighted-average rate of return on plan
assets................................................... 8.93% 8.94%
OTHER NON-QUALIFIED PLANS
Since January 1, 1995, the Company has established various unfunded,
non-qualified supplemental retirement and compensation deferred programs for
certain eligible employees. In 1995, the Company established a benefits
protection trust (the "Trust") to partially provide for the benefits for
employees participating in these plans. At December 31, 1997, the Trust had
assets of approximately $10 million ($2 million at December 31, 1996), which are
included in Other Assets on the Consolidated Balance Sheet.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE
The Company provides health care and life insurance benefits for eligible
retired employees. These benefits are provided through various insurance
companies and health care providers. The Company accrues the estimated cost of
these benefits during the employees' credited service periods.
Effective January 1, 1993, the Company made changes to its retiree health
care programs principally related to plan eligibility requirements for active
employees. Beginning January 1, 1995, employees are required to have 10 years of
company service after age 45 to receive the Company's full contribution for
retiree health care. These changes resulted in a reduction of the accumulated
postretirement benefit obligation at January 1, 1993 of $20 million. The Company
is amortizing this reduction over the average remaining credited service period
of eligible employees (6.5 years) which results in a reduction of net
postretirement benefit expense of $3 million per year.
For the years 1997, 1996 and 1995, the components of expense for these
postretirement benefits were as follows:
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
(Dollars in millions)
Service cost-benefits earned during the period.......... $ 2 $ 2 $ 3
Interest costs on accumulated postretirement
benefit obligation................................. 6 5 4
Amortization of the reduction resulting from
plan amendments.................................... (3) (3) (3)
---- ---- ----
Total expense...................................... $ 5 $ 4 $ 4
==== ==== ====
64
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) BENEFITS PLANS--(CONTINUED)
At December 31, 1997 and 1996, the actuarial and recorded liabilities for
these postretirement benefits, none of which have been funded, were as follows:
AT DECEMBER 31,
1997 1996
---- ----
(Dollars in millions)
Accumulated postretirement benefit obligation:
Retirees.......................................................... $59 $51
Fully eligible active plan participants........................... 18 14
Other active participants......................................... 4 3
Unrecognized reduction of the obligation resulting
from plan amendments............................................ 4 8
Unrecognized net gain (loss)...................................... (2) 4
------ ------
Accrued postretirement benefit costs............................ $ 83 $ 80
====== ======
The discount rate used in determining the accumulated postretirement
benefit obligation ("APBO") as of December 31, 1997 was 7.0% (7.75% in 1996).
The assumed health care cost trend rate used in determining this obligation was
8.25% (9.0% in 1996), declining between 0.5% and 1% per year to an ultimate rate
of 4.75% for the year 2006 and thereafter. The assumed rate of increase in
salary levels for the life insurance portion of the APBO was 4.50% (5.25% in
1996). Cost-sharing provisions between the Company and its employees are assumed
to remain constant in the future.
If the health care cost trend rate assumptions were increased by 1%, the
APBO as of December 31, 1997 would be increased by $5 million. The effect of
this change on the sum of service cost and interest cost components of net
periodic postretirement benefit cost for 1997 would be $1 million.
SAVINGS PLAN
The Company's employee savings plan provides eligible employees the
opportunity for long-term savings and investment. Participating employees can
contribute 1% to 7.5% of employee compensation as basic contributions and an
additional 0.5% to 10% of employee compensation as supplemental contributions.
The Company contributes on behalf of each participating employee an amount equal
to 30% (50%, effective January 1, 1998) of the employee's basic contribution.
The Company contributed $2 million in 1997 and 1996 and $1 million in 1995.
INCENTIVE PLAN
The Company provides group profit sharing plans for employees in various
subsidiaries worldwide. Costs for the profit sharing plans were $19 million, $17
million and $18 million in 1997, 1996 and 1995, respectively.
65
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) RESTRUCTURING COSTS
The Company recorded restructuring costs of $30 million during 1995 to
write-off fixed assets of $22 million and accrue $8 million of related shutdown
costs in connection with a project to close certain high cost manufacturing
operations and to add modern lower cost manufacturing operations at the
Company's North American graphite electrode plants.
(15) MANAGEMENT COMPENSATION AND INCENTIVE PLANS
Upon consummation of the Recapitalization, the Company entered into three-
year employment agreements with certain officers which automatically renew
annually for additional one-year terms. The employment agreements provide the
officers with the opportunity to receive bonuses based in part on the
achievement of designated EBITDA targets. The Company recorded expenses
applicable to these bonuses of $3 million in 1997 ($5 million in 1996 and $4
million in 1995).
Prior to the Recapitalization, the Company had a long-term incentive plan
for certain management employees which provided incentive compensation based on
the Company's performance as compared to designated profitability and cash flow
goals for the three years ending December 31, 1995. The goals for 1995 were
deemed achieved in accordance with the plan at the date of the Recapitalization.
The Company recorded expenses applicable to this plan of $2 million in 1995.
To encourage senior management to acquire shares of common stock in
connection with the Recapitalization, UCAR adopted an equity ownership program.
Under this program, certain members of management were given the opportunity to
purchase from UCAR shares of common stock at $7.60 per share (the price per
share paid for the common stock purchased by Blackstone and Chase Equity
Associates in the Recapitalization). Approximately 733,000 shares were purchased
for $6 million by members of management under this program. The Company loaned
approximately $3 million to certain members of management in connection with
these purchased shares. In addition, for each two U.S. dollars of common stock
purchased, UCAR granted the purchaser one U.S. dollar of restricted matching
stock (the "Matching Shares"), approximately 329,000 shares. The Matching Shares
vested at the time of the Initial Offering.
The shares purchased by management and the Matching Shares were subject to
certain restrictions and to "puts" under which the holder could require UCAR to
repurchase the shares under certain conditions. The restrictions and "puts"
expired at the time of the Secondary Offering.
In connection with the Recapitalization, UCAR adopted the Management Stock
Option Plan under which it granted non-qualified stock options to certain
members of management to purchase up to an aggregate of 4,761,000 shares of
common stock at an exercise price of $7.60 per share, of which (i) time vesting
options for 2,777,000 shares vested fully at the time of the Initial Offering
and (ii) performance vesting options for 1,984,000 shares vested and were to
vest as follows: 60% at the time of the Initial Offering and 20% in each of 1998
and 1999 if EBITDA for those years is equal to or exceeds a target amount. On
December 8, 1997, UCAR's Board of Directors approved the accelerated vesting of
the outstanding performance stock options associated with the 1998 performance
targets and, accordingly, the Company recorded compensation expense of $12
million ($9 million after tax). UCAR's Board of Directors did not vest the
performance stock options associated with the 1999 performance targets. If
UCAR's Board of Directors had accelerated the vesting of those options at
December 31, 1997, approximately $12 million of additional compensation expense
would have been recorded in 1997. In addition, because the Company has not met
the probability criterion associated with achieving the 1999 performance
targets, no compensation expense associated with those performance stock options
has been recorded.
66
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(15) MANAGEMENT COMPENSATION AND INCENTIVE PLANS--(CONTINUED)
On December 13, 1995, UCAR granted additional fully vested options to
purchase 10,000 shares of common stock at an exercise price of $31.59 per share.
Options vested under such plan were restricted from exercise until the time of
the 1996 Secondary Offering. On February 10, 1997, UCAR granted additional fully
vested options to purchase 155,000 shares of common stock at an exercise price
of $37.59 per share.
Effective as of February 6, 1996, UCAR adopted the 1996 Mid-Management
Equity Incentive Plan under which it may grant awards to selected employees to
purchase up to an aggregate of 1,000,000 shares of common stock. Under such
plan, granted shares which have been subsequently forfeited are available for
future granting thereunder. On February 9, 1996, UCAR granted time vesting
options to purchase 960,000 shares of common stock at an exercise price of
$35.00 per share. On May 13, 1996, UCAR granted additional time vesting options
to purchase 4,000 shares of common stock at an exercise price of $40.44 per
share. On February 10, 1997, UCAR granted additional time vesting options to
purchase 61,500 shares of common stock at an exercise price of $39.31 per share.
The options granted under the 1996 Mid-Management Equity Incentive Plan have a
term of ten years and vest eight years from the date of grant. Accelerated
vesting occurs as the market price of the common stock equals or exceeds
specified amounts. At December 31, 1997, 460,350 of such options were fully
vested.
At December 31, 1997, the Company has reserved 5,037,776 shares of
authorized common stock for issuance in accordance with existing stock option
and equity plans.
The Company applies APB 25 in accounting for its stock-based compensation
plans. Accordingly, no compensation cost has been recognized for its time
vesting option plans. The compensation cost that has been charged against income
for its performance vesting options was $12 million in 1997 and $19 million in
1995. Had compensation cost for the Company's stock-based compensation plans
been determined by the fair value method prescribed by SFAS 123, the Company's
net income (loss) and net income per share would have been reduced to the pro
forma amounts indicated below:
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996 1995
---- ---- ----
Dollars in millions,
except per share data)
Net income (loss):
As reported................................................... $(160) $152 $ (12)
Pro forma..................................................... (156) 149 (15)
Diluted net income (loss) per share:
As reported(a) .............................................. (3.49) 3.15 1.87
Pro forma.................................................... (3.39) 3.07 1.80
- --------------------
(a) Pro forma for 1995. See Note 18.
67
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(15) MANAGEMENT COMPENSATION AND INCENTIVE PLANS--(CONTINUED)
A summary of the status of the Company's stock-based compensation plans as
of December 31, 1997, 1996 and 1995, and changes during the years then ended is
presented below:
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
WEIGHTED- WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
------ EXERCISE PRICE ------ EXERCISE PRICE ------ EXERCISE PRICE
-------------- -------------- --------------
(SHARES IN THOUSANDS)
Time Vesting Options:
Outstanding at beginning of year..... 3,572 $15.01 2,787 $7.60 -- $ --
Granted.............................. 217 38.08 964 35.02 2,787 7.69
Exercised............................ (432) 9.91 (176) 8.22 -- --
Forfeited............................ (33) 35.00 (3) 35.00 -- --
------ ----- -----
Outstanding at end of year......... 3,324 16.98 3,572 15.01 2,787 7.69
====== ===== =====
Options exercisable at year end...... 2,799 13.55 2,853 9.97 -- --
Weighted-average fair value of
Options granted during year........ $17.33 $16.02 $6.13
Performance Vesting Options:
Outstanding at beginning of year..... 1,508 $7.60 1,984 $7.60 -- $ --
Granted.............................. -- -- -- -- 1,984 7.60
Exercised............................ (284) 7.60 (476) 7.60 -- --
Forfeited............................ (50) 7.60 -- -- -- --
------ ----- -----
Outstanding at end of year......... 1,174 7.60 1,508 7.60 1,984 7.60
====== ===== =====
Options exercisable at year end...... 842 7.60 714 7.60 -- --
Weighted-average fair value of
Options granted during year........ $-- $-- $6.11
The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield
of 0.0% for all years; expected volatility of 30%, 30% and 94%; risk-free
interest rates of 6.4%, 5.7% and 7.7%; and expected lives of seven years, eight
years and six years. The following table summarizes information about stock
options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICES EXERCISABLE EXERCISE PRICES
--------------- ----------- ---------------- --------------- ----------- ---------------
(SHARES IN THOUSANDS)
Time Vesting Options:
$7.60 2,210 9 years $ 7.60 2,210 $ 7.60
$31.59 to 40.44 1,114 8 years 35.59 589 35.87
----- -----
3,324 9 years 16.98 2,799 13.55
===== =====
Performance Vesting Options:
$7.60 1,174 9 years 7.60 802 7.60
===== =====
68
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(16) CONTINGENCIES
On June 5, 1997, the Company was served with subpoenas issued by the
United States District Court for the Eastern District of Pennsylvania (the
"District Court") to produce documents to a grand jury convened by attorneys for
the Antitrust Division of the United States Department of Justice (the "DOJ")
and a related search warrant in connection with an investigation as to whether
there has been any violation of federal antitrust laws by producers of graphite
electrodes. Concurrently, representatives of Directorate General IV of the
European Union, the antitrust enforcement authorities of the European Union (the
"EU authorities"), visited offices of the Company's French subsidiary for
purposes of gathering information to determine whether there has been any
violation of Article 85-1 of the Treaty of Rome, the antitrust law of the
European Union. In addition, on June 5, 1997, one of the Company's competitors
in the graphite electrode industry, The Carbide/Graphite Group, Inc. ("C/G"),
announced that the DOJ had granted it the opportunity to participate in the
DOJ's Corporate Leniency Program and that it was cooperating with the
government. Subsequently, the Company was served with subpoenas in the United
States to produce documents relating to, among other things, its carbon
electrode and bulk graphite businesses. In December 1997, UCAR's Board of
Directors appointed a special committee of outside directors, consisting of John
R. Hall and R. Eugene Cartledge, to exercise the power and authority of UCAR's
Board of Directors in connection with antitrust investigations and related
lawsuits and claims. On February 23, 1998, the DOJ announced that it had charged
Showa Denko Carbon, Inc. ("SDC"), a U.S. subsidiary of Showa Financing K.K., a
Japanese firm, and unnamed co-conspirators with participating from 1993 until
January 1997 in an international conspiracy involving meetings and conversations
in the Far East, Europe and the United States resulting in agreements to fix
prices and allocate market shares worldwide, to restrict co-conspirators'
capacity and to restrict non-conspiring producers' access to manufacturing
technology for graphite electrodes. The DOJ further announced that SDC has
agreed to plead guilty, pay a fine of $29 million and cooperate in its
investigation and that other cases were likely to be filed.
On April 7, 1998, pursuant to an agreement with the DOJ, UCAR agreed to
plead guilty to a one count charge of violating federal antitrust laws in
connection with the sale of graphite electrodes. Additionally, UCAR has agreed
to pay a non-interest-bearing fine in the aggregate amount of $110 million,
payable in six annual installments. Under the plea agreement, which is subject
to approval by the District Court, the Company will be required to make annual
payments of $20 million, $15 million, $15 million, $18 million, $21 million and
$21 million, respectively, commencing 90 days after the Company is sentenced by
the District Court, if such sentence is issued in accordance with the plea
agreement. Under the plea agreement, UCAR will not be subject to prosecution by
the DOJ with respect to any antitrust violations occurring prior to the date the
plea agreement is approved. The fine payable pursuant to the plea agreement is
within the amounts used by the Company for purposes of determining the $340
million charge described below. The plea agreement has been submitted for court
approval. Although UCAR does not expect such an outcome, it is possible that the
District Court could reject the plea agreement. In such event, it is possible
that UCAR could be required to either defend any charges which could be brought
or enter into a less favorable plea agreement. Regardless of whether the plea
agreement is accepted by the District Court, the plea agreement makes it more
difficult to defend against antitrust civil lawsuits.
The Company has become aware that the Canadian Competition Bureau has
commenced a criminal investigation under the Canadian Competition Act (the
"Canadian Act"). Under Section 45 of the Canadian Act, the maximum fine for the
Company, would be ten million Canadian dollars. It is possible that Section 46
of the Canadian Act may be implicated in this matter. Under Section 46, the
amount of the fine is discretionary, and there is no maximum. The Company,
through its counsel, is cooperating with the DOJ and the EU authorities in their
continuing investigations. It is possible that antitrust investigations could be
initiated by authorities in other jurisdictions.
On June 17, 1997, UCAR was served with a complaint commencing a putative
class action lawsuit in the United States District Court for the Western
District of Pennsylvania. Subsequently, the Company was served with four
additional complaints commencing similar lawsuits in the District Court. UCAR,
SGL Carbon Corporation ("SGL Carbon"), a U.S. subsidiary of SGL Carbon AG
("SGL"), a German firm, and C/G are named as defendants in each complaint. SGL
is also named as a defendant in each of the four subsequently served complaints.
In each complaint, the plaintiffs alleged that the defendants violated federal
antitrust laws. Each complaint sought, among other things, an award of treble
damages resulting from such alleged violations. On August 5, 1997, the four
69
complaints filed in the District Court were consolidated into a single complaint
in the District Court entitled IN RE: GRAPHITE ELECTRODES ANTITRUST LITIGATION.
In the consolidated litigation, the proposed class consists of all persons who
purchased graphite electrodes in the United States directly from the defendants
during the period from January 1, 1992 through August 15, 1997. On August 21,
1997, the first served complaint was withdrawn without prejudice to refile. UCAR
filed a motion to dismiss the consolidated complaint, which was denied in
November 1997 with leave to renew such motion after discovery is completed.
Discovery and depositions relating to class certification have begun. The
District Court, however, has ordered a stay of non-class depositions and certain
other discovery until July 1998. Accordingly, the consolidated lawsuit is still
in its early stages. UCAR intends to vigorously defend against the consolidated
lawsuit. UCAR may at any time, however, settle the lawsuit and any related
possible unasserted claims. UCAR has had discussions in this regard with
plaintiffs' counsel, with those members of the proposed class who have indicated
that they intend to opt out of any class which is certified as well as other
potential plaintiffs.
On each of March 30, 1998 and April 3, 1998, UCAR was served with
complaints commencing civil lawsuits in the District Court. UCAR, C/G, SGL
Carbon, SGL and SDC, are named as defendants in each complaint. Additionally,
Showa Denko K.K., UCAR Global Enterprises Inc., UCAR Carbon Company Inc., Union
Carbide and Mitsubishi are named as defendants in the complaint served on March
30, 1998. In each complaint, the plaintiffs allege that the defendants violated
federal antitrust laws. Additionally, in the complaint served on April 3, 1998,
the plaintiffs allege that Union Carbide and Mitsubishi violated applicable
state fraudulent transfer laws. Each complaint seeks, among other things, an
award of treble damages resulting from such alleged antitrust violations. The
complaint served on April 3, 1998 also seeks to have payments made by UCAR to
Union Carbide and Mitsubishi in connection with the Recapitalization declared to
be fraudulent conveyances and returned to UCAR for purposes of enabling UCAR to
satisfy any judgments resulting from such alleged antitrust violations. The
Company has not responded to either of these lawsuits and intends to vigorously
defend against these lawsuits. These lawsuits are in their earliest stages. The
Company may at any time, however, settle such lawsuits and any related possible
unasserted claims. The Company has had discussions in this regard with certain
of the plaintiffs and their counsel. The Company anticipates that other lawsuits
could be commenced against the Company.
The Company anticipates that additional antitrust lawsuits seeking,
among other things, to recover damages, could be commenced against the Company
in the United States and in other jurisdictions.
On March 4, 1998, UCAR was served with a complaint commencing a
shareholder derivative lawsuit in the Connecticut Superior Court (Judicial
District of Danbury). The current directors, certain former directors and
certain officers are named as defendants. The Company is named as a nominal
defendant. The complaint alleges that the defendants breached their fiduciary
duties in connection with alleged non-compliance by the Company and its
employees with antitrust laws. The complaint also alleges that certain of the
defendants sold common stock while in possession of materially adverse
non-public information relating to such non-compliance with antitrust laws. The
complaint seeks recovery for UCAR of damages to the Company resulting from such
alleged breaches and sales. The complaint does not contain specific allegations
of the factual basis underlying such allegations and appears to be based on the
existence of the previously announced grand jury investigation, the related
consolidated civil lawsuit and the Company's public announcements and filings
with the Commission. This lawsuit is in its earliest stages. UCAR has not yet
responded to the complaint. Accordingly, no evaluation of potential liability
has been made with respect to this lawsuit.
On April 1, 1998, a complaint commencing a securities fraud class action
lawsuit was filed in the United States District Court for the District of
Connecticut. UCAR, David A. Stockman, a former director, and each of Messrs.
Krass, Hart, Mancino, Wiemels, Wolf, Cartledge, Hall, Hutchins, Kennedy, Lipson,
Peterson and Schwarzman are named as defendants. The proposed class consists of
all persons who purchased UCAR common stock during the period from August 15,
1995 through March 13, 1998. The complaint alleges that during such period the
defendants violated securities laws in connection with purchases and sales of
common stock by failing to disclose alleged violations of antitrust laws. The
complaint seeks, among other things, to recover damages resulting from such
alleged violations. UCAR has not yet responded to this complaint. This lawsuit
is in its earliest stages. Accordingly, no evaluation of potential liability has
been made with respect to this lawsuit.
70
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(16) CONTINGENCIES--(CONTINUED)
The Company is involved in various other legal proceedings incidental to
the conduct of its business. While it is not possible to determine the ultimate
disposition of each of these other proceedings, the Company believes that the
ultimate disposition of such other proceedings will not have a material adverse
effect on the Company.
The Company recorded a charge of $340 million ($310 million after tax)
against results of operations for 1997 for potential liabilities and expenses in
connection with antitrust investigations and related lawsuits and claims. While
such charge reflects the Company's best estimate as to the amount of such
potential liabilities and expenses, actual liabilities and expenses could be
materially higher or lower than such estimate. In addition, due to the fact such
lawsuits are in the earliest stages and no evaluation of liability can yet be
made, no amounts have been accrued with respect to the shareholder derivative
and securities fraud class action lawsuits.
(17) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of SFAS 128, adopted in 1997, using the following share data:
1997 1996 1995
---- ---- ----
Weighted average common shares outstanding for 45,963,407 46,273,820 45,959,718
basic calculation..............................
Add: Effect of stock options....................... ---- 2,195,365 2,803,199
Weighted average common shares ---------- ----------- -----------
outstanding, adjusted for diluted calculation.. 45,963,407 48,469,185 48,762,917
========== =========== ===========
No outstanding options were considered in the 1997 calculation of weighted
average common shares outstanding for the dilutive calculation as they are all
antidilutive due to the net loss for 1997. The calculation of weighted average
common shares outstanding excludes the consideration of performance stock
options for 794,000 shares in both 1996 and 1995 because the exercise of these
options would not be dilutive for either of the respective periods.
(18) PRO FORMA NET INCOME PER SHARE (UNAUDITED)
For the unaudited pro forma net income per share data presented on the
Consolidated Statements of Operations, historical net (loss) for 1995 has been
adjusted as if the Recapitalization, Initial Offering, Redemption and
Refinancing occurred as of January 1, 1995 and to exclude the extraordinary
charge and the non-recurring effects of the Recapitalization and the Initial
Offering. The weighted average common shares outstanding reflects shares of
common stock outstanding after the Initial Offering, including potential common
shares calculated in accordance with the "treasury stock method," wherein the
net proceeds therefrom are assumed to repurchase common shares at $25.74 (the
average price for 1995). Historical net income (loss) per share has been omitted
as the historical capitalization of the Company is not indicative of the
Company's current capital structure.
71
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(18) PRO FORMA NET INCOME PER SHARE (UNAUDITED)
The following table sets forth summary pro forma consolidated statement of
operations data for 1995:
(Dollars in millions,
except per share data)
Pro forma amounts:
Operating profit............................................................... $ 214
Interest expense............................................................... 74
Provision for income taxes..................................................... 52
Net income..................................................................... 91
Basic net income per share..................................................... 1.98
Diluted net income per share................................................... 1.87
The following table sets forth a summary of the pro forma adjustments to
net income reflected in the above table:
(DOLLARS IN
MILLIONS)
Net loss as reported in the Consolidated Financial Statements....................... $(12)
Pro forma effects on the Recapitalization (after tax):
Compensation expense related to the Long Term Incentive Compensation plan.......... 1
Senior subordinated credit facility expense........................................ 4
Net adjustment to interest......................................................... (3)
Taxes due to Recapitalization...................................................... 37
Pro forma effects of the Initial Offering and Redemption (after tax):
Accelerated vesting of performance stock options and matching restricted stock..... 12
Net adjustment to interest......................................................... 9
Extraordinary charge............................................................... 18
Pro forma effects of the Refinancing (after tax):
Net adjustment to interest......................................................... 6
Extraordinary charge............................................................... 19
----
Pro forma net income.................................................................. $ 91
====
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 TO 13 INCLUSIVE
The information required by Items 10, 11, 12 and 13 will appear in the
UCAR International Inc. Proxy Statement for the Annual Meeting of Stockholders
to be held June 4, 1998, which will be filed pursuant to Regulation 14A under
the Exchange Act and is incorporated by reference in this Annual Report on Form
10-K pursuant to General Instruction G(3) of Form 10-K (other than the portions
thereof not deemed to be "filed" for the purpose of Section 18 of the Exchange
Act). In addition, the information set forth below is provided as required as
Item 10.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
current executive officers and directors of UCAR.
NAME AGE* POSITION
---- --- --------
Robert D. Kennedy...................... 65 Chairman of the Board and Chief Executive Officer
Petrus J. Barnard...................... 48 Vice President, Electrodes for the Americas
W. David Cate.......................... 51 Vice President, Electrodes for Europe and South Africa
Peter B. Mancino....................... 55 Vice President, General Counsel and Secretary
William P. Wiemels..................... 53 Vice President and Chief Operating Officer
Fred C. Wolf........................... 53 Vice President and Chief Financial Officer
R. Eugene Cartledge.................... 68 Director
John R. Hall........................... 65 Director
- ------------------------
* As of April 1, 1998
ROBERT D. KENNEDY was elected director of the Company in June 1990 and was
elected Chairman of the Board and Chief Executive Officer of the Company on
March 18, 1998. The Company is a successor to the Carbon Products Division of
Union Carbide Corporation ("Union Carbide"). Mr. Kennedy joined Union Carbide in
1955 and held various marketing and management positions in the United States
and Europe. He was a Senior Vice President of Union Carbide from 1981 to 1985.
In 1985, Mr. Kennedy was elected a director and President of Union Carbide. In
1986, he was elected Chief Executive Officer and Chairman of the Board of Union
Carbide. Mr. Kennedy retired as Chief Executive Officer and President of Union
Carbide in April 1995 and as Chairman of the Board (but not as a director) of
Union Carbide in December 1995. Mr. Kennedy is also a director of Union Camp
Corporation, Sun Company, Inc., K-Mart Corp., LionOre Mining International Ltd.
and General Signal Corp. Mr. Kennedy is Chairman of the Audit Committee and a
member of the Organization and Compensation Committee of UCAR's Board of
Directors.
PETRUS J. BARNARD joined EMSA (Pty.) Ltd. ("EMSA") in 1972 (which at the
time was 50% owned by Union Carbide and 50% owned by a joint venture partner
based in South Africa). Since then, he has held various management positions in
EMSA in South Africa and in the Carbon Products Division of Union Carbide in the
United States. He became Director of Operations for Europe and South Africa of
the Company in 1994, General Manager of the Graphite Electrode Business for
Europe and South Africa in 1995 and has been Vice President, Electrodes for the
Americas since 1997.
W. DAVID CATE joined Union Carbide in 1969 and held various manufacturing
and management positions in the Carbon Products Division. He became General
Manager for Graphite Specialties and GRAFOIL(R) of the Company in 1991, General
Manager for North America in 1994 and has been Vice President, Electrodes for
Europe and South Africa since 1997.
PETER B. MANCINO joined the Law Department of Union Carbide in 1975 and
became Division Counsel of the Industrial Gases and Carbon Products Divisions in
1980. In 1989, he became General Counsel of the Company. Mr. Mancino has been a
Vice President and the Secretary since 1991.
73
WILLIAM P. WIEMELS joined Union Carbide in 1967 and held various
technical, sales and marketing positions in the Carbon Products Division in the
United States and Europe. He became Director of Marketing in Europe in 1986 and
Director of Technology in 1989. Mr. Wiemels was Vice President, U.S.A.
Operations, of the Company from 1991 to 1994 and Vice President, Chief Financial
Officer and Treasurer from 1994 to 1998. Since March 18, 1998, he has been Vice
President and Chief Operating Officer.
FRED C. WOLF joined Union Carbide in 1967 and held various financial and
management positions in the Carbon Products Division until 1979. From 1979 to
1985, he held various finance and business positions in the Industrial Gases and
Engineering Products and Processes Divisions. He returned to the Carbon Products
Division in 1985 as Controller and was a Vice President of the Division from
1986 to 1989. From 1990 to 1998, he was Vice President, Administration and
Strategic Projects of the Company. Since March 18, 1998, he has been Vice
President and Chief Financial Officer.
R. EUGENE CARTLEDGE was elected director of UCAR in February 1996. From
1986 until his retirement in 1994, he was the Chairman of the Board and Chief
Executive Officer of Union Camp Corporation. Mr. Cartledge retired as Chairman
of the Board of Savannah Foods & Industries Inc. in December 1997. He is a
director of Union Camp Corporation, Chase Brass Industries, Inc., Sun Company,
Inc., Delta Air Lines, Inc. and Blount, Inc. Mr. Cartledge is Chairman of the
Nominating Committee and a member of the Audit Committee of UCAR's Board of
Directors.
JOHN R. HALL was elected director of UCAR in November 1995. Since July
1997, he has been the non-employee Chairman of Arch Coal, Inc. He retired as
Chairman effective January 31, 1997 and as Chief Executive Officer effective
October 1, 1996 of Ashland Inc., which positions he held since 1981. Mr. Hall
served in various engineering and managerial capacities at Ashland Inc. since
1957. Mr. Hall is a director of Banc One Corporation, Canada Life Assurance
Company, CSX Corporation, Humana Inc. and Reynolds Metals Company. Mr. Hall is
Chairman of the Organization and Compensation Committee and a member of the
Audit Committee of UCAR's Board of Directors.
74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See Index to Consolidated Financial Statements at page [34] of
this Annual Report on Form 10-K.
(2) Financial Statement Schedules
None.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the year for which this
Annual Report on Form 10-K is filed.
(c) Exhibits
The exhibits listed in the following table have been filed as
part of this Annual Report on Form 10-K.
Exhibit
NUMBER DESCRIPTION OF EXHIBIT
2.1(1) - Recapitalization and Stock Purchase and Sale Agreement dated
as of November 14, 1994 among Union Carbide Corporation,
Mitsubishi Corporation, UCAR International Inc. and UCAR
International Acquisition Inc. and Guaranty made by Blackstone
Capital Partners II Merchant Banking Fund L.P. and Blackstone
Offshore Capital Partners II L.P.
2.2(2) - Amended and Restated Stockholders' Agreement dated as of
February 29, 1996
2.3(1) - Form of Management Common Stock Subscription Agreement
2.4(3) - Form of Management Pledge and Security Agreement, together
with form of Promissory Note
2.5(2) - Amendment, Waiver and Release in connection with such
Management Common Stock Subscription Agreements, Management
Pledge and Security Agreements and Promissory Notes
2.6(1) - Indemnification Agreement dated as of January 26, 1995 among
Mitsubishi Corporation, Union Carbide Corporation and UCAR
International Inc.
2.7(1) - Stock Purchase and Sale Agreement dated as of January 26, 1995
between UCAR International Inc. and UCAR Holdings S.A.
2.8(1) - Exchange Agreements made as of January 26, 1995 between UCAR
International Inc. and UCAR Holdings II Inc.
2.9(1) - Stock Purchase and Sale Agreement dated as of January 26, 1995
between UCAR International Inc.
and UCAR Inc.
2.10(1) - Exchange Agreement made as of January 26, 1995 between UCAR
Carbon Company Inc. and UCAR Holdings Inc.
2.11(1) - Stock Purchase and Sale Agreement dated as of January 26, 1995
between UCAR Carbon Company Inc. and UCAR Mexicana,
S.A. de C.V.
2.12(1) - Exchange Agreement made as of January 26, 1995 between UCAR
International Inc. and UCAR Global
Enterprises Inc.
2.13(1) - Stock Purchase and Sale Agreement dated as of January 26, 1995
between UCAR Carbon Company Inc. and Arapaima s.r.l.
2.14(1) - Deed of Purchase and Sale of 528,999 Shares of UCAR Carbon
Navarra S.L. dated as of January 26, 1995
2.15(1) - Exchange Agreement dated as of December 15, 1993 by and
among Union Carbide Corporation, Union Carbide Chemicals and
Plastics Company Inc., Mitsubishi Corporation and UCAR
International Inc.
2.16(1) - Stock Purchase and Sale Agreement dated as of November 9, 1990
among Mitsubishi Corporation, Union Carbide Corporation and
UCAR Carbon Company Inc.
75
2.17(1) - Letter Agreement dated January 26, 1995 with respect to
termination of the Stockholders' Agreement dated as of
November 9, 1990 among Mitsubishi Corporation, Union Carbide
Corporation and UCAR Carbon Company Inc.
2.18(1) - Settlement Agreement dated as of November 30, 1993 among
Mitsubishi Corporation, Union Carbide Corporation and UCAR
Carbon Company Inc.
2.19(1) - Transfer Agreement dated January 1, 1989 between Union
Carbide Corporation and UCAR Carbon Company Inc.
2.20(1) - Amendment No. 1 to such Transfer Agreement dated
December 31, 1989
2.21(1) - Amendment No. 2 to such Transfer Agreement dated as of
July 2, 1990
2.22(1) - Amendment No. 3 to such Transfer Agreement dated as of
February 25, 1991
2.23(1) - Amended and Restated Realignment Indemnification Agreement
dated as of June 4, 1992 among Union Carbide Corporation,
Union Carbide Chemicals and Plastics Company Inc., Union
Carbide Industrial Gases Inc., UCAR Carbon Company Inc. and
Union Carbide Coatings Service Corporation
2.24(1) - Environmental Management Services and Liabilities Allocation
Agreement dated as of January 1, 1990 among Union Carbide
Corporation, Union Carbide Chemicals and Plastics Company
Inc., UCAR Carbon Company Inc., Union Carbide Industrial
Gases Inc. and Union Carbide Coatings Service Corporation
2.25(1) - Amendment No. 1 to such Environmental Management Services
and Liabilities Allocation Agreement dated as of June 4, 1992
2.26 - [omitted]
2.27 - [omitted]
2.28(4) - Trade Name and Trademark License Agreement dated March 1, 1996
between Union Carbide Corporation and UCAR Carbon Technology
Corporation
2.29(1) - Employee Benefit Services and Liabilities Agreement dated
January 1, 1990 between Union Carbide Corporation and UCAR
Carbon Company Inc.
2.30(1) - Amendment to such Employee Benefit Services and Liabilities
Agreement dated January 15, 1991 2.31 - Supplemental
Agreement to such Employee Benefit Services and Liabilities
Agreement dated February 25, 1991
2.32(1) - Letter Agreement dated December 31, 1990 among Union Carbide
Chemicals and Plastics Company Inc., UCAR Carbon Company Inc.,
Union Carbide Grafito, Inc. and Union Carbide Corporation
2.33(8) - Stock Repurchase Agreement among UCAR International Inc.,
Blackstone Capital Partners, II Merchant Banking Fund L.P.,
Blackstone Offshore Capital Partners II L.P., Blackstone
Family Investment Partnership II L.P. and Chase Equity
Associates, L.P.
2.34(9) - Share Sale Agreement between Samancor Limited and UCAR Carbon
Company Inc. dated April 21, 1997.
3.1(3) - Amended and Restated Certificate of Incorporation of UCAR
International Inc.
3.2(3) - Amended and Restated By-Laws of UCAR International Inc.
4.1(1) - Indenture dated as of January 15, 1995 among UCAR
International Inc., UCAR Global Enterprises Inc. and the
United States Trust Company of New York, as Trustee
10.1(8) - Credit Agreement dated as of October 19, 1995 among UCAR
International Inc., UCAR Global Enterprises Inc., the other
Credit Parties named therein, the Lenders named therein, the
Fronting Banks named therein and The Chase Manhattan Bank, as
Administrative Agent and Collateral Agent, as amended and
restated as of March 19, 1997
10.2(5) - Parent Guarantee Agreement dated as of October 19, 1995 made
by UCAR International Inc. and UCAR Global Enterprises Inc. in
favor of Chemical Bank as Collateral Agent for the Secured
Parties named therein
10.3(5) - Subsidiary Guarantee Agreement dated as of October 19, 1995
executed and delivered by each U.S. Subsidiary of UCAR Global
Enterprises Inc. in favor of Chemical Bank as Collateral Agent
for the Secured Parties named therein
10.4(5) - Indemnity, Subrogation and Contribution Agreement dated as
of October 19, 1995 among UCAR Global Enterprises Inc., the
U.S. Subsidiaries of UCAR Global Enterprises Inc. and Chemical
Bank as Collateral Agent for the Secured Parties named therein
76
10.5(5) - Pledge Agreement dated October 19, 1995 among UCAR
International Inc., UCAR Global Enterprises Inc., certain U.S.
Subsidiaries of UCAR Global Enterprises Inc. and Chemical Bank
as Collateral Agent for the Secured Parties named therein
10.6(8) - Effectiveness Agreement dated as of March 19, 1997 among
UCAR International Inc., UCAR Global Enterprises Inc., the
Lenders listed therein, the Fronting Banks listed therein and
The Chase Manhattan Bank, as Administrative Agent and
Collateral Agent (except, as to Exhibit A thereto, see Exhibit
10.1 to this Annual Report on Form 10-K)
10.7(5) - Security Agreement dated as of October 19, 1995 among UCAR
International Inc., UCAR Global Enterprises Inc., the U.S.
Subsidiaries of UCAR Global Enterprises Inc. and Chemical Bank
as Collateral Agent for the Secured Parties named therein
10.8(5) - Rationalization Project Cash Collateral Agreement dated as
of October 19, 1995 made by UCAR Global Enterprises Inc. in
favor of Chemical Bank as Collateral Agent for the Secured
Parties named therein
10.9(8) - Reaffirmation Agreement dated as of March 19, 1997 among
UCAR International Inc., UCAR Global Enterprises Inc., the
Subsidiary Guarantors listed therein, the Foreign Subsidiaries
referred to therein and The Chase Manhattan Bank, as
Administrative Agent and Collateral Agent
10.10(5) - Local Facility Credit Agreement dated as of October 19, 1995
between UCAR Electrodos S.L. and Chemical Bank, Madrid Branch,
as Administrative Agent
10.11(5) - Local Facility Credit Agreement dated as of October 19, 1995
between UCAR Holdings S.A. and Chemical Bank, Paris Branch, as
Administrative Agent
10.12(5) - Local Facility Credit Agreement dated as of October 19, 1995
between UCAR Inc. and Chemical Bank of Canada, as
Administrative Agent
10.13(1) - Tax Sharing Agreement made as of January 26, 1995 among UCAR
International Inc. and its subsidiaries
10.14(1) - Promissory Note dated January 26, 1995 issued by UCAR
International Inc. in favor of UCAR Global Enterprises Inc.
10.15(1) - Intercompany Loan Agreement dated January 25, 1995 between
UCAR S.A. and UCAR Holdings S.A.
10.16(l) - Employment Agreement dated as of January 26, 1995 between UCAR
International Inc. and Robert P. Krass
10.17(1) - Employment Agreement dated as of January 26, 1995 between
UCAR International Inc. and Robert J. Hart
10.18(1) - Employment Agreement dated as of January 26, 1995 between
UCAR International Inc. and Peter B. Mancino
10.19(1) - Employment Agreement dated as of January 26, 1995 between
UCAR International Inc. and William P. Wiemels
10.20(1) - Employment Agreement dated as of January 26, 1995 between
UCAR International Inc. and Fred C. Wolf
10.21(1) - Form of Non-Qualified Stock Option Agreement
10.22(9) - UCAR International Inc. Amended and Restated Management
Stock Option Plan, effective as of January 26, 1997 (restated
to delete provisions which have ceased to be operative)
10.23 - [omitted]
10.24 - [omitted]
10.24(a) - [omitted]
10.25(1) - UCAR International Inc. Bonus II Plan effective as of
January 26, 1995
10.25(a)(6) - First Amendment to such Bonus II Plan dated May 7, 1996
10.26(5) - UCAR International Inc. Compensation Deferral Program as
amended and restated effective November 6, 1995
10.27(1) - First Amendment to such Compensation Deferral Program
effective as of January 1, 1995
10.28(2) - Second Amendment to such Compensation Deferral Program
effective as of March 15, 1996
10.29(6) - Third Amendment to such Compensation Deferral Program
effective as of January 1, 1996
10.30(10) - Fourth Amendment to such Compensation Deferral Plan effective
as of January 1, 1997
10.31(6) - Amended and Restated UCAR International Inc. Officers'
Incentive Plan dated May 7, 1996
10.32(11) - UCAR Carbon Savings Plan as amended and restated effective
January 1, 1996
10.33 - [omitted]
10.34 - [omitted]
77
10.34(a) - [omitted]
10.34(b) - [omitted]
10.35(3) - UCAR Carbon Retirement Plan as amended and restated
effective as of January 1, 1994
10.35(a)(7) - First Amendment to such Retirement Plan effective
February 25, 1991
10.35(b)(6) - Second Amendment to such Retirement Plan dated May 7, 1996
10.35(c)(7) - Third Amendment to such Retirement Plan effective, as to
paragraph 2, as of January 26, 1995 and as to paragraphs
1 and 3-5, as of January 1, 1997
10.36(6) - Amended and Restated Equalization Benefit Plan for
Participants of the UCAR Carbon Retirement Plan dated
May 7, 1996
10.37 - [omitted]
10.38(1) - UCAR Carbon Company Inc. Supplemental Retirement Income Plan
effective as of February 25, 1991
10.39(1) - First Amendment to such Supplemental Retirement Income Plan
effective as of January 1, 1992
10.40(1) - Second Amendment to such Supplemental Retirement Income Plan
effective as of January 1, 1994, as to paragraph 1 thereof
and January 1, 1995, as to paragraph 2 thereof
10.40(a)* - Third Amendment to the Supplemental Retirement Income Plan
effective as of January 1, 1995
10.41(3) - UCAR International Inc. Benefits Protection Trust effective
as of July 27, 1995
10.41(a)(10) - First Amendment to such Benefits Protection Trust effective
as of July 27, 1995
10.42(7) - Second Amendment to such Benefits Protection Trust effective
as of January 1, 1996
10.42(a)* - Third Amendment to such Benefits Protection Trust effective
as of January 1, 1997
10.43(3) - UCAR International Inc. 1995 Equity Incentive Plan effective
as of August 15, 1995
10.43(a)(6) - First Amendment to such Equity Incentive Plan dated
July 29, 1996
10.44(3) - UCAR International Inc. 1995 Directors' Stock Plan effective
as of August 15, 1995
10.45(5) - First Amendment to such Directors' Stock Plan effective
September 1, 1995
10.45(a)(6) - Second Amendment to such Directors' Stock Plan dated
July 29, 1996
10.45(b)* - Third Amendment to such Directors' Stock Plan effective
September 8, 1997
10.45(c)* - Fourth Amendment to such Directors' Stock Plan effective
April 8, 1997
10.46(5) - UCAR International Inc. 1996 Mid-Management Equity Incentive
Plan effective as of February 6,
1996
10.47(6) - Amendment to such Mid-Management Equity Incentive Plan
dated July 29,1996
10.48* - Form of Waiver dated as of April 10, 1998 among UCAR
International Inc., UCAR Global Enterprises Inc., the other
Lenders referred to therein, the Fronting Banks referred to
therein and The Chase Manhattan Bank, as Administrative
Agent and Collateral Agent.
21.1* - List of subsidiaries of UCAR International Inc.
23.1* - Consent of KPMG Peat Marwick LLP
24.1* - Powers of Attorney (included on signature pages)
27.1* - Financial Data Schedule for fiscal 1997 (for Commission use
only)
27.2* - Restated Financial Data Schedule for fiscal 1996 and 1995
(for Commission use only)
- ---------------
* Filed herewith.
(1) Incorporated by reference to the Registration Statement of UCAR
International Inc. and UCAR Global Enterprises Inc. on Form S-1
(File No. 33-84850).
(2) Incorporated by reference to the Annual Report of the registrant on Form
10-K for the year ended December 31, 1995.
(3) Incorporated by reference to the Registration Statement of the registrant
on Form S-1 (File No. 33-94698).
(4) Incorporated by reference to the Quarterly Report of the registrant
on Form l0-Q for the quarter ended March 31, 1996.
(5) Incorporated by reference to the Registration Statement of the registrant
on Form S-1 (File No. 333-1090).
(6) Incorporated by reference to the Quarterly Report of the registrant
on Form 10-Q for the quarter ended June 30, 1996.
(7) Incorporated by reference to the Quarterly Report of the registrant on
Form 10-Q for the quarter ended September 30, 1996.
(8) Incorporated by reference to the Quarterly Report of the registrant on
Form 10-Q for the quarter ended March 31, 1997.
78
(9) Incorporated by reference to the Quarterly Report of the registrant on
Form l0-Q for the quarter ended September 30, 1997.
(10) Incorporated by reference to the Annual Report of the registrant on Form
10-K for the year ended December 31, 1996.
(11) Incorporated by reference to the Quarterly Report of the registrant on
Form 10-Q for the quarter ended June 30, 1997.
79
SIGNATURE
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.
April 13, 1998 By: /S/ FRED C. WOLF
-------------------------------
Fred C. Wolf
Title: VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Know All Men By These Presents, that each individual whose signature
appears below hereby constitutes and appoints William P. Wiemels and Peter B.
Mancino, and each of them individually, his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments to
this report together with all schedules and exhibits thereto, (ii) act on, sign
and file with the Securities and Exchange Commission any exhibits to this
report, (iii) act on, sign and file such certificates, instruments, agreements
and other documents as may be necessary or appropriate in connection therewith
and (iv) take any and all actions which may be necessary or appropriate in
connection therewith, granting unto such agents, proxies and attorneys-in-fact,
and each of them individually, full power and authority to do and perform each
and every act and thing necessary or appropriate to be done, as fully for all
intents and purposes as he might or could do in person, hereby approving,
ratifying and confirming all that such agents, proxies and attorneys-in-fact,
any of them or any of his or their substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
Chairman of the Board and Chief April 13, 1998
/s/ Robert D. Kennedy Executive Officer (Principal
Robert D. Kennedy Executive Officer)
Vice President and Chief Financial
Officer (Principal Financial and April 13, 1998
/s/ Fred C. Wolf Accounting Officer)
Fred C. Wolf
/s/ R. Eugene Cartledge Director April 13, 1998
R. Eugene Cartledge
/s/ John R. Hall
John R. Hall Director April 13, 1998
80
EXHIBIT INDEX
10.40(a) - Third Amendment to the UCAR Carbon Company Inc. Supplemental
Retirement Income Plan, effective as of January 1, 1995
10.42(a) - Third Amendment to such Benefits Protection Trust effective
as of January 1, 1997
10.45(b) - Third Amendment to such Directors' Stock Plan effective
September 8, 1997
10.45(c) - Fourth Amendment to such Directors' Stock Plan effective
April 8, 1997
10.48 - Form of Waiver dated as of April 10, 1998 among UCAR
International Inc., Global Enterprises, Inc., the other
Lenders referred to therein, the Fronting Banks referred to
therein and The Chase Manhattan Bank, as Administrative
Agent and Collateral Agent
21.1 - List of subsidiaries of UCAR International Inc.
23.1 - Consent of KPMG Peat Marwick LLP
24.1 - Powers of Attorney (included on signature pages)
27.1 - Financial Data Schedule for fiscal 1997 (for Commission use
only)
27.1 - Restated Financial Data Schedule for fiscal 1996 and 1995 (for
Commission use only)