As filed with the Securities and Exchange Commission on May 1, 2002
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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UCAR FINANCE INC. UCAR INTERNATIONAL INC.
(Exact Names of Registrants as Specified in Their Charters)
DELAWARE DELAWARE
(State or Other Jurisdiction (State or Other Jurisdiction
Incorporation or Organization) Incorporation or Organization)
3620 3620
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
62-1808846 06-1385548
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
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SEE TABLE OF ADDITIONAL REGISTRANTS BELOW
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BRANDYWINE WEST
1521 CONCORD PIKE
SUITE 301
WILMINGTON, DELAWARE 19803
(302) 778-8227
(Address, including Zip Code, and Telephone Number, including Area Code, of
Each Registrants' Principal Executive Offices)
KAREN G. NARWOLD
VICE PRESIDENT, GENERAL COUNSEL, HUMAN RESOURCES & SECRETARY
UCAR FINANCE INC.
BRANDYWINE WEST
1521 CONCORD PIKE
SUITE 301
WILMINGTON, DELAWARE 19803
(302) 778-8214
(Name and Address, including Zip Code and Telephone Number,
including Area Code, of Agent for Service)
WITH A COPY TO:
M. RIDGWAY BARKER, ESQ.
KELLEY DRYE & WARREN LLP
TWO STAMFORD PLAZA
281 TRESSER BOULEVARD
STAMFORD, CONNECTICUT 06901
(203) 324-1400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
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CALCULATION OF REGISTRATION FEE
=========================== ================== ======================== =========================== ===================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED OFFERING PRICE PER NOTE PRICE(1) REGISTRATION FEE
--------------------------- ------------------ ------------------------ --------------------------- -------------------
10 1/4% Senior Notes
due 2012 $400,000,000 100% $400,000,000 $36,800
--------------------------- ------------------ ------------------------ --------------------------- -------------------
Guarantees by UCAR
International Inc. and
certain of its subsidiaries
(2) -- -- -- --
--------------------------- ------------------ ------------------------ --------------------------- -------------------
TOTALS (3) $400,000,000 100% $400,000,000 $36,800
=========================== ================== ======================== =========================== ===================
(1) Estimated solely for purposes of calculating the amount of the registration
fee pursuant to Rule 457(f). Pursuant to Rule 457(n), no separate fee is payable
with respect to the guarantees.
(2) No separate consideration will be received
for the guarantees.
(3) Such amount represents the principal amount of the Notes to be exchanged
hereunder.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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ADDITIONAL REGISTRANTS
STATE OR OTHER ADDRESS, INCLUDING ZIP CODE AND
EXACT NAME OF REGISTRANT JURISDICTION OF PRIMARY STANDARD I.R.S. EMPLOYER TELEPHONE NUMBER, INCLUDING AREA CODE,
AS SPECIFIED IN ITS INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION OF EACH REGISTRANT'S PRINCIPAL
CHARTER ORGANIZATION CODE NUMBER NUMBER EXECUTIVE OFFICE
UCAR Carbon Company Inc. Delaware 3620 06-1249029 Brandywine West
1521 Concord Pike
Suite 301
Wilmington, Delaware 19803
(302) 778-8208
UCAR Carbon Technology Delaware 3620 06-1258220 Brandywine West
LLC 1521 Concord Pike
Suite 301
Wilmington, Delaware 19803
(302) 778-8208
UCAR Composites Inc. California 3620 33-0308920 5 Burroughs
Irvine, CA 92618
(949) 455-0665
UCAR Global Enterprises Delaware 3620 06-1415602 Brandywine West
Inc. 1521 Concord Pike
Suite 301
Wilmington, Delaware 19803
(302) 778-8208
UCAR Holdings III Inc. Delaware 3620 06-1415605 Brandywine West
1521 Concord Pike
Suite 301
Wilmington, Delaware 19803
(302) 778-8208
UCAR International Delaware 3620 06-1419027 Brandywine West
Trading Inc. 1521 Concord Pike
Suite 301
Wilmington, Delaware 19803
(302) 778-8208
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED MAY 1, 2002
PRELIMINARY PROSPECTUS
UCAR FINANCE INC.
OFFER TO EXCHANGE $400,000,000 OF ITS 10 1/4%
SENIOR NOTES DUE 2012 WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT
FOR $400,000,000 OF ITS OUTSTANDING 10 1/4%
SENIOR NOTES DUE 2012
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Terms of the exchange offer:
o The exchange offer will expire at 5:00 p.m., New York City
time, on , 2002 unless extended.
o The exchange offer is subject to certain customary conditions,
which we may waive.
o All outstanding Initial Notes that are validly tendered and not
withdrawn will be exchanged.
o UCAR International Inc. and its subsidiaries are also offering to
exchange their guarantees of UCAR Finance's obligations under the
outstanding Initial Notes for like guarantees of UCAR Finance's
obligations under the Exchange Notes, which guarantees have also
been registered under the Securities Act.
o Tenders of outstanding Initial Notes may be withdrawn at any time
prior to the expiration of the exchange offer.
o The terms of the Exchange Notes that we will issue in the exchange
offer are substantially identical to those of the outstanding
Initial Notes, except that certain transfer restrictions and
registration rights relating to the outstanding Initial Notes will
not apply to the Exchange Notes.
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BEFORE PARTICIPATING IN THIS EXCHANGE OFFER, PLEASE SEE "RISK FACTORS"
COMMENCING ON PAGE 20.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE EXCHANGE NOTES TO BE ISSUED IN THE
EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is , 2002
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TABLE OF CONTENTS
PAGE PAGE
---- ----
Preliminary Notes.......................... ii Management............................ 113
Prospectus Summary......................... 1 Description of Senior Facilities...... 116
Risk Factors............................... 20 Description of the Notes.............. 120
The Exchange Offer......................... 39 Certain U.S. Federal Income Tax
Use of Proceeds............................ 50 Considerations..................... 182
Capitalization............................. 51 Plan of Distribution.................. 188
Selected Consolidated Financial Data....... 52 Notice to Canadian Residents.......... 188
Management's Discussion and Analysis of Where You Can Find More Information... 190
Financial Condition and Results of Incorporation of Certain Documents By
Operations............................. 56 Reference.......................... 190
Business .................................. 84 Legal Matters......................... 190
Graphite Power Systems................. 84 Experts............................... 190
Advanced Energy Technology Division.... 98 Index to Financial Statements......... F-1
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THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT US FROM DOCUMENTS THAT ARE NOT INCLUDED IN OR DELIVERED WITH
THIS PROSPECTUS. YOU CAN OBTAIN THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS
PROSPECTUS WITHOUT CHARGE BY REQUESTING THEM IN WRITING OR BY TELEPHONE FROM US
AT THE FOLLOWING ADDRESS AND TELEPHONE NUMBER:
UCAR INTERNATIONAL INC.
BRANDYWINE WEST
1521 CONCORD PIKE, SUITE 301
WILMINGTON, DELAWARE 19803
TELEPHONE: (302) 778-8227
ATTENTION: ELISE A. GAROFALO
TO OBTAIN TIMELY DELIVERY OF ANY OF OUR FILINGS, AGREEMENTS OR
OTHER DOCUMENTS, YOU MUST MAKE YOUR REQUEST TO US NO LATER THAN FIVE BUSINESS
DAYS BEFORE THE EXPIRATION DATE OF THE EXCHANGE OFFER.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until , 2002, all dealers that effect
transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
PRELIMINARY NOTES
IMPORTANT TERMS
Except as otherwise set forth under "Description of the Notes," we use
the following terms to identify various companies or groups of companies or
other matters. These terms help to simplify the presentation of information in
this prospectus.
"UCAR" refers to UCAR International Inc. only. UCAR is our public
parent company. UCAR will be a guarantor of the Exchange Notes. We have
requested our stockholders to approve, at our Annual Meeting of Stockholders for
2002, a change in the name of UCAR to GrafTech International Ltd.
"UCAR GLOBAL" refers to UCAR Global Enterprises Inc. only. UCAR Global
is a direct, wholly owned subsidiary of UCAR and the direct or indirect holding
company for all of our operating subsidiaries. UCAR Global will be a guarantor
of the Exchange Notes.
"UCAR CARBON" refers to UCAR Carbon Company Inc. only. UCAR Carbon is
our wholly owned subsidiary through which we conduct most of our U.S.
operations. In connection with the corporate realignment of our subsidiaries,
UCAR Carbon will change its name to UCAR Technology Company Inc. and transfer
its businesses to one or more newly formed wholly owned U.S. subsidiaries. UCAR
Carbon will be a guarantor of the Exchange Notes.
"UCAR FINANCE" refers to UCAR Finance Inc. only. UCAR Finance is a
direct, wholly owned, special purpose finance subsidiary of UCAR and the
borrower under our senior secured bank credit facilities (as amended, the
"SENIOR FACILITIES"). UCAR Finance will be the issuer of the Exchange Notes.
"GRAFTECH" refers to Graftech Inc. only. Graftech is our 97.5% owned
(wholly owned, prior to June 2001) subsidiary engaged in the development,
manufacture and sale of natural graphite-based products. In connection with the
corporate realignment of our subsidiaries, Graftech will change its name to
Graftech Technology Company Inc. and transfer its businesses to a newly formed
100% owned U.S. subsidiary (to be named Graftech Inc.). These companies will
retain their names after UCAR International Inc. changes its name to GrafTech
International Ltd.
"CARBONE SAVOIE" refers to Carbone Savoie S.A.S. and its subsidiaries.
Carbone Savoie is a 70% owned subsidiary engaged in the development, manufacture
and sale of graphite and carbon cathodes.
"EXCHANGE NOTES" refers to the notes offered under this prospectus.
"INITIAL NOTES" refers to the $400 million of 10 1/4% Senior Notes due
2012 issued by UCAR Finance on February 15, 2002.
"NOTES" or "SENIOR NOTES" refers to the Initial Notes and the Exchange
Notes, collectively.
"SUBSIDIARIES" refers to those companies which, at the relevant time,
are or were majority owned or wholly owned directly or indirectly by UCAR or by
its predecessors to the extent that those predecessors' activities related to
the graphite and carbon business. All of UCAR's subsidiaries have been wholly
owned (with DE MINIMIS exceptions in the case of certain foreign subsidiaries)
from at least January 1, 1999 through December 31, 2001, except for:
ii
o our German subsidiary, which was acquired in early 1997 and 70%
owned until early 1999, when it became wholly owned to
facilitate its liquidation;
o Carbone Savoie, which has been and is 70% owned; and
o Graftech, which was 100% owned until it became 97.5% owned in
June 2001.
Our 100% owned Brazilian cathode manufacturing operations were contributed to
Carbone Savoie and, as a result, became 70% owned on March 31, 2001.
"WE," "US" or "OUR" refers collectively to UCAR and its subsidiaries
or, if the context so requires, UCAR, UCAR Global or UCAR Finance, individually.
We use other terms in this prospectus that are defined under
"Description of the Notes." Among other references, UCAR is called therein "UCAR
International" and "UCAR Finance" is called therein the "Company."
PRESENTATION OF FINANCIAL, MARKET AND LEGAL DATA
References to cost in the context of our low-cost supplier strategy do
not include the impact of special, non-recurring or unusual charges or credits,
such as those related to investigations, lawsuits or claims, restructurings,
impairment losses, inventory write-downs or expenses incurred in connection with
lawsuits initiated by us, or the impact of accounting changes.
All historical cost savings and reductions are estimates based on a
comparison, with respect to provision for income taxes, to costs in 1998 or, for
all other costs, to costs in the 1998 fourth quarter (annualized). All cost
savings and reductions targeted or estimated under our new major cost savings
plan announced on January 9, 2002 are based on a comparison to costs in 2001.
Unless otherwise specifically noted, market and market share data in
this prospectus are our own estimates. Market data relating to the steel
industry, our general expectations concerning such industry and our market
position and market share within such industry, both domestically and
internationally, are derived from publications by the International Iron and
Steel Institute and other industry sources as well as assumptions made by us,
based on such data and our knowledge of the industry, which we believe to be
reasonable. Market data relating to the fuel cell power generation industry, our
general expectations concerning such industry and our market position and market
share within such industry, both domestically and internationally, are derived
from publications by securities analysts relating to Ballard Power Systems Inc.,
other industry sources and public filings, press releases and other public
documents of Ballard Power Systems as well as assumptions made by us, based on
such data and our knowledge of the industry, which we believe to be reasonable.
Market and market share data relating to the graphite and carbon industry as
well as cost information relating to our competitors, our general expectations
concerning such industry and our market position and market share within such
industry, both domestically and internationally, are derived from the sources
described above and public filings, press releases and other public documents of
our competitors as well as assumptions made by us, based on such data and our
knowledge of the industry. Although we are not aware of any misstatements
regarding any industry or market share data, our estimates involve risks and
uncertainties and are subject to change based on various factors, including
those discussed under "Risk Factors." We cannot guarantee the accuracy or
completeness of this data and have not independently verified it. We have not
sought the consent of any of the sources mentioned above to the disclosure or
use of data in this prospectus.
iii
Unless otherwise noted, when we refer to dollars, we mean U.S. dollars.
Unless otherwise noted, references to "MARKET SHARES" are based on unit
volumes in 2001. As used herein, references to "MAJOR PRODUCT LINES" mean
graphite and carbon electrodes and cathodes and flexible graphite.
Neither any statement in this prospectus nor any charge taken by us
relating to any legal proceedings constitutes an admission as to any wrongdoing
or liability.
The GRAFTECH logo, GRAFCELL(R), eGraf(TM), GRAFOIL(R), GRAFGUARD(R) and
GRAFSHIELD(R) are our trademarks and trade names. This prospEctus also contains
trademarks and trade names belonging to other parties.
iv
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE MAKING A DECISION TO PARTICIPATE IN THE EXCHANGE OFFER. YOU SHOULD READ
CAREFULLY THIS ENTIRE PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE IN
THIS PROSPECTUS, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
UCAR INTERNATIONAL INC.
We are one of the world's largest manufacturers and providers of high
quality natural and synthetic graphite- and carbon-based products and services,
offering energy solutions to industry-leading customers worldwide. We
manufacture graphite and carbon electrodes and cathodes, used primarily in
electric arc furnace steel production and aluminum smelting. We also manufacture
other natural and synthetic graphite and carbon products used in, and provide
services to, the fuel cell power generation, electronics, semiconductor and
transportation markets. We believe that we have the leading market share in all
of our major product lines. We have over 100 years of experience in the research
and development of graphite and carbon technology, and currently hold numerous
patents related to this technology.
We are a global business, selling our products and engineering and
technical services in more than 70 countries. We have 13 manufacturing
facilities strategically located in Brazil, Mexico, South Africa, France, Spain,
Russia and the U.S., and a planned joint venture manufacturing facility located
in China, which, subject to receipt of required Chinese governmental approvals
and satisfaction of other conditions, is expected to commence operations in
2003. Our customers include industry leaders such as Nucor Corporation and
Arcelor in steel, Alcoa Inc. and Pechiney in aluminum, Ballard Power Systems in
fuel cells, Intel Corporation in electronics, MEMC Electronic Materials, Inc. in
semiconductors and The Boeing Company in transportation. In 2001, our net sales
were $654 million and our as adjusted EBITDA was $130 million.
In June 1998, we began to implement management changes, which resulted
in a new senior management team. Since then, this management team has:
LOWERED COSTS. We have delivered total recurring annualized run rate
cost savings of $132 million by the end of 2001 under a global restructuring and
rationalization plan originally announced in September 1998 and completed at the
end of 2001. Cost saving achievements include a 15% reduction in our average
graphite electrode production cost per metric ton since the 1998 fourth quarter
and a 20% reduction in overhead since 1998. Cost of sales and overhead savings
represent about 70% of the $132 million, with the balance being interest
savings. In January 2002, we announced a new major cost savings plan that
targets more than $80 million of further total recurring annual cost savings by
2004 (for a three-year cumulative total of $200 million in cost savings under
the 2002 plan).
REDUCED DEBT. From the end of 1998 through 2001, we reduced total debt
and other long term obligations by over $200 million, $91 million of which
represents the net proceeds from our public offering of common stock in July
2001.
REALIGNED OUR BUSINESSES TO MAXIMIZE VALUE. In 2001, we realigned our
businesses into two new operating divisions, our Graphite Power Systems Division
and our Advanced Energy Technology Division. We believe that the realignment
will allow each division to develop and implement strategies uniquely designed
to maximize the value of its businesses, enter into strategic alliances and
identify and implement manufacturing and sales rationalization and cost savings
initiatives. We also believe that the realignment will allow us to identify
opportunities to improve efficiencies in intellectual property
1
management, global cash management and other corporate services. To reflect our
new emphasis on graphite and carbon technology, our new competitive strategy and
our new corporate vision, we are requesting our stockholders to approve a change
in the name of UCAR to GrafTech International Ltd.
OUR DIVISIONS
GRAPHITE POWER SYSTEMS DIVISION
Our Graphite Power Systems Division manufactures and delivers high
quality graphite and carbon electrodes and cathodes and related services that
are key components of the conductive power systems used to produce steel,
aluminum and other non-ferrous metals. Graphite electrodes are consumed in the
production of steel in electric arc furnaces, the steel making technology used
by all "mini-mills." Graphite electrodes are also consumed in refining steel in
ladle furnaces and in other smelting processes. Carbon electrodes are used in
the production of silicon metal, a raw material primarily used in the
manufacture of aluminum. Graphite and carbon cathodes are used in aluminum
smelting.
During 2001, net sales of this division, which represented 80% of our
total net sales, were $525 million, with gross profit of $147 million. Despite
difficult economic conditions during 2001, this division maintained a gross
profit margin of about 28%.
Because of its strong competitive position, we believe that this
division is well positioned to benefit from the expected cyclical recovery in
the production of steel and other metals.
LOW COST SUPPLIER. We believe that our graphite electrode production
cost structure is and will continue to be the lowest of all major producers. We
believe that our network of state-of-the-art manufacturing facilities in diverse
geographic regions, including Brazil, Mexico, South Africa, France, Spain and
Russia, coupled with our planned joint venture manufacturing facility located in
China, provides us with significant operational flexibility and an important
cost advantage. We have aggressively reduced our graphite electrode production
costs by closing higher cost facilities and redeploying much of that capacity to
our larger, lower cost, strategically located facilities. Completed actions
include the shutdown of graphite electrode manufacturing capacity in Canada,
Germany and the U.S., coupled with incremental expansion of graphite electrode
manufacturing capacity in Mexico, South Africa and Spain.
LEADING MARKET SHARE. We are one of only two global producers of
graphite and carbon electrodes and cathodes. We believe that this division has
the leading market share in all of its major product lines.
SIGNIFICANT BARRIERS TO ENTRY. We believe that the barriers to entrants
in the graphite and carbon electrode industries are high. There have been no
significant entrants since 1950. We estimate that our average capital investment
to incrementally increase our annual graphite electrode manufacturing capacity
would be less than 10% of the initial investment for "greenfield" capacity. We
also believe that production of these materials requires a significant amount of
expertise and know-how, which we believe is difficult for entrants to replicate
in order to compete effectively.
GRAPHITE ELECTRODES ARE USED IN THE HIGHER LONG TERM GROWTH SECTOR OF
THE STEEL INDUSTRY. Graphite electrodes accounted for about 79% of this
division's net sales during 2001. Graphite electrodes are consumed in the
production of steel in "mini-mills." "Mini-mills" constitute the higher long
term growth sector of the steel industry. Worldwide electric arc furnace steel
production grew from about 14% of total steel production in 1970 to about 33% of
total steel production in 2001. The following table illustrates the growth in
electric arc furnace steel production over the past 31 years:
2
Worldwide Steel Production
(MILLIONS OF METRIC TONS)
[Insert the Worldwide Steel Production chart here]
Sources: International Iron and Steel Institute and UCAR estimates
To maintain our strong competitive position, we have instituted a
number of strategic initiatives to improve the cost structure, increase the
revenues and maximize the cash flow generated by this division. These strategic
initiatives include:
PURSUING COST SAVINGS. We are focused on continuous cost improvement.
We believe that key actions identified under our new major cost savings plan
will enable us to reduce our average graphite electrode production cost by an
additional 15% by 2004 as compared to 2001. These actions include:
o the mothballing of our graphite electrode manufacturing capacity
in Caserta, Italy, completed during the 2002 first quarter, ahead
of schedule, combined with the redeployment of much of that
capacity to our larger, lower cost graphite electrode
manufacturing facilities in Mexico, France and Spain; and
o the delivery of the balance of the full benefits from the
completed closure of our U.S. graphite electrode manufacturing
operations.
LEVERAGING OUR GLOBAL PRESENCE WITH INDUSTRY LEADING CUSTOMERS.
Capitalizing on our global leadership position and the continuing consolidation
within the steel and other metals industries, we are prioritizing our sales and
marketing efforts toward the world's larger global steel and other metals
producers. These efforts focus on offering consistently high quality electrodes
and technical services on a global basis at competitive prices.
We believe that, as a result of these efforts and our diverse
geographic locations, we are the producer of graphite electrodes best positioned
to serve the global graphite electrode purchasing requirements of these steel
producers. We believe that we have increased our market share of graphite
electrodes sold to the ten largest electric arc furnace steel producers by about
4 percentage points in 2001 as compared to 2000. In 2001, six of our top ten
graphite electrode customers were among the ten largest producers of graphite
electrodes worldwide. To further strengthen our competitive advantage and expand
our global
3
manufacturing presence, we have entered into and begun performance under an
agreement with Jilin Carbon Joint Stock Company, Ltd. (together with its
affiliates, "JILIN") to form a joint venture, which, subject to receipt of
required Chinese governmental approval and satisfaction of other conditions, is
expected to produce and sell high quality graphite electrodes in China.
We have a strategic alliance with Pechiney in the cathode business,
which has allied us with the recognized world leader in aluminum smelting
technology and which we believe positions us as the quality leader in the low
cost production of high quality graphite cathodes. We believe that our graphite
cathode technology will enable us to incrementally increase our market share of
graphite cathodes sold upon the commencement of operation of the new, more
efficient aluminum smelting furnaces that are being built, even as older
furnaces are being shut down. Our cathode capacity is completely sold out for
the 2002 first half and we have booked over 80% of our cathode capacity for
the 2002 second half.
DELIVERING EXCEPTIONAL AND CONSISTENT QUALITY AND SERVICE. We believe
that our products are among the highest quality available. We continue to work
diligently to improve the quality and uniformity of our products on a worldwide
basis, providing significant production efficiencies for our customers and the
flexibility to source most orders from the facility that optimizes our
profitability. We have a strong commitment to provide a high level of technical
service to our customers, with more technical service engineers located in more
countries than any of our competitors. We believe that we have the most
extensive technical and customer service organization in our industry, which we
use strategically to service key customers to our competitive advantage.
ADVANCED ENERGY TECHNOLOGY DIVISION
Our Advanced Energy Technology Division develops, manufactures and
sells high quality, highly engineered natural and synthetic graphite- and
carbon-based energy technologies, products and services for both established and
high-growth-potential markets. We currently sell these products primarily to the
transportation, chemical, petrochemical, fuel cell power generation and
electronic thermal management markets. In addition, we provide cost effective
technical services for a broad range of markets and license our proprietary
technology in markets where we do not anticipate engaging in manufacturing
ourselves. During 2001, net sales of this division were $129 million, with gross
profit of $38 million and gross profit margin of 29.6%.
We are the world's leading manufacturer of natural graphite-based
products, including flexible graphite. Flexible graphite is an excellent gasket
and sealing material that to date has been used primarily in high temperature
and corrosive environments in the automotive, chemical and petrochemical
markets. Advanced flexible graphite can be used in the production of materials,
components and products for proton exchange membrane fuel cells and fuel cell
systems, electronic thermal management applications, industrial thermal
management applications and battery and supercapacitor power storage
applications. Our synthetic graphite- and carbon-based products range from
established products, such as graphite and carbon refractories, graphite molds
and rocket nozzles and cones, to new carbon composites used in the fuel cell
power generation and electronic thermal management markets.
We believe that the strengths of this division include:
o developing intellectual property;
o developing and commercializing prototype and next generation
products and services; and
4
o establishing strategic alliances with leading customers and suppliers
as well as key technology focused companies.
We are leveraging our strengths to build the value of this division
through the development and commercialization of proprietary technologies into
high-growth-potential markets. We believe that our two largest growth
opportunities are in the fuel cell power generation and electronic thermal
management markets.
Since December 2000, this division has entered into strategic alliances
with Ballard Power Systems, the world's leader in fuel cell development, and two
leading chip makers in electronic thermal management. This division has also
entered into a strategic alliance with Conoco Inc. for carbon fiber technology
and manufacturing services.
RECENT DEVELOPMENTS
NEW MAJOR COST SAVINGS PLAN. In January 2002, we announced a new major
cost savings plan designed to generate cost savings to strengthen our balance
sheet. The key elements of the 2002 plan include:
o the rationalization of graphite electrode manufacturing capacity
at our higher cost facilities and the incremental expansion of
capacity at our lower cost facilities;
o the redesign and implementation of changes in our U.S. benefit
plans for active and retired employees, which has been completed;
o the implementation of work process changes, including
consolidating and streamlining order fulfillment, purchasing,
finance and accounting, and human resource processes, along with
the identification and implementation of outsourcing
opportunities;
o additional plant and corporate overhead cost reductions; and
o the corporate realignment of our subsidiaries, consistent with the
operational realignment of our divisions, to generate significant
tax savings.
We estimate that the 2002 plan will generate cumulative cost savings of
about $45 million by the end of 2002, $120 million by the end of 2003 and $200
million by the end of 2004, and recurring annual cost savings of $80 million by
the end of 2004. We expect that cost of sales and overhead savings will account
for about 75% of the $80 million, with the balance being interest and tax
savings. These savings are additive to those which we achieved by the end of
2001 under the global restructuring and rationalization plan that we originally
announced in September 1998 and that is now completed. We delivered total
recurring annualized run rate cost savings of $132 million by the end of 2001
under the 1998 plan. We estimate that the aggregate cash cost to implement the
cost savings initiatives of the 2002 plan will be about $20 million. We estimate
that the capacity expansion will cost an additional $15 million.
ANNOUNCED ASSET SALES. We intend to sell real estate, non-strategic
businesses and certain other non-strategic assets over the next two years. We
estimate that the pre-tax, cash proceeds from these sales will total $75 million
by the end of 2003. The non-strategic businesses contributed net sales of about
$25 million in 2001.
ISSUANCE OF INITIAL NOTES. On February 15, 2002, UCAR Finance issued
$400 million of the Initial Notes. We used $314 million of the net proceeds to
repay term loans under the Senior Facilities
5
and the balance of the net proceeds to reduce the outstanding balance under our
revolving credit facility. After such repayment, the aggregate principal
payments due on the term loans are: no payments in 2002, 2003 or 2004, $26
million in 2005, $26 million in 2006 and $164 million in 2007.
RECENT BANK AMENDMENT AND OTHER MATTERS. In connection with the issuance of
the Initial Notes, the Senior Facilities were amended to, among other things,
permit us to issue the Initial Notes (in an amount not to exceed $400 million)
and use the net proceeds as described under "Issuance of Initial Notes."
In connection with this amendment, our maximum permitted leverage ratio
substantially increased, our minimum required interest coverage ratio
substantially decreased and the manner in which those ratios are calculated was
changed to provide us more flexibility (with full availability of our revolving
credit facility) with respect to, among other things, the lawsuit initiated by
us against our former parents and the provision of security for antitrust fines.
In January 2002, we finalized discussions with the U.S. Department of
Justice to restructure the payment schedule for the remaining $60 million due on
our 1998 antitrust fine. Previously, we were scheduled to make payments of $18
million in the 2002 second quarter and $21 million in both the 2003 and 2004
second quarters. The revised payment schedule requires a $2.5 million payment in
2002 (which has been timely made), a $5.0 million payment in 2003 and, beginning
with the 2004 second quarter, quarterly payments ranging from $3.25 million to
$5.375 million through the 2007 first quarter. Interest will begin to accrue on
the unpaid balance, commencing with the 2004 second quarter, at the statutory
rate of interest then in effect. In January 2002, the statutory rate of interest
was 2.13% per annum.
CONSENT SOLICITATION. On April 23, 2002, we announced that we are
seeking consent from holders of the Initial Notes to waive a provision under the
Indenture in order to permit the issuance of up to $150 million of additional
Notes without the requirement to make additional intercompany loans to our
foreign subsidiaries. We intend to use the net proceeds from the issuance of the
additional Notes to repay debt outstanding under the Senior Facilities.
6
ORGANIZATIONAL CHART
The following chart summarizes our corporate organizational structure
following completion of the corporate realignment of our subsidiaries (but
without giving effect to any change in the names of our subsidiaries). We
completed the realignment of our management and operations in 2001, and expect
to substantially complete the realignment of our corporate organizational
structure in the 2002 first half.
[Insert the corporate organizational chart of
UCAR International Inc. and its subsidiaries here]
UCAR Finance does not have any material assets other than: the
unsecured intercompany term note obligations that are pledged to secure the
Initial Notes; a secured intercompany revolving note issued by our Swiss
subsidiary and secured guarantees of that note by our other principal foreign
subsidiaries, as well as a secured intercompany revolving note issued by UCAR
Carbon, both of which are pledged to secure the Senior Facilities; other
intercompany notes (called "CASH FLOW NOTES") payable to it created to
facilitate the flow of funds among our subsidiaries (some or all of which will
be effectively contributed to our Swiss subsidiary in connection with the
corporate realignment of our subsidiaries); and assets associated with our
treasury, cash management, cash pooling and hedging activities that are
conducted through UCAR Finance.
----------------
UCAR, UCAR Global, UCAR Carbon, UCAR Carbon Technology LLC, UCAR
Holdings III Inc., UCAR International Trading Inc., Graftech and UCAR Finance
are Delaware corporations and UCAR Composites Inc. is a California corporation.
Our principal executive offices are located at Brandywine West, 1521 Concord
Pike, Suite 301, Wilmington, Delaware 19803, and our telephone number at that
location is (302) 778-8227. We maintain a web site at http://www.ucar.com, our
7
subsidiary, Graftech, maintains a web site at http://www.graftech.com and our
High Tech High Temp ("HT2") business unit maintains a web site at http:
//www.HT2.com. The information contained on these web sites is not part of this
prospectus.
We intend to change the name of UCAR International Inc. to GrafTech
International Ltd.
8
SUMMARY OF THE EXCHANGE OFFER
The Exchange Offer........................................ We are offering to exchange $400,000,000 aggregate
principal amount of Exchange Notes for a like aggregate
principal amount of our Initial Notes. In order to be
exchanged, the Initial Notes must be properly tendered
and accepted. All outstanding Initial Notes that are
validly tendered and not validly withdrawn will be
exchanged.
Resales of Exchange Notes................................. Based on certain no-action letters issued by the staff
of the SEC, we believe that the Exchange Notes may be
offered for resale, resold and otherwise transferred
by you without compliance with the registration and
prospectus delivery provisions of the Securities Act,
provided that:
o you are acquiring the Exchange Notes in the
ordinary course of your business;
o you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate, in
the distribution of the Exchange Notes; and
o you are not an affiliate of the Company,
within the meaning of Rule 405 under
the Securities Act of 1933.
If any of these conditions is not true and you
transfer any Exchange Note without delivering
a prospectus meeting the requirements of the
Securities Act or without an exemption from such
requirements, you may incur liability under the
Securities Act. We do not and will not assume, or
indemnify you against, such liability.
Each broker-dealer that receives Exchange Notes for
its own account may be deemed an "underwriter"
within the meaning of the Securities Act and must
acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act
in connection with any resale of such Exchange Notes. A
broker-dealer may use this prospectus for any offer to
resell, resale and other transfer of Exchange Notes
received in exchange for Initial Notes which
were acquired by such broker-dealer as a result of
market-making activities or other trading activities.
The Letter of Transmittal that accompanies this
prospectus states that, by so acknowledging and
by delivering a
9
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning
of the Securities Act.
Registration Rights....................................... The terms of the Registration Rights Agreement which we
entered into with the initial purchasers for the
Initial Notes grants you certain exchange and
registration rights with respect to your Initial
Notes. This exchange offer is intended to satisfy all
of those rights, and those rights will terminate when
the exchange offer is completed. If you do not
exchange your Initial Notes for Exchange Notes, you
will no longer be able to obligate us to register your
Initial Notes under the Securities Act except in the
limited circumstances provided under the Registration
Rights Agreement. In addition, you will not be able to
resell, offer to resell or otherwise transfer your
Initial Notes unless they are registered under the
Securities Act or unless you resell, offer to resell or
otherwise transfer them under an exemption from the
registration requirements of, or in a transaction not
subject to, the Securities Act. See "Risk Factors --
Risks Relating to the Exchange Offer -- A Failure to
Participate in the Exchange Offer May Have Adverse
Consequences."
Expiration Date........................................... The exchange offer will expire at 5:00 p.m., New York
City time, on , 2002 unless we decide to
extend it.
Conditions to the
Exchange Offer............................................ The exchange offer is not subject to any condition
other than certain customary conditions, including
that:
o there is no change in laws and regulations
which would impair our ability to proceed with
the exchange offer;
o there is no change in the current
interpretation of the staff of the SEC which
permits resales of the Exchange Notes;
o there is no stop order issued by the staff
of the SEC which suspends the effectiveness
of the registration statement of which this
prospectus is a part;
o there is no litigation which impairs our
10
ability to proceed with the exchange offer;
o we obtain all the governmental approvals we
deem necessary for the exchange offer; and
o there is no change, or development involving
a prospective change, in our business or
financial affairs which might materially
impair our ability to proceed with the
exchange offer.
See "The Exchange Offer--Conditions of the Exchange
Offer."
Procedures for
Tendering Initial Notes................................... If you wish to participate in the exchange offer, you
must complete, sign and date the Letter of Transmittal,
or a facsimile of the Letter of Transmittal, and mail
or otherwise deliver it together with your Initial
Notes and any other documents required by the Letter of
Transmittal to State Street Bank and Trust Company, as
Exchange Agent, at the address indicated on the Letter
of Transmittal. In the alternative, you may tender
your Initial Notes by following the procedures for
book-entry transfer described in this prospectus. See
"The Exchange Offer--Procedures for Tendering."
Special Procedures for
Beneficial Owners......................................... If your Initial Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other
nominee, we urge you to contact that person promptly if
you wish to tender your Initial Notes in the exchange
offer. See "The Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery
Procedures................................................ If you wish to tender your Initial Notes and you cannot
get your required documents to the Exchange
Agent prior to the Expiration Date, you may
tender your Initial Notes according to the
guaranteed delivery procedures described
under "The Exchange Offer--Guaranteed
Delivery Procedures."
Withdrawal Rights......................................... You may withdraw the tender of your Initial Notes at
any time prior to 5:00 p.m. New York City time on the
Expiration Date. To withdraw, you must send a written
or facsimile transmission notice of
11
withdrawal to the Exchange Agent at its address set forth
under "The Exchange Offer--Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date.
Certain U.S. Federal
Income Tax
Consequences.............................................. The exchange of the Initial Notes for Exchange Notes
will not be a taxable exchange for U.S. federal income
tax purposes. See "Certain U.S. Federal Income Tax
Considerations."
Use of Proceeds........................................... We will not receive any proceeds from the issuance of
the Exchange Notes. The exchange offer is intended
solely to satisfy certain of our obligations under the
Registration Rights Agreement.
Exchange Agent............................................ State Street Bank and Trust Company is serving as the
Exchange Agent in connection with the exchange offer.
SUMMARY OF THE TERMS OF THE EXCHANGE NOTES
Issuer.................................................... UCAR Finance Inc.
Notes Offered............................................. $400,000,000 aggregate principal amount of 10 1/4%
Senior Notes due 2012. The form and terms of the
Exchange Notes are the same as the form and terms of
the Initial Notes, except that the Exchange Notes will
be registered under the Securities Act and, therefore,
will not bear legends restricting their transfer and
will not be entitled to registration rights under the
Registration Rights Agreement. The Exchange Notes will
evidence the same debt as the Initial Notes and both
the Initial Notes and the Exchange Notes are governed
by the same Indenture.
Maturity Date............................................. February 15, 2012.
Interest and Interest Payment Dates....................... The Exchange Notes will accrue interest at a rate of
10 1/4% per annum, payable semi-annually on each February 15
and August 15 of each year, beginning on August 15, 2002.
Guarantees................................................ The Exchange Notes are guaranteed on a senior unsecured
basis by UCAR, UCAR Global and UCAR Carbon and other
U.S. subsidiaries holding a substantial majority of our
U.S. assets, except that the guarantee by UCAR Carbon
is secured by a
12
limited junior pledge of our shares of
Graftech.
Intercompany Notes and Intercompany Note Guarantees....... Certain unsecured intercompany term notes and
guarantees of those unsecured intercompany term
notes (together, the unsecured intercompany term
note obligations) issued to UCAR Finance by certain
of our foreign subsidiaries are pledged by UCAR
Finance to the Trustee for the benefit of the
holders of the Notes, subject to the limitation that
at no time will the combined value of the pledged portion
of any foreign subsidiary's unsecured intercompany term
note and unsecured intercompany term note guarantee
exceed 19.99% of the principal amount of the then
outstanding Notes.
Security for the UCAR Carbon Guarantee.................... The guarantee by UCAR Carbon is secured by a pledge of
our shares of Graftech, but at no time will the value
of the pledged portion of such shares exceed 19.99% of
the principal amount of the then outstanding Exchange
Notes. The pledge of the shares of Graftech is junior
to the pledge of such shares to secure the Senior
Facilities.
Ranking................................................... The Exchange Notes rank senior to present and future
subordinated debt and equally with present and future
senior debt and obligations of UCAR Finance. The
Exchange Notes are effectively subordinated to present
and future secured debt and obligations of UCAR
Finance, to the extent of the value of the assets
securing such debt and obligations, and be structurally
subordinated to debt and obligations, including trade
payables, of subsidiaries that are neither guarantors
nor unsecured intercompany term note obligors.
Ranking of the Intercompany Note Obligations.............. The unsecured intercompany term note obligations rank
senior to present and future subordinated guarantees,
debt and obligations of the respective obligors, and
equally with present and future senior guarantees, debt
and obligations of the respective obligors. The
unsecured intercompany term note obligations are
effectively subordinated to present and future secured
guarantees, debt and obligations of the respective
obligors, to the extent of the value of the assets
securing such guarantees, debt and obligations, and are
structurally subordinated to guarantees, debt and
obligations, including trade payables, of subsidiaries
of the respective obligors that are not also unsecured
intercompany term note
13
obligors.
Optional Redemption....................................... We may redeem some or all of the Initial Notes at any
time after February 15, 2007, at the redemption prices
listed under "Description of Notes-- Optional
Redemption." In addition, prior to February 15, 2005,
we can redeem up to 35% of the original aggregate
principal amount of the Exchange Notes (including the
original principal amount of any Additional Notes) with
net proceeds from public equity offerings.
Change of Control Offer......................... We must offer to repurchase the Exchange Notes at 101%
of principal amount, plus accrued and unpaid interest,
if any, if we are the subject of specified kinds of
changes of control.
Certain Covenants............................... The Indenture contains covenants that limit our ability
to:
o incur or guarantee additional debt;
o pay dividends or make distributions on, or redeem
or repurchase, our capital stock or junior debt;
o make other restricted payments, including
investments;
o create liens;
o sell or otherwise dispose of assets, including
capital stock of subsidiaries;
o enter into arrangements that restrict dividends
from subsidiaries;
o enter into mergers or consolidations;
o enter into transactions with affiliates;
o enter into sale/leaseback transactions; and
o prepay or amend the terms of the unsecured
intercompany term note obligations.
These covenants are subject to important exceptions and
qualifications, which are described in "Description of
the Notes" under "--Certain Covenants" and "--Intercompany
Notes and Intercompany Note Guaranties." See
"Risk Factors-Risks Relating to Us."
14
Transfer Restrictions........................... There has previously been only a limited secondary
market, and no public market, for the Initial Notes.
The Initial Notes are eligible for trading in the
Private Offerings, Resales and Trading Through
Automated Linkages (PORTAL) market. There is no
established trading market for the Exchange Notes. We
do not currently intend to apply for listing of the
Exchange Notes on any national securities exchange or
for quotation through any automated quotation system.
Accordingly, there can be no assurance as to the
development of any market for, or the liquidity of any
market that may develop for, the Exchange Notes. See
"Risk Factors-- There Will Be No Public Market for the
Exchange Notes" and "Transfer Restrictions."
15
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data at and for
the years ended December 31, 1997, 1998, 1999, 2000 and 2001 have been derived
from our audited annual Consolidated Financial Statements, except for the data
under "Other Operating Data." The following summary "as adjusted" consolidated
financial data at and for the twelve month period ended December 31, 2001 have
been derived, except for the items under "Other Operating Data," from our
Consolidated Financial Statements, adjusted to give effect to both the offering
of the Initial Notes and our equity offering completed in July 2001 as well as
the application of the net proceeds from both offerings, as if both offerings
had occurred on January 1, 2001 for "Statement of Operations Data" or on
December 31, 2001 for "Balance Sheet Data." The data are presented for
informational purposes only and do not purport to be indicative of the results
that would have actually been obtained if these offerings had been completed on
the dates indicated or that may be expected to occur in the future.
You should read these data in conjunction with the "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto included elsewhere in this prospectus.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- ----
(AS ADJUSTED)
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $1,097 $947 $831 $776 $654 $654
Gross profit(a)............................ 411 343 258 216 185 185
Selling, administrative and other expenses. 115 103 86 86 78 78
Restructuring charges
(credit)(b).............................. - 86 (6) 6 12 12
Impairment loss on long-lived assets(c).... - 60 35 3 80 80
Antitrust investigations and related
lawsuits and claims(d)................... 340 - - - 10 10
Securities class action and stockholder
derivative lawsuits(e)................... - - 13 (1) - -
Corporate realignment and related
expenses(f).............................. - - - - 2 2
Operating profit
(loss)(a)(b)(c)(d)(e).................... (58) 77 130 111 (10) (10)
Interest expense........................... 64 73 84 75 60 69
Provision for (benefit from) income taxes.. 39 32 1 10 15 12
Income (loss) before extraordinary
item(a)(b)(c)(d)(e)...................... (160) (30) 42 23 (87) (93)
Extraordinary item, net of tax(g).......... - 7 - 13 - -
Net income
(loss)(a)(b)(c)(d)(e)(g)................. (160) (37) 42 10 (87) (93)
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges (h)..... - - 1.54x 1.30x - -
Cash flow provided by (used in) operating
activities............................... 172 (29) 80 94 17 17
Cash flow provided by (used in) investing
activities............................... (221) (31) (39) (50) (39) (39)
Cash flow provided by (used in) financing
activities............................... 13 62 (80) (13) 15 15
Gross profit margin(a)..................... 37.5% 36.2% 31.0% 27.8% 28.3% 28.3%
Operating profit (loss) margins............ (5.3) 8.1 15.6 14.3 (1.5) (1.5)
Depreciation and amortization.............. $49 $51 $45 $43 $36 $36
Capital expenditures....................... 79 52 56 52 40 40
OTHER OPERATING DATA:
Adjusted EBITDA(i)......................... 331 274 225 164 130 130
16
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- ----
(AS ADJUSTED)
(DOLLARS IN MILLIONS)
Total debt to Adjusted EBITDA.............. 2.21x 2.93x 3.21x 4.48x 4.91x 5.01x
Adjusted EBITDA to interest expense........ 5.17x 3.75x 2.68x 2.19x 2.17x 1.88x
Average sales revenue per metric ton of
graphite electrodes...................... 3,123 3,013 2,676 2,379 2,341 2,341
Average cost of sales per metric ton of
graphite electrodes...................... 1,953 1,918 1,783 1,723 1,691 1,691
Quantity of graphite electrodes sold
(thousands of metric tons)(j)(k)......... 242 211 206 217 174 174
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.................. $58 $58 $17 $47 $38 $38
Working capital............................ 94 203 105 101 112 112
Total assets............................... 1,262 1,137 933 908 797 810
Total debt................................. 732 804 722 735 638 651
Balance of reserve for antitrust
investigations, lawsuits and claims...... 337 195 131 107 101 101
Other long term obligations (excluding the
reserve for antitrust investigations,
lawsuits and claims)(l).................. 150 149 120 126 132 132
Stockholders' equity (deficit)............. (227) (287) (293) (316) (332) (332)
-----------
(a) For 1999, includes an $8 million charge for the write-down to lower of
cost or market of certain advanced graphite materials inventory.
(b) For 1998, represents costs recorded in connection with closing graphite
electrode operations in Canada and Germany and consolidation of certain
corporate administrative offices. These costs consisted primarily of
severance, write-offs of fixed assets and environmental and other
shutdown costs. For 1999, represents a net reduction in the estimate of
shutdown costs recorded in 1998. For 2000, represents a $2 million
charge in connection with restructuring of our advanced graphite
materials business and a $4 million charge in connection with a
corporate restructuring involving workforce reduction. These costs
consisted primarily of severance. For 2001, represents a $7 million
charge for restructuring costs in connection with closure of graphite
electrode manufacturing operations in Tennessee and coal calcining
operations in New York and relocation of corporate headquarters, which
consisted primarily of severance, and a $5 million charge in connection
with mothballing of our graphite electrode operations in Italy.
(c) Represents impairment losses on long-lived assets associated with our
Russian assets in 1998, our advanced graphite materials assets in 1999
and our cathode assets in 2000. For 2001, represents a $51 million
charge related to our graphite electrode assets in Tennessee, a $1
million charge related to our coal calcining assets in New York, a $1
million charge related to our advanced graphite materials assets, a $24
million charge related to our graphite electrode assets in Italy and a
$3 million charge related to impairment losses on securities.
(d) Represents estimated potential liabilities and expenses in connection
with antitrust investigations and related lawsuits and claims.
(e) Represents estimated liabilities and expenses in connection with
securities class action and stockholder derivative lawsuits, $1 million
of which was reversed in 2000.
17
(f) Represents costs in connection with the corporate realignment of our
subsidiaries.
(g) The 1998 extraordinary item and the 2000 extraordinary item resulted
from early extinguishment of debt in connection with our debt
refinancings and recapitalizations.
(h) The ratio of earnings to fixed charges has been computed by dividing
(i) earnings before income taxes, plus fixed charges (excluding
capitalized interest) and amortization of capitalized interest by (ii)
fixed charges, which consist of interest charges (including capitalized
interest) plus the portion of rental expense that includes an interest
factor. In 1997, earnings were insufficient to cover fixed charges by
$122 million due to, among other things, the $340 million charge
recorded in connection with estimated potential liabilities and
expenses in connection with antitrust investigations and related
lawsuits and claims. Earnings were insufficient to cover fixed charges
by $3 million in 1998 and by $69 million in 2001 due to, among other
things, restructuring charges and impairment losses on long-lived and
other assets.
(i) EBITDA, for this purpose, means operating profit (loss), plus
depreciation, amortization, impairment losses on long-lived and other
assets, impairment losses on investments, inventory write-downs (in
each case as described above) and that portion of restructuring charges
(credits) applicable to non-cash asset write-offs. The amount of
restructuring charges (credits) applicable to non-cash asset write-offs
was a charge of $29 million in 1998, a credit of $6 million in 1999 and
a charge of $4 million in 2001. Adjusted EBITDA, for this purpose,
means EBITDA plus the cash portion of restructuring charges (credits),
charges (credits) for estimated potential liabilities and expenses in
connection with antitrust investigations and related lawsuits and
claims, securities class actions and stockholder derivative lawsuits,
the charge related to the withdrawn public offering by Graftech and the
charges in connection with the corporate realignment of our
subsidiaries. We believe that EBITDA and Adjusted EBITDA are generally
accepted as providing useful information regarding a company's ability
to incur and service debt. EBITDA and Adjusted EBITDA should not be
considered in isolation or as a substitute for net income, cash flows
from continuing operations or other consolidated income or cash flow
data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
Our method for calculating EBITDA or Adjusted EBITDA may not be
comparable to methods used by other companies and is not the same as
the method for calculating EBITDA under the Senior Facilities or the
Indenture. The following table sets forth, for the periods indicated,
the calculation of EBITDA and Adjusted EBITDA:
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
Operating profit (loss)(a)(b)(c)(d)................. $(58) $ 77 $130 $111 $ (10)
Depreciation and amortization....................... 49 51 45 43 36
Impairment loss on long-lived assets(c)............. - 60 35 3 80
Write-down of graphite specialties inventory(a)..... - - 8 - -
Non-cash portion of restructuring charges (credits). - 29 (6) - 4
------ ------ ----- ------ ------
EBITDA.............................................. (9) 217 212 157 110
Cash portion of restructuring charges............... - 57 - 6 8
Corporate realignment and related expenses.......... - - - - 2
Expenses related to the withdrawn Graftech offering. - - - 2 -
Antitrust investigations and related lawsuits and
claims(d)........................................ 340 - - - 10
Securities class action and stockholder derivative
lawsuits(e)...................................... - - 13 (1) -
------ ------ ----- ------ -----
Adjusted EBITDA..................................... $331 $274 $225 $164 $130
===== ==== ==== ==== ====
18
(j) Excludes 8,000 metric tons of graphite electrodes sold in 1997 by our
South African subsidiary before it became wholly owned on April 21,
1997.
(k) Management believes the quantity of graphite electrodes sold in the
1997 fourth quarter was impacted by customer buy-ins in advance of
price increases effective in January 1998.
(l) Represents pension, post-retirement and related benefits, employee
severance liabilities and miscellaneous other long term obligations.
19
RISK FACTORS
AN INVESTMENT IN THE EXCHANGE NOTES INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW, IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE
PARTICIPATING IN THE EXCHANGE OFFER. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
ARE NOT THE ONLY ONES FACING US. ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR
FINANCIAL CONDITION, RESULTS OF OPERATIONS, CASH FLOWS OR BUSINESS. IF ANY OF
THE FOLLOWING RISKS OR UNCERTAINTIES ACTUALLY OCCUR, OUR FINANCIAL CONDITION,
RESULTS OF OPERATIONS, CASH FLOWS OR BUSINESS COULD BE HARMED.
RISKS RELATING TO US
WE ARE DEPENDENT ON THE GLOBAL STEEL AND OTHER METALS INDUSTRIES. OUR RESULTS OF
OPERATIONS MAY DETERIORATE DURING GLOBAL AND REGIONAL ECONOMIC DOWNTURNS.
Our principal product, graphite electrodes, which accounted for about
63% of our total net sales in 2001, is sold primarily to the electric arc
furnace steel production industry. Many of our other products are sold primarily
to other metals industries and the transportation industry. These are global
basic industries, and customers in these industries are located in every major
geographic market. As a result, our customers are affected by changes in global
and regional economic conditions. This, in turn, affects demand for, and prices
of, our products sold to these industries. Accordingly, we are directly affected
by changes in global and regional economic conditions.
In addition, demand for our products sold to these industries may be
adversely affected by improvements in those products as well as in the
manufacturing operations of customers, which reduce the rate of consumption or
use of our products for a given level of production by our customers. We
estimate that the average rate of consumption of graphite electrodes per metric
ton of steel produced (called "SPECIFIC CONSUMPTION") declined from about 4.3
kilograms of graphite electrodes per metric ton of steel produced in 1990 to
about 2.4 kilograms per metric ton in 2001. While we believe that the rate of
decline of specific consumption over the long term has become lower, we believe
that there was a slightly more significant decline in 2001 than would otherwise
have been the case due to the shutdown of older, less efficient electric arc
furnaces due to the severe downturn affecting the steel industry.
As a result of global and regional economic conditions, reductions in
rates of consumption and other factors, demand for our graphite electrodes and
some of our other products sold to these industries has fluctuated significantly
and prices have declined since 1998. These circumstances reduced our net sales
and net income.
Throughout 1998 and the 1999 first quarter, electric arc furnace steel
production declined as a result of adverse global and regional economic
conditions. A recovery began in the 1999 second quarter that lasted through
mid-2000. Beginning in mid-2000, economic conditions began to weaken in North
America, becoming more severe in the 2000 fourth quarter.
The economic weakening in North America became more severe in 2001. In
addition, the impact of the economic weakness in North America on other regional
economies became more severe during 2001. This global economic weakness was
exacerbated by the impact on economic conditions of the terrorist acts in the
U.S. in September 2001. We believe that worldwide electric arc furnace steel
production declined in 2001 by 2% as compared to 2000 (to a total of 279 million
metric tons, about 33% of total steel production).
20
These fluctuations in electric arc furnace steel production resulted in
corresponding fluctuations in demand for graphite electrodes. Overall pricing
worldwide was weak. Although we implemented increases in local currency selling
prices of our graphite electrodes in 2000 and early 2001 in Europe, the Asia
Pacific region, the Middle East and South Africa, we have not been able to
maintain all of these price increases. We continue to face pricing pressures
worldwide.
Demand and prices for most of our other products sold to other metals
and the transportation industries were adversely affected by the same global and
regional economic conditions that affected graphite electrodes.
We believe that business conditions for most of our products (other
than cathodes) will remain challenging through 2002 and that a recovery in the
metals and transportation industries will not occur until the 2002 second half,
at the earliest.
We cannot assure you that the electric arc furnace steel production
industry will continue to be the higher long term growth sector of the steel
industry or that the other metals or transportation industries served by us will
experience stability, growth or recovery from current economic conditions
affecting them. Accordingly, we cannot assure you that there will be stability
or growth in demand for or prices of graphite electrodes or our other products
sold to these industries. An adverse change in global or certain regional
economic conditions could materially adversely affect us.
ANY SUBSTANTIAL GROWTH IN NET SALES, CASH FLOW FROM OPERATIONS OR NET INCOME OF
OUR ADVANCED ENERGY TECHNOLOGY DIVISION DEPENDS PRIMARILY ON SUCCESSFULLY
DEVELOPING, INTRODUCING AND SELLING GRAPHITE AND CARBON TECHNOLOGY AND PRODUCTS
FOR EMERGING APPLICATIONS ON A PROFITABLE BASIS. IF WE ARE NOT SUCCESSFUL, WE
WILL NOT ACHIEVE OUR PLANNED GROWTH.
Our planned growth depends on successful and profitable development and
sale of:
o materials and components for proton exchange membrane fuel cells
and fuel cell systems;
o electronic thermal management products, including thermal
interface products, heat spreaders, heat sinks and heat pipes, for
computer, communications, industrial, military, office equipment
and automotive electronic applications;
o fire retardant products for transportation applications and
building and construction materials applications;
o industrial thermal management products for high temperature
process applications; and
o conductive products for battery and supercapacitor power storage
applications.
Successful and profitable commercialization of technology and products
is subject to various risks, including risks beyond our control, such as:
o the possibility that we may not be able to develop viable products
or, even if we develop viable products, that our products may not
gain commercial acceptance;
o the possibility that our commercially accepted products could be
subsequently displaced by other technologies or products;
21
o the possibility that, even if our products are incorporated in new
products of our customers, our customers' new products may not
become viable or commercially accepted or may be subsequently
displaced;
o the possibility that a mass market for commercially accepted
products, or for our customers' products which incorporate our
products, may not develop;
o restrictions under our agreement with Ballard Power Systems on
sales of our fuel cell materials and components to, and
collaboration with, others; and
o failure of our customers, including Ballard Power Systems, to
purchase our products in the quantities that we expect.
These risks could be impacted by adoption of new laws and regulations,
changes in governmental programs, failure of necessary supporting systems (such
as a fuel delivery infrastructure for fuel cells) to be developed, and consumer
perceptions about costs, benefits and safety.
OUR FINANCIAL CONDITION COULD SUFFER IF WE EXPERIENCE UNANTICIPATED COSTS AS A
RESULT OF ANTITRUST INVESTIGATIONS, LAWSUITS AND CLAIMS.
Since 1997, we have been subject to antitrust investigations, lawsuits
and claims. We recorded a pre-tax charge of $340 million against results of
operations for 1997 and an additional pre-tax charge of $10 million against
results of operations for the 2001 second quarter as a reserve for estimated
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims. We cannot assure you that remaining liabilities
and expenses in connection with antitrust investigations, lawsuits and claims
will not materially exceed the remaining uncommitted balance of the reserve or
that the timing of payment thereof will not be sooner than anticipated. At
December 31, 2001, $101 million remained in this unfunded reserve. The balance
of this reserve is available for the remaining balance of the fine payable by us
to the U.S. Department of Justice that was imposed in 1998 (excluding imputed
interest thereon), the fine assessed against us by the antitrust authority of
the European Union in July 2001 and other antitrust related matters. The
aggregate amount of remaining committed payments for imputed interest at
December 31, 2001 (without giving effect to the more favorable restructured
payment schedule for the fine payable to the U.S. Department of Justice
established in January 2002) was about $9 million. Our insurance has not and
will not materially cover liabilities that have or may become due in connection
with antitrust investigations or related lawsuits or claims.
If such liabilities or expenses materially exceed the remaining
uncommitted balance of this reserve or if the timing of payment thereof is
sooner than anticipated, we may not be able to comply with the financial
covenants under the Senior Facilities. A failure to so comply, unless waived by
the lenders thereunder, would be a default thereunder. This would permit the
lenders to accelerate the maturity of the Senior Facilities. It would also
permit the lenders to terminate their commitments to extend credit under our
revolving credit facility. This would have an immediate material adverse effect
on our liquidity. An acceleration of maturity of the Senior Facilities would
permit the holders of the Notes to accelerate the maturity of the Notes. If we
were unable to repay our debt to the lenders and holders or otherwise obtain a
waiver from the lenders and holders, we could experience the consequences or be
forced to take the actions described in the two following risk factors and the
lenders and holders could proceed against the collateral securing the Senior
Facilities and the Notes, respectively, and exercise all other rights available
to them. We cannot assure you that we would be able to obtain any such waiver on
acceptable terms or at all.
22
WE ARE HIGHLY LEVERAGED AND OUR SUBSTANTIAL DEBT AND OTHER OBLIGATIONS COULD
LIMIT OUR FINANCIAL RESOURCES, OPERATIONS AND ABILITY TO COMPETE AND MAY MAKE US
MORE VULNERABLE TO ADVERSE ECONOMIC EVENTS.
We are highly leveraged, and we have substantial obligations in
connection with antitrust investigations, lawsuits and claims. At December 31,
2001, we had total debt of $638 million and a stockholders' deficit of $332
million. A substantial portion of our debt has variable interest rates. In
addition, we typically discount or factor a substantial portion of our accounts
receivable. During 2001, certain of our subsidiaries sold receivables totaling
$223 million, of which we estimate that $45 million was outstanding at December
31, 2001. We are dependent on our revolving credit facility, the availability of
which depends on continued compliance with the financial covenants under the
Senior Facilities, for liquidity.
Our high leverage and our antitrust related obligations could have
important consequences, including the following:
o our ability to restructure or refinance our debt or obtain
additional debt or equity financing for payment of these
obligations, or for working capital, capital expenditures,
acquisitions, strategic alliances or other general corporate
purposes, may be impaired in the future;
o a substantial portion of our cash flow from operations must be
dedicated to debt service and payment of these antitrust related
obligations, thereby reducing the funds available to us for other
purposes;
o an increase in interest rates could result in an increase in the
portion of our cash flow from operations dedicated to servicing
our debt, in lieu of other purposes;
o we may have substantially more leverage and antitrust related
obligations than certain of our competitors, which may place us at
a competitive disadvantage; and
o our leverage and our antitrust related obligations may hinder our
ability to adjust rapidly to changing market conditions or other
events and make us more vulnerable to insolvency, bankruptcy or
other adverse consequences in the event of a downturn in general
or certain regional economic conditions or in our business or in
the event that these obligations are greater, or the timing of
payment is sooner, than expected.
OUR ABILITY TO SERVICE OUR DEBT, INCLUDING THE NOTES, AND MEET OUR OTHER
OBLIGATIONS DEPENDS ON CERTAIN FACTORS BEYOND OUR CONTROL.
Our ability to service our debt, including the Notes, and meet our
other obligations as they come due is dependent on our future financial and
operating performance. This performance is subject to various factors, including
certain factors beyond our control such as, among other things, changes in
global and regional economic conditions, developments in antitrust
investigations, lawsuits and claims involving us, changes in our industry,
changes in interest or currency exchange rates and inflation in raw materials,
energy and other costs.
If our cash flow and capital resources are insufficient to enable us to
service our debt and meet these obligations as they become due, we could be
forced to:
o reduce or delay capital expenditures;
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o sell assets or businesses;
o limit or discontinue, temporarily or permanently, business plans,
activities or operations;
o obtain additional debt or equity financing; or
o restructure or refinance debt.
We cannot assure you as to the timing of such actions or the amount of
proceeds that could be realized from such actions. Accordingly, we cannot assure
you that we will be able to meet our debt service and other obligations as they
become due or otherwise.
WE ARE SUBJECT TO RESTRICTIVE COVENANTS UNDER THE SENIOR FACILITIES AND THE
INDENTURE. THESE COVENANTS COULD SIGNIFICANTLY AFFECT THE WAY IN WHICH WE
CONDUCT OUR BUSINESS. OUR FAILURE TO COMPLY WITH THESE COVENANTS COULD LEAD TO
AN ACCELERATION OF OUR DEBT.
The Senior Facilities and the Indenture contain a number of covenants
that, among other things, significantly restrict our ability to:
o dispose of assets;
o incur additional indebtedness;
o repay or refinance other indebtedness or amend other debt
instruments;
o create liens on assets;
o enter into leases or sale/leaseback transactions;
o make investments or acquisitions;
o engage in mergers or consolidations;
o make certain payments and investments, including dividend
payments; and
o make capital expenditures or engage in certain transactions with
subsidiaries and affiliates.
The Senior Facilities also require us to comply with specified
financial covenants, including minimum interest coverage and maximum leverage
ratios. In addition, pursuant to the Senior Facilities, we cannot borrow under
our revolving credit facility:
o if the aggregate amount of our payments made (excluding certain
imputed interest) and additional reserves created in connection
with antitrust, securities and stockholder derivative
investigations, lawsuits and claims exceed $340 million by more
than $130 million (which $130 million is reduced by the amount of
certain debt, other than the Notes, incurred by us that is not
incurred under the Senior Facilities, $14 million of which debt
was outstanding at March 31, 2002); or
o if the additional borrowings would cause us to breach the
financial contained therein.
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Further, substantially all of our assets in the U.S. are pledged to
secure guarantees of the Senior Facilities by our domestic subsidiaries. In
addition, our principal foreign operating subsidiaries are obligors under
intercompany term notes and guarantees of those notes issued to UCAR Finance
that are pledged to secure the Notes. Our Swiss subsidiary is an obligor under
an intercompany revolving note and our principal foreign subsidiaries are
guarantors of that note. Such note and guarantees are pledged to secure the
Senior Facilities. Most of the assets of the obligors under that intercompany
revolving note and the related guarantees, which constitute a majority of our
assets outside the U.S., are pledged to secure that note and those guarantees.
We are currently in compliance with the covenants contained in the
Senior Facilities and the Indenture. However, our ability to continue to comply
may be affected by events beyond our control. The breach of any of the covenants
contained in the Senior Facilities, unless waived by the lenders, would be a
default under the Senior Facilities. This would permit the lenders to accelerate
the maturity of the Senior Facilities. It would also permit the lenders to
terminate their commitments to extend credit under our revolving credit
facility. This would have an immediate material adverse effect on our liquidity.
An acceleration of maturity of the Senior Facilities would permit the holders of
the Notes to accelerate the maturity of the Notes. A breach of the covenants
contained in the Indenture would also permit the holders of the Notes to
accelerate the maturity of the Notes. Acceleration of maturity of the Notes
would permit the lenders to accelerate the maturity of the Senior Facilities and
terminate their commitments to extend credit under our revolving credit
facility. If we were unable to repay our debt to the lenders and holders or
otherwise obtain a waiver from the lenders and holders, we could be forced to
take the actions described in the preceding risk factor and the lenders and
holders could proceed against the collateral securing the Senior Facilities and
the Notes, respectively, and exercise all other rights available to them. We
cannot assure you that we would have sufficient funds to make these accelerated
payments or that we would be able to obtain any such waiver on acceptable terms
or at all.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OPERATIONS IN MULTIPLE COUNTRIES.
We have significant international operations. In 2001, about 70% of our
net sales was derived from sales outside of the U.S., and, at December 31,
2001, about 74% of our total property, plant and equipment and other long-lived
assets was located outside the U.S. In addition, we have entered into and begun
performance under an agreement with Jilin to form a joint venture which, subject
to receipt of Chinese governmental approval and satisfaction of other
conditions, is expected to produce and sell high quality graphite electrodes in
China. As a result, we are subject to risks associated with operating in
multiple countries, including:
o currency devaluations and fluctuations in currency exchange rates,
including impacts of transactions in various currencies,
translation of various currencies into dollars for U.S. reporting
purposes, and impacts on results of operations due to the fact
that costs of our foreign subsidiaries for our principal raw
material, petroleum coke, are incurred in dollars even though
their products are primarily sold in other currencies;
o imposition of or increases in customs duties and other tariffs;
o imposition of or increases in currency exchange controls,
including imposition of or increases in limitations on conversion
of various currencies into dollars or euros, making of
intercompany loans by subsidiaries or remittance of dividends,
interest or principal payments or other payments by subsidiaries;
o imposition of or increases in revenue, income or earnings taxes
and withholding and other taxes on remittances and other payments
by subsidiaries;
25
o imposition or increases in investment restrictions and other
restrictions or requirements by non-U.S. governments;
o inability to definitively determine or satisfy legal requirements,
inability to effectively enforce contract or legal rights and
inability to obtain complete financial or other information
under local legal, judicial, regulatory, disclosure and other
systems; and
o nationalization and other risks which could result from a change
in government or other political, social or economic instability.
We cannot assure you that such risks will not have a material adverse
effect on us in the future.
In general, our results of operations and financial condition are
affected by inflation in each country in which we have a manufacturing facility.
We maintain operations in Brazil, Russia and Mexico, countries which have had in
the past, and may have now or in the future, highly inflationary economies,
defined as cumulative inflation of about 100% or more over a three calendar year
period. We cannot assure you that future increases in our costs will not exceed
the rate of inflation or the amounts, if any, by which we may be able to
increase prices for our products.
OUR ABILITY TO GROW AND COMPETE EFFECTIVELY DEPENDS ON PROTECTING OUR
INTELLECTUAL PROPERTY, INCLUDING THAT RELATING TO FUEL CELL POWER GENERATION,
ELECTRONIC THERMAL MANAGEMENT AND OTHER IDENTIFIED OPPORTUNITIES. FAILURE TO
PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR PLANNED GROWTH.
Failure to protect our intellectual property may result in the loss of
the exclusive right to use our technologies. We rely on patent, trademark and
trade secret law to protect our intellectual property. Our issued patents
relating to fuel cell power generation and electronic thermal management
applications, which we believe are particularly important to our planned growth,
will expire at various times between 2004 and 2018. Some of our intellectual
property is not covered by any patent or patent application. Our patents are
subject to complex factual and legal considerations, and there can be
uncertainty as to the validity, scope and enforceability of any particular
patent. Accordingly, we cannot assure you that:
o any of the U.S. or foreign patents now or hereafter owned by us,
or that third parties have licensed to us or may in the
future license to us, will not be circumvented, challenged or
invalidated;
o any of the U.S. or foreign patents that third parties have
licensed to us or may license to us in the future will not be
licensed to others; or
o any of our pending or future patent applications will be issued at
all or with the breadth of claim coverage sought by us.
In addition, effective patent, trademark and trade secret protection may be
unavailable, limited or not applied for in some foreign countries in which we
operate.
Our ability to maintain our proprietary intellectual property may be
achieved in part by prosecuting claims against others whom we believe are
infringing upon our rights and by defending against claims of intellectual
property infringement brought by others against us. Our involvement in
intellectual property litigation could result in significant expense to us,
adversely affecting development
26
of sales of the related products and diverting the efforts of our technical and
management personnel, regardless of the outcome of such litigation.
We also seek to protect our proprietary intellectual property,
including intellectual property that may not be patented or patentable, in part
by confidentiality agreements and, if applicable, inventors' rights agreements
with our strategic partners and employees. We cannot assure you that these
agreements will not be breached, that we will have adequate remedies for any
such breach or that such partners or employees will not assert rights to
intellectual property arising out of these relationships.
If necessary or desirable, we may seek licenses to intellectual
property of others. However, we can give no assurance that we will obtain such
licenses or that the terms of any such licenses will be acceptable to us.
The failure to obtain a license from a third party for its intellectual
property that is necessary to make or sell any of our products could cause us to
incur substantial liabilities and to suspend the manufacture or shipment of
products or our use of processes requiring the use of such intellectual
property.
OUR CURRENT AND FORMER MANUFACTURING OPERATIONS ARE SUBJECT TO INCREASINGLY
STRINGENT HEALTH, SAFETY AND ENVIRONMENTAL REQUIREMENTS.
We use and generate hazardous substances in our manufacturing
operations. In addition, both the properties on which we currently operate and
those on which we have ceased operations are and have been used for industrial
purposes. Further, our manufacturing operations involve risks of personal injury
or death. We are subject to increasingly stringent environmental, health and
safety laws and regulations relating to our current and former properties and
neighboring properties and our current operations. These laws and regulations
provide for substantial fines and criminal sanctions for violations and
sometimes require the installation of costly pollution control or safety
equipment or costly changes in operations to limit pollution and decrease the
likelihood of injuries. In addition, we may become subject to potentially
material liabilities for the investigation and cleanup of contaminated
properties and to claims alleging personal injury or property damage resulting
from exposure to or releases of hazardous substances or personal injury as a
result of an unsafe workplace. In addition, noncompliance with or stricter
enforcement of existing laws and regulations, adoption of more stringent new
laws and regulations, discovery of previously unknown contamination or
imposition of new or increased requirements could require us to incur costs or
become the basis of new or increased liabilities that could be material.
WE ARE DEPENDENT ON SUPPLIES OF RAW MATERIALS AND ENERGY AT AFFORDABLE PRICES.
OUR RESULTS OF OPERATIONS COULD DETERIORATE IF THAT SUPPLY IS SUBSTANTIALLY
DISRUPTED FOR AN EXTENDED PERIOD.
We purchase raw materials and energy from a variety of sources. In many
cases, we purchase them under short term contracts or on the spot market, in
each case at fluctuating prices. The availability and price of raw materials and
energy may be subject to curtailment or change due to:
o limitations which may be imposed under new legislation or
governmental regulations;
o suppliers' allocations to meet demand of other purchasers during
periods of shortage (or, in the case of energy suppliers, extended
cold weather);
o interruptions in production by suppliers; and
27
o market and other events and conditions.
Petroleum products, including petroleum coke, our principal raw
material, and energy, particularly natural gas, have been subject to significant
price fluctuations. Over the past several years, we have mitigated the effect of
price increases on our results of operations through our cost reduction efforts.
We cannot assure you that such efforts 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 or energy, would have a material adverse effect on
us.
OUR RESULTS OF OPERATIONS COULD DETERIORATE IF OUR MANUFACTURING OPERATIONS WERE
SUBSTANTIALLY DISRUPTED FOR AN EXTENDED PERIOD.
Our manufacturing operations are subject to disruption due to extreme
weather conditions, floods and similar events, major industrial accidents,
strikes and lockouts, and other events. We cannot assure you that no such events
will occur. If such an event occurs, it could have a material adverse effect on
us.
OUR RESULTS OF OPERATIONS FOR ANY QUARTER ARE NOT NECESSARILY INDICATIVE OF OUR
RESULTS OF OPERATIONS FOR A FULL YEAR.
Sales of graphite electrodes and other products fluctuate from quarter
to quarter due to such factors as changes in global and regional economic
conditions, changes in competitive conditions, 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. We have experienced, and expect
to continue to experience, volatility with respect to demand for and prices of
graphite electrodes and other products, both globally and regionally.
We have also experienced volatility with respect to prices of raw
materials and energy, and it has frequently required several quarters of cost
reduction efforts to mitigate increases in those prices. We expect to experience
volatility in such prices in the future.
Accordingly, results of operations for any quarter are not necessarily
indicative of the results of operations for a full year.
THE GRAPHITE AND CARBON INDUSTRY IS HIGHLY COMPETITIVE. OUR MARKET SHARE, NET
SALES OR NET INCOME COULD DECLINE DUE TO VIGOROUS PRICE AND OTHER COMPETITION.
Competition in the graphite and carbon products industry (other than
with respect to new products) is based primarily on price, product quality and
customer service. Graphite electrodes, in particular, are subject to rigorous
price competition. Price increases by us or price reductions by our competitors,
decisions by us with respect to maintaining profit margins rather than market
share, technological developments, changes in the desirability or necessity of
entering into long term fixed price supply contracts with customers, or other
competitive or market factors or strategies could adversely affect our market
share, net sales or net income.
Competition with respect to new products is, and is expected to be,
based primarily on product innovation, performance and cost effectiveness as
well as customer service.
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Competition could prevent implementation of price increases, require
price reductions or require increased spending on research and development,
marketing and sales that could adversely affect our results of operations, cash
flows or financial condition.
WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY IMPLEMENT ANY STRATEGIC ALLIANCES
FOR ANY OF OUR BUSINESSES.
One of our key strategies is establishment and expansion of strategic
alliances to reduce our average cost of sales, expand our share of various
geographic markets, expand our product lines or technology, or strengthen our
businesses. We cannot assure you that any alliance will be completed or as to
the timing, terms or benefits of any alliance that may be completed.
WE MAY NOT BE ABLE TO COMPLETE OUR PLANNED ASSET SALES.
We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years. We cannot assure you if or
when we will be able to complete these sales or that we will realize proceeds
therefrom that meet our current expectations.
WE CANNOT ASSURE YOU THAT THE CORPORATE REALIGNMENT OF OUR SUBSIDIARIES WILL BE
COMPLETED IN THE 2002 FIRST HALF.
We are currently in the process of realigning the corporate
organizational structure of our subsidiaries, which we expect to be
substantially completed in the 2002 first half. We cannot assure you that the
realignment will be completed on a timely basis or at all. If completion is
delayed or the realignment is not completed, we may not achieve some of our
targeted cost savings when anticipated or at all.
WE MAY NOT ACHIEVE THE COST SAVINGS TARGETED UNDER THE 2002 PLAN.
Our targeted cost savings under the 2002 plan are based on assumptions
regarding the costs and savings associated with the activities undertaken and to
be undertaken as part of the 2002 plan. We cannot assure you that these
assumptions are correct or that we will be able to implement these activities at
the anticipated costs, if at all. If the costs associated with these activities
are higher than anticipated or if we are unable to implement the activities as
and when we have assumed, we may not be able to meet our cost savings targets.
RISKS RELATING TO THE NOTES AND PLEDGES OF OUR ASSETS
THE NOTES AND THE RELATED GUARANTEES HAVE LIMITED SECURITY. AS A RESULT, THEY
ARE EFFECTIVELY SUBORDINATED TO THE SENIOR FACILITIES, WHICH ARE SECURED BY MOST
OF OUR ASSETS, AND TO CERTAIN OTHER SECURED DEBT AND OBLIGATIONS. THIS COULD
RESULT IN HOLDERS OF THE NOTES RECEIVING LESS ON LIQUIDATION THAN THE LENDERS
UNDER THE SENIOR FACILITIES AND CERTAIN OTHER CREDITORS.
Unsecured intercompany term notes in an aggregate principal amount of
$391 million or 98% of the principal amount of the outstanding Notes (based on
currency exchange rates in effect at September 30, 2001), or $382 million or 96%
of the principal amount of the Notes outstanding (based on currency exchange
rates in effect at March 31, 2002), and unsecured guarantees of those unsecured
intercompany term notes, issued to UCAR Finance by certain of our foreign
subsidiaries have been pledged to secure the Notes. In any event, at no time
will the combined value of the pledged portion of a foreign subsidiary's
unsecured intercompany term note and unsecured guarantee of unsecured
intercompany term notes issued by other foreign subsidiaries (collectively
called "UNSECURED
29
INTERCOMPANY TERM NOTE OBLIGATIONS" of such foreign subsidiary) exceed 19.99% of
the principal amount of the then outstanding Notes. As a result of this
limitation, the aggregate principal amount of unsecured intercompany term notes
pledged to secure the Notes was about $322 million or about 81% of the principal
amount of the outstanding Notes (in each case, based on currency exchange rates
in effect at March 31, 2002). The remaining unsecured intercompany term notes
held by UCAR Finance (in an aggregate principal amount of $60 million or 15% of
the aggregate principal amount of the outstanding Notes (in each case, based on
currency exchange rates in effect at March 31, 2002)) and any pledged unsecured
intercompany term notes that cease to be pledged due to a reduction in the
principal amount of the then outstanding Notes due to redemption, repurchase or
other events, will not be subject to any pledge and will be available to satisfy
the claims of creditors (including the lenders under the Senior Facilities and
the holders of the Notes) of UCAR Finance as their interests may appear. The
Indenture contains provisions restricting, subject to certain exceptions, the
pledge of those unsecured intercompany term notes to secure any debt or
obligation unless they are equally and ratably pledged to secure the Notes for
so long as such other pledge continues in effect.
Substantially all of our assets in the U.S. are pledged to secure
guarantees of the Senior Facilities by our domestic subsidiaries. In addition,
UCAR Carbon and our Swiss subsidiary are obligors under secured intercompany
revolving notes that are pledged to secure the Senior Facilities. Substantially
all of their assets are pledged to secure those notes. The secured intercompany
revolving note of our Swiss subsidiary is also guaranteed by our other principal
foreign subsidiaries. Those guarantees are secured by a pledge of most of the
assets of the guarantors. Those guarantees are pledged to secure the Senior
Facilities. As a result, most of our assets outside the U.S. are pledged to
secure the secured intercompany revolving note of our Swiss subsidiary and
guarantees of that note. Moreover, certain of our subsidiaries have financed the
construction or acquisition of assets with debt secured by such assets. At
December 31, 2001, the aggregate amount of such debt was $4 million. Further,
our obligation to pay the $60 million balance of the antitrust fine to the U.S.
Department of Justice is secured by a lien on the shares of UCAR Global and UCAR
Finance held by UCAR as well as the interest of UCAR in the lawsuit initiated by
us against our former parents, and we may secure our obligation to pay the
antitrust fine of [euro] 50.4 million (about $45 million, at currency exchange
rates in effect at December 31, 2001) assessed by the antitrust authority of the
European Union with a letter of credit issued under the Senior Facilities or by
a pledge of certain assets of one of our French subsidiaries.
The Notes are guaranteed by UCAR, UCAR Global and UCAR Carbon and other
U.S. subsidiaries holding a substantial majority of our U.S. assets. Those
guarantees are unsecured, except the guarantee by UCAR Carbon. Each of the
guarantors of the Notes has also guaranteed the Senior Facilities, and those
guarantees are secured. Graftech has also guaranteed the Senior Facilities, but
has not guaranteed the Notes. The guarantee of the Notes by UCAR Carbon has been
secured by a limited pledge of our shares of Graftech. While all of our shares
of Graftech are pledged to secure the UCAR Carbon guarantee of the Notes, at no
time will the value of the pledged portion of such shares exceed 19.99% of the
principal amount of the then outstanding Notes. Moreover, the pledge of such
shares is junior to the pledge of the same shares to secure UCAR Carbon's
guarantee of the Senior Facilities.
None of our foreign subsidiaries has guaranteed the Senior Facilities
or the Notes. However, all of the foreign subsidiaries that have issued the
unsecured intercompany term notes that are pledged to secure the Notes had also
issued secured intercompany term notes which were pledged to secure the Senior
Facilities. All those secured intercompany term notes were repaid in connection
with the creation of the unsecured intercompany term notes that have been
pledged to secure the Exchange Notes. The Indenture does not contain any
limitation on new secured intercompany term loans pursuant to the Senior
Facilities, or related guarantees, to foreign subsidiaries that are unsecured
intercompany term note obligors. The guarantees of the unsecured intercompany
term notes by foreign subsidiaries are limited as
30
required to comply with applicable law. Many of these laws effectively limit the
amount of the guarantee to the net worth of the guarantor foreign subsidiary.
The lenders and creditors whose debt and obligations are secured will
have prior claims on our assets, to the extent of the lesser of the value of the
assets securing, or the amount of, the respective debt or obligations. If we
become bankrupt or insolvent or are liquidated or if maturity of such debt or
obligations is accelerated, the secured lenders and creditors will be entitled
to exercise the remedies available to a secured party under applicable law and
pursuant to the relevant agreements and instruments. If they exercise such
remedies, it is possible that our remaining assets could be insufficient to
repay the Notes in full.
WE HAVE A HOLDING COMPANY STRUCTURE AND THE ISSUER OF THE NOTES IS A SPECIAL
PURPOSE FINANCE COMPANY. ACCORDINGLY, THE NOTES ARE STRUCTURALLY SUBORDINATED TO
CERTAIN OF OUR OBLIGATIONS.
UCAR is our parent company. It is a holding company with no material
assets or operations other than the common stock of UCAR Global and UCAR Finance
and its interest in the lawsuit initiated by us against our former parents. Its
principal liabilities consist of its guarantees of the Senior Facilities and the
Notes and its obligations with respect to the antitrust fines payable to the
U.S. Department of Justice and the antitrust authority of the European Union as
well as any other remaining potential liabilities and expenses in connection
with antitrust investigations and related lawsuits and claims, an intercompany
promissory note owed to UCAR Carbon issued in connection with our leveraged
equity recapitalization in 1995, and guaranties of debt and commercial
obligations of our subsidiaries. UCAR Global is a holding company with no
material assets or operations other than the common stock of UCAR Carbon, which,
in turn, holds the common stock of our other subsidiaries other than UCAR
Finance. Its principal liabilities consist of its guarantees of the Senior
Facilities and the Notes, intercompany promissory notes, and guaranties of debt
and commercial obligations of our subsidiaries.
The Initial Notes were, and the Exchange Notes will be, issued by UCAR
Finance. UCAR Finance is the borrower under the Senior Facilities. UCAR Finance
does not have any material assets other than:
o the unsecured intercompany term note obligations that are pledged
to secure the Notes;
o a secured intercompany revolving note issued by our Swiss
subsidiary and secured guarantees of that note by our other
principal foreign subsidiaries, as well as a secured intercompany
revolving note issued by UCAR Carbon, that are pledged to secure
the Senior Facilities;
o Cash flow notes payable to it created to facilitate the flow of
funds among our subsidiaries (some or all of which will be
effectively contributed to our Swiss subsidiary in connection with
the corporate realignment of our subsidiaries); and
o assets associated with our treasury, cash management, cash pooling
and hedging activities that are conducted through UCAR Finance.
Its principal liabilities consist of its obligations under the Senior Facilities
and the Notes, its obligations under cash flow notes payable by it (some or all
of which will be likewise assumed by our Swiss subsidiary) and liabilities
associated with such treasury and other activities.
Gross proceeds from the sale of the Initial Notes were loaned, on an
unsecured basis, to our foreign subsidiaries in an amount equal to the principal
amount of their then outstanding secured intercompany term notes, which
aggregated $391 million (based on currency exchange rates in effect on
31
September 30, 2001) and which had been pledged to secure the Senior Facilities.
Those unsecured loans are evidenced by unsecured intercompany term notes (that
have been pledged to secure the Notes, subject to the limitation described in
the preceding risk factor) having a stated maturity that is the same as the
stated maturity of the Notes. Such foreign subsidiaries used the gross proceeds
loaned to them to repay the entire principal amount of their then outstanding
secured intercompany term notes. Those repayments were used to fund repayment of
a portion of the Senior Facilities.
A substantial portion of our operations is conducted by, and a
substantial portion of our cash flow from operations is derived from, our
foreign subsidiaries. The foreign subsidiaries that have issued the unsecured
intercompany term notes are our operating subsidiaries in Mexico, Spain, South
Africa and Switzerland, our operating subsidiary in Italy engaged in the
graphite electrode business and our holding company in France. The obligations
of the holding company in France in respect of its unsecured intercompany term
note are guaranteed by our operating company in France engaged in the graphite
electrode business on an unsecured basis. The unsecured intercompany term notes
are guaranteed by our operating subsidiaries in Brazil, Canada, Mexico, Spain,
Switzerland and the United Kingdom and the holding company in France. These
subsidiaries have also guaranteed the secured intercompany revolving note of our
Swiss subsidiary that is pledged to secure the Senior Facilities. Those
guarantees are secured by pledges of most of their assets.
Our operating subsidiary in Italy engaged in the advanced graphite
materials business and our operating subsidiary in Russia as well as Carbone
Savoie, Graftech and certain immaterial domestic and foreign operating companies
and holding companies are neither guarantors of the Notes nor unsecured
intercompany term note obligors. At December 31, 2001, the aggregate book value
of their assets was about $102 million. For 2001, their net income was about $6
million and their cash flow from operations was about $18 million (excluding the
impact of payments and borrowings under a short-term intercompany note issued by
Carbone Savoie).
UCAR Finance has made and will continue to make secured intercompany
revolving loans to our Swiss subsidiary and UCAR Carbon. At March 31, 2002 (and
based on currency exchange rates in effect on March 31, 2002), the aggregate
principal amount of the secured intercompany revolving note of our Swiss
subsidiary was nil. After the corporate realignment of our subsidiaries, UCAR
Finance may make secured intercompany revolving loans to one or more other
domestic or foreign subsidiaries on the same basis as the existing secured
intercompany revolving loans. The Indenture does not contain any limitation on
existing or new secured intercompany revolving loans pursuant to the Senior
Facilities to domestic or foreign subsidiaries that are guarantors of the Notes
or unsecured intercompany term note obligors. Failure to fully complete the
corporate realignment of our subsidiaries could result in a substantial change
in the principal amount of the secured intercompany revolving note of our Swiss
subsidiary.
UCAR Finance will rely upon interest and principal payments on
intercompany loans, as well as loans, advances and other transfers from our
operating subsidiaries, to generate the funds necessary to meet its debt service
obligations with respect to the Senior Facilities and the Notes. Our
subsidiaries are separate entities that are legally distinct from UCAR Finance,
and our subsidiaries that are neither guarantors of the Notes nor unsecured
intercompany term note obligors have no obligation, contingent or otherwise, to
pay debt service on the Notes or to make funds available for such payments. The
ability of our subsidiaries to make these interest or principal payments, loans,
advances or other transfers is subject to, among other things, their earnings,
their availability of funds, the covenants of their own debt, corporate laws,
restrictions on dividends or repatriation of earnings, monetary transfer
restrictions and foreign currency exchange regulations.
The ability of UCAR Finance or the holders of the Notes to realize upon
the assets of any subsidiary that is neither a guarantor of the Notes nor an
unsecured intercompany term note obligor in any
32
liquidation, bankruptcy, reorganization or similar proceedings involving such
subsidiary will be subject to the claims of their respective creditors,
including their respective trade creditors and holders of their respective debt.
As a result, the Notes are structurally subordinated to all existing
and future debt and other obligations, including trade payables, of our
subsidiaries that are neither guarantors of the Notes nor unsecured intercompany
term note obligors. At December 31, 2001, on an as adjusted basis after giving
effect to the sale of the Initial Notes, the application of the proceeds
therefrom and the corporate realignment of our subsidiaries (and based on
currency exchange rates in effect at December 31, 2001), the debt and
liabilities of such subsidiaries would have totaled $27 million (excluding
intercompany trade and other miscellaneous liabilities of $14 million).
Except as otherwise noted in this risk factor, the financial
information included or incorporated by reference in this prospectus is
presented on a consolidated basis, including both our domestic and foreign
subsidiaries. As a result, such financial information does not completely
indicate the historical or as adjusted assets, liabilities or operations of each
source of funds for payment of debt service on the Notes.
THE PROVISIONS OF THE UNSECURED INTERCOMPANY TERM NOTE OBLIGATIONS CAN BE
CHANGED, AND THE UNSECURED INTERCOMPANY TERM NOTES CAN BE PREPAID IN WHOLE OR IN
PART, WITHOUT THE CONSENT OF THE HOLDERS OF THE NOTES UNDER CERTAIN
CIRCUMSTANCES. PREPAYMENT WOULD INCREASE THE STRUCTURAL SUBORDINATION OF THE
NOTES. PREPAYMENT OR CHANGES IN SUCH PROVISIONS COULD REDUCE OR ELIMINATE THE
ABILITY OF HOLDERS OF THE NOTES TO SEEK RECOVERY DIRECTLY FROM OUR FOREIGN
SUBSIDIARIES UPON A DEFAULT UNDER THE NOTES.
In general, the unsecured intercompany term notes and the unsecured
intercompany term note guarantees cannot be changed, and the unsecured
intercompany term notes cannot be prepaid or otherwise discharged, without the
consent of the holders of the Notes. However, without the consent of the holders
of the Notes:
o the interest rate, interest payment dates, currency of payment of
principal and interest and currency in which the unsecured
intercompany term note is denominated (subject to certain
limitations) can be amended;
o provisions of any unsecured intercompany term note obligation can
be amended to comply with changes in applicable law, so long as
such amendments do not change the enforceability, principal
amount, stated maturity, average life, ranking or priority or
prepayment provisions of such unsecured intercompany term note or
the enforceability or obligations guaranteed under such unsecured
intercompany term note guaranty; and
o any unsecured intercompany term note can be prepaid in whole or in
part if the proceeds received by UCAR Finance from such prepayment
are (i) invested in or loaned to a guarantor of the Notes, (ii)
loaned to another foreign subsidiary pursuant to an unsecured
intercompany note that is pledged to secure the Notes and is, to
the extent permitted by applicable law, guaranteed by the
unsecured intercompany term note guarantors or (iii) applied to an
offer to purchase Notes at a purchase price equal to 100% of the
principal amount of the Notes plus accrued but unpaid interest.
In addition, in connection with the mothballing of our graphite
electrode manufacturing capacity in Caserta, Italy and planned asset sales
pursuant to the 2002 major cost savings plan, the unsecured intercompany term
note of our Italian subsidiary engaged in the graphite electrode business may be
33
prepaid in whole or in part so long as the proceeds from such prepayment are
either applied as described above or applied to prepayment of term loans under
the Senior Facilities. At March 31, 2002 (and based on currency exchange rates
in effect at March 31, 2002), the principal amount of the unsecured intercompany
term note of that Italian subsidiary was about $15 million.
The principal amount (expressed in dollars) of any unsecured
intercompany term note that is not denominated in dollars could increase or
decrease at any time due to changes in currency exchange rates.
A reduction in the principal amount of one or more unsecured
intercompany notes could increase the structural subordination of the Notes, as
described in the preceding risk factors, and reduce the ability of holders of
the Notes to realize upon the assets of our foreign subsidiaries upon a default
under the Notes. A change in the provisions of the unsecured intercompany note
obligations could also limit such ability.
IN THE EVENT OF THE BANKRUPTCY OR INSOLVENCY OF UCAR GLOBAL, UCAR CARBON OR ANY
OF THE SUBSIDIARY GUARANTORS OR UNSECURED INTERCOMPANY TERM NOTE OBLIGORS, THE
GUARANTEE OF THE NOTES BY UCAR GLOBAL, UCAR CARBON OR SUCH SUBSIDIARY OR THE
UNSECURED INTERCOMPANY TERM NOTE AND THE UNSECURED INTERCOMPANY TERM NOTE
GUARANTEE OF SUCH OBLIGOR COULD BE VOIDED OR SUBORDINATED.
In the event of the bankruptcy or insolvency of UCAR Global, UCAR
Carbon or any of the subsidiary guarantors or unsecured intercompany term note
obligors, its guarantee, unsecured intercompany term note guarantee or unsecured
intercompany term note would be subject to review under relevant fraudulent
conveyance, fraudulent transfer, equitable subordination and similar statutes
and doctrines in a bankruptcy or insolvency proceeding or a lawsuit by or on
behalf of creditors of that guarantor or obligor. Under those statutes and
doctrines, if a court were to find that the guarantee or note was incurred with
the intent of hindering, delaying or defrauding creditors or that the guarantor
or obligor received less than a reasonably equivalent value or fair
consideration for its guarantee or note and, at the time of its incurrence, the
guarantor or obligor:
o was insolvent or rendered insolvent by reason of the incurrence of
its guarantee or note; or
o was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital to
carry on its business; or
o intended to, or believed that it would, incur debts beyond its
ability to pay as they matured or became due;
then the court could void or subordinate its guarantee or note.
The measure of insolvency varies depending upon the law of the
jurisdiction being applied. Generally, however, a company will be considered
insolvent at a particular time if the sum of its debts at that time is greater
than the then fair salable value of its assets or if the fair salable value of
its assets at the time is less than the amount that would be required to pay its
probable liability on its existing debts as they become absolute and mature. We
believe that each of the guarantors and obligors was:
o neither insolvent nor rendered insolvent by reason of the
incurrence of its guarantee or note;
o in possession of sufficient capital to run its business
effectively; and
o incurring debts within its ability to pay as the same mature or
become due.
34
The assumptions and methodologies used by us in reaching these
conclusions about our solvency and the solvency of the guarantors or obligors
may not be adopted by a court, and a court may not concur with these
conclusions. If the guarantee of a guarantor or the unsecured intercompany term
note guarantee or unsecured intercompany term note of an unsecured intercompany
term note obligor is voided or subordinated, holders of the Notes would
effectively be subordinated to all indebtedness and other liabilities of that
guarantor or obligor.
The unsecured intercompany term note obligors are incorporated in
jurisdictions other than the U.S. and are subject to the insolvency laws of such
other jurisdictions. We cannot assure you that the insolvency laws of such
jurisdictions will be as favorable to your interests as creditors as the laws of
the U.S.
WE MAY NOT HAVE THE ABILITY TO PURCHASE THE NOTES UPON A CHANGE OF CONTROL AS
REQUIRED BY THE INDENTURE.
Upon the occurrence of certain specific kinds of change of control
events, we will be required to offer to purchase the outstanding Notes at a
purchase price equal to 101% of the principal amount, plus accrued and unpaid
interest, if any, to the date of purchase. If such event were to occur, we
cannot assure you that we would have sufficient funds to pay the purchase price
of the outstanding Notes, and we expect that we would require third party
financing to do so. We cannot assure you that we would be able to obtain this
financing on favorable terms or at all. In the event of certain kinds of change
of control events, we may have to repay all borrowings under the Senior
Facilities or obtain the consent of the lenders under the Senior Facilities to
purchase the Notes. If we do not obtain such consent or repay such borrowings,
we may be prohibited from purchasing the Notes. In such case, our failure to
purchase tendered Notes would constitute a default under the Indenture. If the
holders of the Notes were to accelerate the maturity of the Notes upon such
default, the lenders under the Senior Facilities would have the right to
accelerate the maturity of the Senior Facilities. We cannot assure you that we
will have the financial ability to purchase outstanding Notes and repay such
borrowings upon the occurrence of any such event.
RISKS RELATING TO THE EXCHANGE OFFER
A FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER MAY HAVE ADVERSE CONSEQUENCES.
The Initial Notes have not been registered under the Securities Act or
any state securities laws. As a result, the Initial Notes may not be offered,
sold or otherwise transferred except in compliance with the registration
requirements of the Securities Act and any other applicable securities laws, or
pursuant to an exemption therefrom. Initial Notes that bear legends restricting
their transfer that are not exchanged will continue to bear those legends. In
addition, upon completion of the exchange offer, the holders of Initial Notes
that are not exchanged will not be entitled to have their Initial Notes
registered under the Securities Act, and will not have any similar rights under
the Registration Rights Agreement. We currently do not intend to register under
the Securities Act any Initial Notes which remain outstanding after completion
of the exchange offer.
To the extent that Initial Notes are tendered and accepted in the
exchange offer, the principal amount of the outstanding Initial Notes will be
reduced by the principal amount so tendered and exchanged and a holder's ability
to sell unexchanged Initial Notes could be adversely affected. As a result, the
liquidity of the market for unexchanged Initial Notes could be adversely
affected by completion of the exchange offer.
35
YOU MAY FIND IT DIFFICULT TO SELL YOUR EXCHANGE NOTES.
The Initial Notes were not registered under the Securities Act or under
any state securities laws and may not be resold unless they are subsequently
registered or resold pursuant to an exemption from the registration requirements
of the Securities Act and applicable state securities laws. The Exchange Notes
will be registered under the Securities Act but will constitute a new issue of
securities with no established trading market, and there can be no assurance as
to:
o the development of any market for the Exchange Notes;
o the liquidity of any such market that may develop;
o the ability of holders of Exchange Notes to sell their Exchange
Notes; or
o the price at which the holders of the Exchange Notes would be able
to sell their Exchange Notes.
We do not intend to list the Exchange Notes on any national securities
exchange or for quotation through any automated quotation system. We cannot
assure you that an active trading market will develop for the Exchange Notes, or
that any trading market that may develop will be liquid. If an active trading
market for the Exchange Notes were to develop, the Exchange Notes could trade at
prices that may be higher or lower than their principal amount or purchase
price, depending on many factors, including prevailing interest rates, the
market for similar notes and our financial performance. If a market for the
Exchange Notes does not develop, purchasers may be unable to resell their
Exchange Notes for an extended period of time, if at all. Historically, the
market for non-investment grade debt has been subject to disruptions that have
caused substantial volatility in the prices of securities similar to the
Exchange Notes. We cannot assure you that the market for the Exchange Notes, if
any, will not be subject to similar disruptions. Any such disruptions may
adversely affect a holder of the Exchange Notes.
FORWARD LOOKING STATEMENTS
This prospectus contains forward looking statements. In addition, from
time to time, we or our representatives have made or may make forward looking
statements orally or in writing. These include statements about such matters as:
future production and sales of steel, aluminum, fuel cells, electronic devices
and other products that incorporate our products or that are produced using our
products; future prices and sales of and demand for graphite electrodes and our
other products; future operational and financial performance of various
businesses; strategic plans and programs; impacts of regional and global
economic conditions; restructuring, realignment, strategic alliance, supply
chain, technology development and collaboration, investment, acquisition, joint
venture, operating, integration, tax planning, rationalization, financial and
capital projects; legal matters and related costs; consulting fees and related
projects; potential offerings, sales and other actions regarding debt or equity
securities of us or our subsidiaries; and future costs, working capital,
revenue, business opportunities, values, debt levels, cash flow, cost savings
and reductions, margins, earnings and growth. The words "will," "may," "plan,"
"estimate," "project," "believe," "anticipate," "intend," "expect," "should" and
similar expressions identify some of these statements.
Actual future events and circumstances (including future performance,
results and trends) could differ materially from those set forth in these
statements due to various factors. These factors include:
o the possibility that global or regional economic conditions
affecting our products may not improve or may worsen;
36
o the possibility that announced or anticipated additions to
capacity for producing steel in electric arc furnaces, or
announced or anticipated reductions in graphite electrode
manufacturing capacity, may not occur;
o the possibility that increased production of steel in electric arc
furnaces or reductions in graphite electrode manufacturing
capacity may not result in stable or increased demand for or
prices or sales volume of graphite electrodes;
o the possibility that economic or technological developments may
adversely affect growth in the use of graphite cathodes in lieu of
carbon cathodes in the aluminum smelting process;
o the possibility of delays in or failure to achieve widespread
commercialization of proton exchange membrane fuel cells which use
natural graphite materials and components and the possibility that
manufacturers of proton exchange membrane fuel cells using those
materials or components may obtain those materials or components
or the natural graphite used in them from other sources;
o the possibility of delays in or failure to achieve successful
development and commercialization of new or improved electronic
thermal management or other products;
o the possibility of delays in meeting or failure to meet
contractually specified development objectives and the possible
inability to fund and successfully complete expansion of
manufacturing capacity to meet growth in demand for new or
improved products, if any;
o the possibility that we may not be able to protect our
intellectual property or that intellectual property used by us
infringes the rights of others;
o the occurrence of unanticipated events or circumstances relating
to pending antitrust investigations, lawsuits or claims;
o the commencement of new investigations, lawsuits or claims
relating to the same subject matter as the pending investigations,
lawsuits or claims;
o the possibility that the lawsuit against our former parents
initiated by us could be dismissed or settled, our theories of
liabilities or damages could be rejected, material counterclaims
could be asserted against us, legal expenses and distraction of
management could be greater than anticipated, or unanticipated
events or circumstances may occur;
o the possibility that expected cost savings from our 2002 new major
cost savings plan, including our POWER OF ONE initiative and the
shutdown of certain of our facilities or other cost savings
efforts, will not be fully realized;
o the possibility that anticipated benefits from the realignment of
our businesses into two new divisions may be delayed or may
not occur;
o the possibility that the corporate realignment of our subsidiaries
may not be completed when anticipated or at all and that, as a
result, the anticipated benefits therefrom may not be achieved
when anticipated or at all;
37
o the possibility that we may incur unanticipated health, safety or
environmental compliance, remediation or other costs or experience
unanticipated raw material or energy supply, manufacturing
operation or labor difficulties;
o the occurrence of unanticipated events or circumstances relating
to strategic plans or programs or relating to corporate
realignment, restructuring, strategic alliance, supply chain,
technology development, investment, acquisition, joint venture,
operating, integration, tax planning, rationalization, financial
or capital projects;
o changes in interest or currency exchange rates, changes in
competitive conditions, changes in inflation affecting our raw
material, energy or other costs, development by others of
substitutes for some of our products and other technological
developments;
o the possibility that changes in financial performance may affect
our compliance with financial covenants or the amount of funds
available for borrowing under the Senior Facilities; and
o other risks and uncertainties, including those described elsewhere
or by reference in this prospectus.
Occurrence of any of the events or circumstances described above could
also have a material adverse effect on our business, financial condition,
results of operations or cash flows.
No assurance can be given that any future transaction about which
forward looking statements may be made will be completed or as to the timing or
terms of any such transaction.
All subsequent written and oral forward looking statements by or
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these factors. Except as otherwise required to be disclosed in
periodic reports required to be filed by public companies with the SEC pursuant
to the SEC's rules, we have no duty to update these statements.
38
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Initial Notes were initially issued and sold by UCAR Finance on
February 15, 2002 to the initial purchasers pursuant to a Purchase Agreement
dated February 8, 2002. The initial purchasers subsequently resold the Initial
Notes to:
o qualified institutional buyers, as defined in Rule 144A under the
Securities Act in reliance on Rule 144A; and
o non-U.S. persons in offshore transactions in reliance on
Regulation S under the Securities Act.
Pursuant to the Purchase Agreement, UCAR Finance and the initial
purchasers entered into the Registration Rights Agreement. Pursuant to the
Registration Rights Agreement, we agreed to use our commercially reasonable best
efforts to file with the SEC an exchange offer registration statement not later
than May 1, 2002.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and we refer you to the provisions of
the Registration Rights Agreement, which has been incorporated by reference into
the registration statement of which this prospectus is a part.
The registration statement of which this prospectus is a part is
intended to satisfy our obligations with respect to the registration of Exchange
Notes in accordance with the terms of the Registration Rights Agreement.
Following completion of the exchange offer, holders of Initial Notes
not validly tendered in the exchange offer and holders of Exchange Notes will
not have any further registration rights. In addition, holders of Initial Notes
will continue to be subject to restrictions on transfer of their Initial Notes.
Accordingly, the liquidity of the market for Initial Notes could be adversely
affected. See, "Risk Factors--A Failure to Participate in the Exchange Offer May
Have Adverse Consequences."
Based on interpretations by the staff of the SEC, as set forth in
no-action letters issued to third parties, we believe that the Exchange Notes
issued pursuant to the exchange offer may be offered for resale, resold or
otherwise transferred by each holder of Exchange Notes (other than a
broker-dealer who acquired the Initial Notes directly from the Company for
resale pursuant to Rule 144A under the Securities Act or any other available
exemption under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such holder:
o is acquiring the Exchange Notes in the ordinary course of its
business;
o is not participating in, and does not intend to participate in, a
distribution of the Exchange Notes within the meaning of the
Securities Act, and has no arrangement or understanding with any
person to participate in a distribution of the Exchange Notes
within the meaning of the Securities Act; and
o is not an affiliate (as defined in Rule 405 under the Securities
Act) of UCAR Finance.
By tendering Initial Notes in exchange for Exchange Notes, each holder,
other than a broker-dealer, will be required to make representations to that
effect. If a holder of Initial Notes is participating
39
in or intends to participate in, a distribution of the Exchange Notes, or has
any arrangement or understanding with any person to participate in a
distribution of the Exchange Notes to be acquired pursuant to the exchange
offer, such holder may be deemed to have received restricted securities and may
not rely on the applicable interpretations of the staff of the SEC. Any such
holder will have to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Initial Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. The Letter of Transmittal which accompanies this
prospectus states that, by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. A broker-dealer may utilize this prospectus, as
it may be amended or supplemented from time to time, in connection with offers
to resell and other transfers of Exchange Notes received in exchange for Initial
Notes which were acquired by such broker-dealer as a result of market making or
other trading activities. We have agreed that we will make this prospectus
available to any broker-dealer for a period of time not to exceed 180 days after
the consummation of the exchange offer for use in connection with any such offer
to resell, resale or other transfer. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and conditions described in this prospectus and the
accompanying Letter of Transmittal, we will accept any and all Initial Notes
which are validly tendered and which are not withdrawn prior to 5:00 p.m. New
York City time on , 2002, or such later time and date to which we extend the
exchange offer in our sole discretion. This time and date, as specified herein
or as extended, is called the "Expiration Date". We will issue $1,000 principal
amount of Exchange Notes for each $1,000 principal amount of Initial Notes
validly tendered pursuant to the exchange offer and not withdrawn prior to the
Expiration Date. Initial Notes may only be tendered in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and
terms of the Initial Notes, except that:
o the Exchange Notes will have been registered under the Securities
Act and, therefore, will not bear legends restricting their
transfer; and
o the holders of the Exchange Notes will not be entitled to any of
the registration rights of holders of Initial Notes under the
Registration Rights Agreement, which rights, in any event, will
terminate upon the completion of the exchange offer.
The Exchange Notes will represent the same indebtedness as the Initial Notes and
will be issued under, and be entitled to the benefits of, the Indenture which
authorized the issuance of the Initial Notes. The Exchange Notes and the Initial
Notes will be treated as a single class of securities under the Indenture.
As of the date of this prospectus, $400.0 million in aggregate
principal amount of Initial Notes was outstanding. Only a registered holder of
Initial Notes (or such holder's legal representative or attorney-in-fact), as
reflected in the Trustee's records under the Indenture, may participate in the
exchange offer. There is no fixed record date for determining holders of the
Initial Notes entitled to participate in the exchange offer. Holders of Initial
Notes do not have any appraisal or dissenters' rights under the General
Corporation Law of the State of Delaware or the Indenture in connection with the
exchange offer. We intend to conduct the exchange offer in accordance with the
applicable provisions of
40
the Registration Rights Agreement and the applicable requirements of the
Securities Act and the rules and regulations of the SEC thereunder.
We will be deemed to have accepted validly tendered Initial Notes when,
and if, we give oral or written notice to the State Street Bank and Trust
Company, as Exchange Agent. The Exchange Agent will act as agent for the
tendering holders of Initial Notes for the purposes of receiving the Exchange
Notes from us.
You will not be required to pay brokerage commissions or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange of Initial Notes in the exchange offer. We will pay all
charges and expenses, other than certain applicable taxes described below, in
connection with this exchange offer. See "--Fees and Expenses."
EXTENSION; AMENDMENTS
In order to extend the exchange offer, we are obligated to notify the
Exchange Agent of any extension by oral (promptly confirmed in writing) or
written notice and will make a public announcement thereof, each prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
We expressly reserve the right in our discretion to:
o delay accepting any Initial Notes;
o extend the exchange offer; and
o amend the terms of the exchange offer in any manner,
by giving oral or written notice of such delay, extension or amendment to the
Exchange Agent.
If we amend the exchange offer in a manner determined by us to
constitute a material change, we will promptly disclose such amendment by means
of a prospectus supplement that we will distribute to each registered holder of
Initial Notes. In addition, we will also extend the exchange offer for an
additional five to ten business days, depending on the significance of the
amendment, if the exchange offer would otherwise expire during such period.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension or amendment of the exchange offer, we will
have no obligation to publish, advertise or otherwise communicate any such
public announcement other than by making a timely news release to an appropriate
news agency.
PROCEDURES FOR TENDERING
Only a registered holder of Initial Notes (or such registered holder's
legal representative or attorney-in-fact) may tender such Initial Notes in the
exchange offer. The term "holder" with respect to the exchange offer means any
person in whose name Initial Notes are registered on the books the Trustee under
the Indenture or any other person who has obtained a properly completed bond
power from such a registered holder. To tender your Initial Notes in the
exchange offer, you must complete, sign and date the Letter of Transmittal, or a
facsimile thereof, have the signatures thereon guaranteed if required by the
Letter of Transmittal, and mail or otherwise deliver the Letter of Transmittal
or such facsimile together with the certificates representing the Initial Notes
being tendered and any other required documents to the
41
Exchange Agent at the address set forth below under "--Exchange Agent" for
receipt at or prior to 5:00 p.m. New York City time on the Expiration Date.
Alternatively, you may either:
o send a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Initial Notes, if such procedure is
available, into the Exchange Agent's account at the Depository
Trust Company ("DTC" or the "Depository") pursuant to the
procedure for book-entry transfer described below, at or prior to
5:00 p.m. on the Expiration Date; or
o comply with the guaranteed delivery procedures described below.
Your tender of Initial Notes will constitute an agreement between you
and us in accordance with the terms and subject to the conditions set forth in
this prospectus and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF INITIAL NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT YOUR ELECTION AND RISK. INSTEAD OF DELIVERY
BY MAIL, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND DELIVERY SERVICE,
PROPERLY INSURED. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE
TIMELY DELIVERY. YOU SHOULD NOT SEND THE LETTER OF TRANSMITTAL OR ANY INITIAL
NOTES TO THE COMPANY. YOU MAY REQUEST YOUR BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES OR NOMINEES TO EFFECT SUCH TENDER ON YOUR BEHALF.
If you are the beneficial owner of Initial Notes that are registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
and you wish to tender your Initial Notes, you should contact the registered
holder promptly and instruct such registered holder to tender on your behalf. If
you wish to tender on your own behalf, you must, prior to completing and
executing the Letter of Transmittal and delivering your Initial Notes, either
make appropriate arrangements to register ownership of the Initial Notes in your
name or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Initial Notes are tendered:
o by a registered holder who has not completed the box titled
"Special Delivery Instructions" on the Letter of Transmittal; or
o for the account of an Eligible Institution.
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be made by a member firm of a registered national securities exchange or
the National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the U.S. or an "eligible guarantor
institution" (within the meaning of Rule 17Ad-15 under the Securities Exchange
Act of 1934) that is a member of one of the recognized signature guarantee
programs identified in the Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Initial Notes listed therein, such Initial Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder exactly as such registered holder's name appears on the
Initial Notes.
42
If the Letter of Transmittal or any Initial Notes are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless waived by us, evidence
satisfactory to us of their authority to so act must also be submitted with the
Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Initial Notes.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by the Initial
Notes being tendered (or a timely confirmation received of a book-entry transfer
of Initial Notes into the Exchange Agent's account at the Depository with an
Agent's Message) or a Notice of Guaranteed Delivery from an Eligible Institution
is received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Initial Notes tendered pursuant to a Notice of Guaranteed Delivery by an
Eligible Institution will be made only against delivery of the Letter of
Transmittal (and any other required documents) and the tendered Initial Notes
(or a timely confirmation received of a book-entry transfer of Initial Notes
into the Exchange Agent's account at the Depository with an Agent's Message, as
defined under "--Book-Entry Transfer") to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Initial Notes will be determined
by us in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all Initial Notes not properly
tendered or any Initial Notes which if accepted, in our opinion or in our
counsel's opinion, would be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular Initial Notes.
Our interpretation of the terms and conditions of the exchange offer (including
the instructions in the Letter of Transmittal) will be final and binding. Unless
waived, any defects or irregularities in connection with tenders of Initial
Notes must be cured within such time as we determine. Although we intend to
notify you of defects or irregularities with respect to tenders of Initial
Notes, neither we, the Exchange Agent nor any other person shall incur any
liability for failure to give such notification. Tenders of Initial Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived.
While we presently have no plan to acquire any Initial Notes that are
not tendered in the exchange offer, or to file a registration statement to
permit resales of any Initial Notes that are not tendered pursuant to the
exchange offer, we reserve the right in our sole discretion to purchase or make
offers for any Initial Notes that remain outstanding subsequent to the
Expiration Date and, to the extent permitted by applicable law, purchase Initial
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
exchange offer.
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the exchange
offer, we will accept, promptly after the Expiration Date, all Initial Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Initial Notes. For purposes of the exchange offer, the Initial Notes will be
deemed to have been accepted as validly tendered for exchange when, and if, we
have given oral or written notice to the Exchange Agent.
RETURN OF INITIAL NOTES
If any tendered Initial Notes are not accepted for any reason set forth
in the terms and conditions of the exchange offer or if Initial Notes are
withdrawn, we will return the unaccepted, withdrawn or non-
43
exchanged Initial Notes to you without expense (or, in the case of Initial Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Depository pursuant to the book-entry transfer procedures described below, the
Initial Notes will be credited to an account maintained with the Depository) as
promptly as practicable after withdrawal, rejection of tender, the Expiration
Date or earlier termination of the exchange offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with
respect to the Initial Notes with the Depository for purposes of the exchange
offer promptly after the date of this prospectus. Any financial institution that
is a participant in the Depository's Book-Entry Transfer Facility system may
make book-entry delivery of the Initial Notes by causing the Depository to
transfer such Initial Notes into the Exchange Agent's account and to deliver an
"Agent's Message" (as defined below) on or prior to the Expiration Date in
accordance with the Depository's procedures for such transfer and delivery. If
delivery of Initial Notes is effected through book-entry transfer into the
Exchange Agent's account at the depository and an Agent's Message is not
delivered, the Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must be transmitted to
and received or confirmed by the Exchange Agent at its addresses set forth
herein under "--Exchange Agent" prior to 5:00 p.m., New York City time on the
Expiration Date or pursuant to the guaranteed delivery procedures described
below. DELIVERY OF DOCUMENTS TO THE DEPOSITORY DOES NOT CONSTITUTE DELIVERY TO
THE EXCHANGE AGENT. All references in this prospectus to deposit of Initial
Notes will be deemed to include DTC's book-entry delivery method.
The term "Agent's Message" means a message transmitted by the
Depository to and received by the Exchange Agent and forming a part of a
Book-Entry Confirmation which states that the Depository has received an express
acknowledgment from the tendering participant, which acknowledgment states that
the participant has received and agrees to be bound by, and makes the
representations and warranties contained, in the Letter of Transmittal and that
we may enforce the Letter of Transmittal against the participant.
GUARANTEED DELIVERY PROCEDURES
If you are a registered holder of Initial Notes and wish to tender your
Initial Notes, but time will not permit your required documents to reach the
Exchange Agent on or prior to the Expiration Date, you may still tender in the
exchange offer if:
o you tender through an Eligible Institution;
o on or prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly
executed Letter of Transmittal and Notice of Guaranteed Delivery,
substantially in the form provided by us (by facsimile
transmission, mail or hand delivery), setting forth your name and
address as holder of Initial Notes and the amount of Initial Notes
tendered, stating that the tender is being made thereby and
guaranteeing that within five business days after the Expiration
Date, a Book-Entry Confirmation or the certificates relating to
the Initial Notes, and all other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
o a Book-Entry Confirmation or the certificates for all tendered
Initial Notes, and all other documents required by the Letter of
Transmittal, are received by the Exchange Agent within five
business days after the Expiration Date.
44
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent
to holders who wish to tender their Initial Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw
tenders of Initial Notes any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
For a withdrawal to be effective, you must send a written notice of
withdrawal to the Exchange Agent at the address set forth below under
"--Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. Any such notice of withdrawal must:
o specify the name of the person having deposited the Initial Notes
to be withdrawn;
o identify the Initial Notes to be withdrawn (including the
certificate number or numbers and principal amount of Initial
Notes); and
o be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which the Initial Notes
were tendered (including required signature guarantees).
All questions as to the validity, form and eligibility (including time
of receipt) of notices of withdrawal will be determined by us, in our sole
discretion, and our determination will be final and binding. Any Initial Notes
so withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the exchange offer, and no Exchange Notes will be issued with
respect thereto unless the Initial Notes so withdrawn are validly retendered.
Properly withdrawn Initial Notes may be retendered by following one of the
procedures described above at any time on or prior to the Expiration Date.
TERMINATION OF CERTAIN RIGHTS
All registration rights under the Registration Rights Agreement
accorded to holders of the Initial Notes (and all rights to receive additional
interest on the Initial Notes to the extent and in the circumstances specified
therein) will terminate upon consummation of the exchange offer except with
respect to our duty to keep the registration statement effective until the
closing of the exchange offer and, for a period of 180 days after the closing of
the exchange offer, to provide copies of the latest version of the prospectus to
any broker-dealer that requests copies of such prospectus in the Letter of
Transmittal for use in connection with any resale by such broker-dealer of
Exchange Notes received for its own account pursuant to the exchange offer in
exchange for Initial Notes acquired for its own account as a result of
market-making or other trading activities.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the exchange offer, we will not be
required to accept Initial Notes for exchange, or issue Exchange Notes in
exchange for any Initial Notes, and we may terminate or amend the exchange offer
as provided in this prospectus before the acceptance of such Initial Notes, if:
o a change in laws or regulations occurs which, in our sole
judgment, our ability to proceed with the exchange offer;
o a change in the current interpretation of the staff of the SEC
occurs which current interpretation permits the Exchange Notes
issued pursuant to the exchange offer in exchange
45
for the Initial Notes to be offered for resale, resold or
otherwise transferred by holders thereof (other than in certain
circumstances);
o a stop order is issued by the SEC or any state securities
authority suspending the effectiveness of the registration
statement of which this prospectus is a part or the qualification
of the Indenture under the Trust Indenture Act of 1939 or
proceedings are initiated or, to our knowledge, threatened for
that purpose;
o an action or proceeding is instituted or threatened in any court
or before any governmental agency or body that in our judgment
would reasonably be expected to prohibit, prevent or otherwise
impair our ability to proceed with the exchange offer;
o a governmental approval is not obtained, which approval we deem,
in our sole judgment, necessary for the consummation of the
exchange offer; or
o a change, or a development involving a prospective change, in our
business or financial affairs occurs which, in our sole judgment,
might materially impair our ability to proceed with the exchange
offer.
These conditions are for our sole benefit and we may assert them
regardless of the circumstances giving rise to any such condition or we may
waive them, in whole or in part, at any time and from time to time, if we
determine in our reasonable judgment that any of the foregoing events or
conditions has occurred or exists or has not been satisfied, subject to
applicable law. Our failure at any time to exercise any of the foregoing rights
will not be deemed a waiver of any such right and each such right will be deemed
an ongoing right which we may assert at any time and from time to time.
If we determine that we may terminate the exchange offer, we may:
o refuse to accept any Initial Notes and return to the holders
thereof Initial Notes that have been tendered;
o extend the exchange offer and retain all Initial Notes tendered
prior to the Expiration Date, subject to the rights of holders of
tendered Initial Notes to withdraw their tendered Initial Notes;
or
o waive such termination event with respect to the exchange offer
and accept all properly tendered Initial Notes that have not been
withdrawn or otherwise amend the terms of the exchange offer in
any respect as provided under "--Extension; Amendments."
The exchange offer is not conditioned upon any minimum principal amount
of Initial Notes being tendered for exchange.
We have no obligation to, and will not knowingly, permit acceptance of
tenders of Initial Notes from our affiliates (within the meaning of Rule 405
under the Securities Act) or from any other holder or holders who are not
eligible to participate in the exchange offer under applicable law or
interpretations thereof by the staff of the SEC, or if the Exchange Notes to be
received by such holder or holders of Initial Notes in the exchange offer, upon
receipt, will not be tradable by such holder without restriction under the
Securities Act and the Securities Exchange Act of 1934 and without material
restrictions under the "blue sky" or securities laws of substantially all of the
states of the U.S.
46
EXCHANGE AGENT
We have appointed State Street Bank and Trust Company as Exchange Agent
for the exchange offer. Questions and requests for assistance, requests for
additional copies of this prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent as follows:
BY REGISTERED OR CERTIFIED MAIL, BY OVERNIGHT COURIER OR BY HAND:
State Street Bank and Trust Company
2 Avenue de Lafayette
Boston, MA 02111
Attention: John Brennan
or:
BY FACSIMILE TRANSMISSION:
State Street Bank and Trust Company
2 Avenue de Lafayette
Boston, MA 02111
Attention: John Brennan
Facsimile Number: (617) 662-1458
Confirm by Telephone: (617) 662-1768
In addition, Letters of Transmittal and any other required
documentation should be sent to the Exchange Agent at the address set forth
above, except where facsimile transmission is specifically authorized (e.g.,
withdrawals and Notices of Guaranteed Delivery). DELIVERY OF THE LETTER OF
TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA
FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders pursuant to the
exchange offer. The principal solicitation is being made by mail; however,
additional solicitation may be made by telegraph, facsimile transmission,
telephone or in person by officers and regular employees of UCAR Finance and its
affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptance of the exchange offer. We will, however, pay the Exchange Agent
reasonable and customary fees for its services and will reimburse its reasonable
out-of-pocket expenses in connection therewith.
We will pay all transfer taxes, if any, applicable to the exchange of
the Initial Notes pursuant to the exchange offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Initial Notes pursuant to
the exchange offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to the tendering holder.
47
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the exchange offer is voluntary. Holders of the
Initial Notes are urged to consult their financial and tax advisors in making
their own decisions on what action to take.
Initial Notes that are not exchanged for Exchange Notes pursuant to the
exchange offer will remain "restricted securities" within the meaning of Rule
144 under the Securities Act. Accordingly, such Initial Notes may be resold
only:
o to us or any of our subsidiaries;
o so long as the Initial Notes are eligible for resale pursuant to
Rule 144A, to a person whom the seller reasonably believes is a
"qualified institutional buyer" within the meaning of Rule 144A
under the Securities Act, purchasing for its own account or for
the account of a qualified institutional buyer, to whom notice is
given that the resale, pledge or other transfer is being made in
reliance on Rule 144A;
o outside the U.S. to non-U.S. Persons in an offshore transaction in
compliance with Rule 904 under the Securities Act;
o pursuant to an exemption from registration under the Securities
Act in accordance with Rule 144 (if available);
o to an institutional "accredited investor" that, prior to such
transfer, furnishes to the Trustee a signed letter containing
certain representations and agreements relating to the
restrictions on transfer of the Initial Notes and, if such
transfer is in respect of a principal amount of Initial Notes at
the time of transfer of less than $500,000, an opinion of counsel
acceptable to us that the transfer is in compliance with the
Securities Act; or
o pursuant to an effective registration statement under the
Securities Act,
in each case in accordance with any applicable securities laws of any state of
the U.S. and subject to certain requirements of the Trustee being met. The
liquidity of the Initial Notes could be adversely affected by the exchange
offer. See "Risk Factors--A Failure to Participate in the Exchange Offer May
Have Adverse Consequences."
RESALES OF THE EXCHANGE NOTES
Based on certain no-action letters issued by the staff of the SEC, we
believe that the Exchange Notes or interests therein issued pursuant to the
exchange offer in exchange for Initial Notes or interests therein may be offered
for resale, resold and otherwise transferred by you (unless you are a
broker-dealer who purchases such Exchange Notes directly from us to resell
pursuant to Rule 144A or any other available exemption under the Securities Act)
without compliance with the registration and prospectus delivery requirements of
the Securities Act; provided that
o you are acquiring the Exchange Notes in the ordinary course of
your business;
o you are not participating, do not intend to participate and have
no arrangement or understanding with any person to
participate, in the distribution of Exchange Notes; and
48
o you are not an affiliate of the Company, within the meaning of
Rule 405 under the Securities Act.
However, if you acquire Exchange Notes in the exchange offer for the
purpose of distributing or participating in the distribution of the Exchange
Notes, you cannot rely on the position of the staff of the SEC in the no-action
letters issued to third parties and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless an exemption from registration is otherwise
available.
Each broker-dealer that receives Exchange Notes for its own account may
be deemed an "underwriter" within the meaning of the Securities Act and must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. A
broker-dealer may use this prospectus for any offer to resell, resale or other
transfer of Exchange Notes received in exchange for Initial Notes which were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Letter of Transmittal that accompanies this prospectus
states that, by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. We have agreed that, for a period of 180 days after the
consummation of the exchange offer, we will make this prospectus available to
any broker-dealer for use in connection with any such offer to resell, resale or
other transfer. See "Plan of Distribution." Subject to certain limitations, we
will take steps to ensure that the issuance of the Exchange Notes will comply
with state securities or "blue sky" laws.
49
USE OF PROCEEDS
The exchange offer is being effected to satisfy certain of our
obligations under the Registration Rights Agreement. We will not receive any
cash proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes, we will receive an equal aggregate
principal amount of Initial Notes. Initial notes that are properly tendered in
the exchange offer and not validly withdrawn will be accepted, canceled and
retired and cannot be reissued. Accordingly, the issuance of the Exchange Notes
will not result in any increase in our outstanding indebtedness.
The net proceeds to us from the original issuance of the Initial Notes
were approximately $387 million, after deducting underwriting discounts,
commissions and other expenses paid by us. We used $314 million of the net
proceeds from the original issuance of the Initial Notes to repay term loans
under the Senior Facilities, of which $191 million was used to repay Tranche A
Term Loans and $123 million was used to repay Tranche B Term Loans, and $73
million of the balance of the net proceeds to reduce the outstanding balance
under our revolving credit facility. After such repayment, the aggregate
principal payments due on the term loans are: no payments in 2002, 2003 or 2004,
$26 million in 2005, $26 million in 2006 and $164 million in 2007. At December
31, 2001, the interest rates on our outstanding debt under the Senior Facilities
were: euro Tranche A Term Loans, 6.4%; Dollar Tranche A Term Loans, 4.9%;
Tranche B Terms Loans, 5.6%; and the revolving credit facility, 5.2%. The
weighted average interest rate on the Senior Facilities was 8.1% during 2001.
Certain affiliates of the initial purchasers are lenders under the
Senior Facilities and received their proportionate shares of the repayment of
the amounts under the Senior Facilities as described above. We are currently in
compliance with the terms of the Senior Facilities. The decision of the initial
purchasers to distribute the Initial Notes was made independently of the
affiliates of the initial purchasers that are lenders under the Senior
Facilities, which lenders had no involvement in determining whether or when to
distribute the Initial Notes in this offering or the terms of this offering. The
initial purchasers did not receive any benefit from the offering of the Initial
Notes other than the initial purchaser's discount provided by us.
50
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
2001 (i) on an actual basis and (ii) on an as adjusted basis to give effect to
the issuance and sale of the Initial Notes and the application of proceeds
therefrom. You should read this table in conjunction with "Use of Proceeds,"
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto included elsewhere in this prospectus.
AT DECEMBER 31, 2001
--------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
Cash and cash equivalents..................................... $ 38 $ 38
======= =========
Short-term debt(a)............................................ $ 7 $ 7
======= =========
Long-term debt:
Senior Facilities(b)(c):
Revolving facility(c).................................... $ 95 $ 22
Tranche A euro facility.................................. 194 26
Tranche A U.S. dollar facility........................... 23 0
Tranche B U.S. dollar facility........................... 313 190
------- ---------
Total Senior Facilities.............................. 625 238
Swiss mortgage and other European debt...................... 6 6
------- ---------
Subtotal............................................. 631 244
101/4% Senior Notes due 2012................................ - 400
------- ---------
Total long-term debt............................ $ 631 $ 644
------- ---------
Total stockholders' deficit................................... $ (332) $ (332)
------- ---------
Total capitalization(d)....................................... $ 299 $ 312
======= =========
-----------
(a) Actual and as adjusted current portion of long-term
debt at December 31, 2001 was nil.
(b) The net proceeds from the sale of the Initial Notes were used
as follows: $168 million was applied to the Tranche A euro
facility; $23 million was applied to the Tranche A U.S. dollar
facility; $123 million was applied to the Tranche B U.S.
dollar facility; and $73 million was applied to our revolving
credit facility.
(c) After the application of the net proceeds from the offering of
the Initial Notes, the aggregate principal amount payable each
year under the Tranche A and Tranche B facilities is as
follows: no payments in 2002, 2003 or 2004, $26 million in
2005, $26 million in 2006 and $164 million in 2007.
(d) Based on the last reported sale price of our common stock on
April 29, 2002, our market equity capitalization was about
$715 million and our total market capitalization, consisting
of the sum of our long term debt at December 31, 2001 and such
market equity capitalization, was about $1.4 billion.
51
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data at and for the years
ended December 31, 1997, 1998, 1999, 2000 and 2001 have been derived from our
audited annual Consolidated Financial Statements, except for the data under
"Other Operating Data." The following selected "As adjusted" consolidated
financial data at and for the twelve month period ended December 31, 2001 have
been derived, except for the items under "Other Operating Data," from our
Consolidated Financial Statements, adjusted to give effect to the offering of
the Initial Notes and our equity offering completed in July 2001 as well as the
application of the net proceeds from both offerings, as if both offerings had
occurred on January 1, 2001 for "Statement of Operations Data" or on December
31, 2001 for "Balance Sheet Data." The data are presented for informational
purposes only and do not purport to be indicative of the results that would have
actually been obtained if these offerings had been completed on the dates
indicated or that may be expected to occur in the future.
You should read this information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto elsewhere in this
prospectus.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- ----
(AS ADJUSTED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $1,097 $947 $831 $776 $654 $654
Gross profit(a)............................ 411 343 258 216 185 185
Selling, administrative and other expenses. 115 103 86 86 78 78
Restructuring charges
(credit)(b).............................. - 86 (6) 6 12 12
Impairment loss on long-lived assets(c).... - 60 35 3 80 80
Antitrust investigations and related
lawsuits and claims(d)................... 340 - - - 10 10
Securities class action and stockholder
derivative lawsuits(e)................... - - 13 (1) - -
Corporate realignment and related
expenses(f).............................. - - - - 2 2
Operating profit
(loss)(a)(b)(c)(d)(e).................... (58) 77 130 111 (10) (10)
Interest expense........................... 64 73 84 75 60 69
Provision for (benefit from) income taxes.. 39 32 1 10 15 12
Income (loss) before extraordinary
item(a)(b)(c)(d)(e)...................... (160) (30) 42 23 (87) (93)
Extraordinary item, net of tax(g).......... - 7 - 13 - -
Net income
(loss)(a)(b)(c)(d)(e)(g)................. (160) (37) 42 10 (87) (93)
Earnings (loss) per common share:
Basic: Income (loss) before extraordinary
items............................. $(3.49) $(0.66) $0.94 $0.51 $(1.75) $(1.88)
====== ====== ===== ===== ====== ======
Net income (loss)................... $(3.49) $(0.83) $0.94 $0.22 $(1.75) $(1.88)
====== ====== ===== ===== ====== ======
Weighted average common shares
outstanding (in thousands)........ 45,963 44,972 45,114 45,224 49,720 49,720
Diluted: Income (loss) before
extraordinary items............... $(3.49) $(0.66) $0.91 $0.50 $(1.75) $(1.88)
====== ====== ===== ===== ====== ======
Net income (loss)................... $(3.49) $(0.83) $0.91 $0.22 $(1.75) $(1.88)
====== ====== ===== ===== ====== ======
Weighted average common shares
outstanding (in thousands)........ 45,963 44,972 46,503 45,813 49,720 49,720
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges(h)...... - - 1.54x 1.30x - -
52
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999 2000 2001 2001
---- ---- ---- ---- ---- ----
(AS ADJUSTED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Gross profit margin(a)..................... 37.5% 36.2% 31.0% 27.8% 28.3% 28.3%
Depreciation and amortization.............. $49 $51 $45 $43 $36 $36
Capital expenditures....................... 79 52 56 52 40 40
OTHER OPERATING DATA:
Cash flow provided by (used in) operating
activities............................... 172 (29) 80 94 17 17
Cash flow provided by (used in) investing
activities............................... (221) (31) (39) (50) (39) (39)
Cash flow provided by (used in) financing
activities............................... 13 62 (80) (13) 15 15
Adjusted EBITDA(i)......................... 331 274 225 164 130 130
Total debt to Adjusted EBITDA.............. 2.21x 2.93x 3.21x 4.48x 4.91x 5.01x
Adjusted EBITDA to interest expense........ 5.17x 3.75x 2.68x 2.19x 2.17x 1.88x
Average sales revenue per metric ton of
graphite electrodes...................... 3,123 3,013 2,676 2,379 2,341 2,341
Average cost of sales per metric ton of
graphite electrodes...................... 1,953 1,918 1,783 1,723 1,691 1,691
Quantity of graphite electrodes sold
(thousands of metric tons)(j)(k)......... 242 211 206 217 174 174
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.................. $58 $58 $17 $47 $38 $38
Working capital............................ 94 203 105 101 112 112
Total assets............................... 1,262 1,137 933 908 797 810
Total debt................................. 732 804 722 735 638 651
Balance of reserve for antitrust
investigations, lawsuits and claims...... 337 195 131 107 101 101
Other long term obligations (excluding the
reserve for antitrust investigations,
lawsuits and claims)(l).................. 150 149 120 126 132 132
Stockholders' equity (deficit)............. (227) (287) (293) (316) (332) (332)
-----------
(a) For 1999, includes an $8 million charge for the write-down to lower of
cost or market of certain advanced graphite materials inventory.
(b) For 1998, represents costs recorded in connection with closing graphite
electrode operations in Canada and Germany and consolidation of certain
corporate administrative offices. These costs consisted primarily of
severance, write-offs of fixed assets and environmental and other
shutdown costs. For 1999, represents a net reduction in the estimate of
shutdown costs recorded in 1998. For 2000, represents a $2 million
charge in connection with restructuring of our advanced graphite
materials business and a $4 million charge in connection with a
corporate restructuring involving workforce reduction. These costs
consisted primarily of severance. For 2001, represents a $7 million
charge for restructuring costs in connection with closure of graphite
electrode manufacturing operations in Tennessee and coal calcining
operations in New York and relocation of corporate headquarters, which
consisted primarily of severance, and a $5 million charge in connection
with mothballing of our graphite electrode operations in Italy.
(c) Represents impairment losses on long-lived assets associated with our
Russian assets in 1998, our advanced graphite materials assets in 1999
and our cathode assets in 2000. For 2001, represents a $51 million
charge related to our graphite electrode assets in Tennessee, a $1
million charge related to our coal calcining assets in New York, a $1
million charge related to our advanced graphite
53
materials assets, a $24 million charge related to our graphite
electrode assets in Italy and a $3 million charge related to
impairment losses on securities.
(d) Represents estimated potential liabilities and expenses in connection
with antitrust investigations and related lawsuits and claims.
(e) Represents estimated liabilities and expenses in connection with
securities class action and stockholder derivative lawsuits, $1 million
of which was reversed in 2000.
(f) Represents costs in connection with the corporate realignment of our
subsidiaries.
(g) The 1998 extraordinary item and the 2000 extraordinary item resulted
from early extinguishment of debt in connection with our debt
refinancings and recapitalizations.
(h) The ratio of earnings to fixed charges has been computed by dividing
(i) earnings before income taxes, plus fixed charges (excluding
capitalized interest) and amortization of capitalized interest by (ii)
fixed charges, which consist of interest charges (including capitalized
interest) plus the portion of rental expense that includes an interest
factor. In 1997, earnings were insufficient to cover fixed charges by
$122 million due to, among other things, the $340 million charge
recorded in connection with estimated potential liabilities and
expenses in connection with antitrust investigations and related
lawsuits and claims. Earnings were insufficient to cover fixed charges
by $3 million in 1998 and by $69 million in 2001 due to, among other
things, restructuring charges and impairment losses on long-lived and
other assets.
(i) EBITDA, for this purpose, means operating profit (loss), plus
depreciation, amortization, impairment losses on long-lived and other
assets, impairment losses on investments, inventory write-downs (in
each case as described above) and that portion of restructuring charges
(credits) applicable to non-cash asset write-offs. The amount of
restructuring charges (credits) applicable to non-cash asset write-offs
was a charge of $29 million in 1998, a credit of $6 million in 1999 and
a charge of $4 million in 2001. Adjusted EBITDA, for this purpose,
means EBITDA plus the cash portion of restructuring charges (credits),
charges (credits) for estimated potential liabilities and expenses in
connection with antitrust investigations and related lawsuits and
claims, securities class actions and stockholder derivative lawsuits,
the charge related to the withdrawn public offering by Graftech and the
charges in connection with the corporate realignment of our
subsidiaries. We believe that EBITDA and Adjusted EBITDA are generally
accepted as providing useful information regarding a company's ability
to incur and service debt. EBITDA and Adjusted EBITDA should not be
considered in isolation or as a substitute for net income, cash flows
from continuing operations or other consolidated income or cash flow
data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
Our method for calculating EBITDA or Adjusted EBITDA may not be
comparable to methods used by other companies and is not the same as
the method for calculating EBITDA under the Senior Facilities or the
Indenture. The following table sets forth, for the periods indicated,
the calculation of EBITDA and Adjusted EBITDA:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
Operating profit (loss)(a)(b)(c)(d)................... $(58) $ 77 $130 $111 $ (10)
Depreciation and amortization......................... 49 51 45 43 36
Impairment loss on long-lived assets(c)............... - 60 35 3 80
Write-down of graphite specialties inventory(a)....... - - 8 - -
Non-cash portion of restructuring charges (credits)... - 29 (6) - 4
------ ------ ----- ------ ------
54
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
EBITDA................................................ (9) 217 212 157 110
Corporate realignment and related expenses........... - - - - 2
Cash portion of restructuring charges................. - 57 - 6 8
Expenses related to the withdrawn Graftech offering... - - - 2 -
Antitrust investigations and related lawsuits and
claims(d).......................................... 340 - - - 10
Securities class action and stockholder derivative
lawsuits(e)........................................ - - 13 (1) -
------ ------ ----- ------ -----
Adjusted EBITDA....................................... $331 $274 $225 $164 $130
===== ==== ==== ==== ====
(j) Excludes 8,000 metric tons of graphite electrodes sold in 1997 by our
South African subsidiary before it became wholly owned on April 21,
1997.
(k) Management believes the quantity of graphite electrodes sold in the
1997 fourth quarter was impacted by customer buy-ins in advance of
price increases effective in January 1998.
(l) Represents pension, post-retirement and related benefits, employee
severance liabilities and miscellaneous other long term obligations.
55
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are one of the world's largest manufacturers and providers of high
quality natural and synthetic graphite- and carbon-based products and services,
offering energy solutions to industry-leading customers worldwide. We
manufacture graphite and carbon electrodes and cathodes, used primarily in
electric arc furnace steel production and aluminum smelting. We also manufacture
other natural and synthetic graphite and carbon products used in, and provide
services to, the fuel cell power generation, electronics, semiconductor and
transportation markets.
We are a global business, selling our products and engineering and
technical services in more than 70 countries. We have 13 manufacturing
facilities strategically located in Brazil, Mexico, South Africa, France, Spain,
Russia and the U.S., and a planned joint venture manufacturing facility located
in China, which, subject to receipt of required Chinese governmental approvals
and satisfaction of other conditions, is expected to commence operations in
2003.
REALIGNMENT
In early 2001, we launched a strategic initiative to strengthen our
competitive position and to change our corporate vision from an industrial
products company to an energy solutions company. In connection with this
initiative, we have realigned our company and management around two new
operating divisions, our Graphite Power Systems Division and our Advanced Energy
Technology Division. We believe that this realignment is enabling us to develop
and implement strategies uniquely designed to maximize the value of each of our
businesses. We may also adopt compensation plans designed to incentivize
management of each division on a basis consistent with its particular
strategies. In addition, we believe that this transparent, unified divisional
focus has and will continue to better enable us to structure and enter into
strategic alliances beneficial to each respective division.
We are also realigning the corporate organizational structure of our
subsidiaries. Upon completion of this corporate realignment, most of the
businesses of each division will be segregated into separate companies along
divisional lines. In addition, because most of the operations, net sales and
growth opportunities of our Graphite Power Systems Division are located outside
the U.S., most of its operations will be held by our Swiss subsidiary or its
subsidiaries. Most of our technology will continue to be held by our U.S.
subsidiaries.
As part of our new major cost savings plan announced in January 2002,
we are using opportunities created by this corporate organizational realignment
to change our U.S. benefit plans, improve cash management, intellectual property
management and corporate services delivery, reduce associated costs, reduce
taxes and reallocate intercompany debt. This reallocation of intercompany debt
will better match intercompany debt with cash flow from operations. Debt service
on our intercompany debt provides an important source of funds to repay our debt
to third parties, including the Senior Facilities and the Senior Notes.
OUR DIVISIONS
Our Graphite Power Systems Division manufactures and delivers high
quality graphite and carbon electrodes and cathodes and related services that
are key components of the conductive power systems used to produce steel,
aluminum and other non-ferrous metals. Graphite electrodes are consumed in the
production of steel in electric arc furnaces, the steel making technology used
by all "mini-mills."
56
Mini-mills constitute the higher long term growth sector of the steel industry.
Graphite electrodes are also consumed in refining steel in ladle furnaces and in
other smelting processes. Our graphite electrodes accounted for about 79% of
this division's net sales during 2001. Carbon electrodes are used in the
production of silicon metal, a raw material primarily used in the manufacture of
aluminum. Graphite and carbon cathodes are used in aluminum smelting.
Our Advanced Energy Technology Division develops, manufactures and
sells high quality, highly engineered natural and synthetic graphite- and
carbon-based energy technologies, products and services for both established and
high-growth-potential markets. We currently sell these products primarily to the
transportation, chemical, petrochemical, fuel cell power generation and
electronic thermal management markets. In addition, we provide cost effective
technical services to a broad range of markets and license our proprietary
technology in markets where we do not anticipate engaging in manufacturing
ourselves. We believe that this division will be successful because of our
patented and proprietary technologies related to graphite and carbon materials
science and our processing and manufacturing technology.
Natural graphite-based products, including flexible graphite, are
developed and manufactured by our subsidiary, Graftech. Our synthetic graphite-
and carbon-based products are developed and manufactured by our Advanced
Graphite Materials and Advanced Carbon Materials business units, respectively.
These business units include our former graphite and carbon specialties
businesses. Our technology licensing and technical services are marketed and
sold by our HT2 business unit.
COST REDUCTION PLANS
OVERVIEW. UCAR's Board of Directors adopted a global restructuring and
rationalization plan in September 1998 and we launched additional initiatives to
enhance the plan in October 1999. The 1998 plan strengthened our position as a
low cost supplier. It also enabled us to largely maintain cash flow from
operations (before antitrust fines and net settlements and expenses, securities
class action and shareholder derivative settlements and restructuring payments),
gross profit margins and operating profit margins despite the difficult economic
conditions that generally affected the steel and metals industries for most of
the period since September 1998. The 1998 plan is now completed. By the end of
2001, we delivered recurring annualized run rate cost savings of $132 million.
In January 2002, we announced a new major cost savings plan. Like the 1998 plan,
we believe that the 2002 plan is by far the most aggressive major cost reduction
plan being implemented in the graphite and carbon industry.
2002 PLAN. In January 2002, we announced a new major cost savings plan
designed to generate cost savings to strengthen our balance sheet. The key
elements of the 2002 plan consist of:
o the rationalization of graphite electrode manufacturing capacity
at our higher cost facilities and the incremental expansion of
capacity at our lower cost facilities;
o the redesign and implementation of changes in our U.S. benefit
plans for active and retired employees, which has been completed;
o the implementation of work process changes, including
consolidating and streamlining order fulfillment, purchasing,
finance and accounting, and human resource processes, along with
the identification and implementation of outsourcing
opportunities;
o the implementation of additional plant and corporate overhead cost
reduction projects; and
o the corporate realignment of our subsidiaries, consistent with the
operational realignment of our businesses into two operating
divisions, to generate significant tax savings.
57
As part of the 2002 plan, we mothballed our graphite electrode
manufacturing operations in Caserta, Italy during the 2002 first quarter, ahead
of schedule. These operations had the capacity to manufacture 26,000 metric tons
of graphite electrodes annually. After the shutdown of our operations in
Tennessee in the 2001 third quarter, these operations were our highest cost
graphite electrode manufacturing operations. We expect to further incrementally
expand graphite electrode manufacturing capacity at our facilities in Mexico,
France and Spain over the next twelve months. After the mothballing and
incremental expansion, our total annual graphite electrode manufacturing
capacity will remain about 210,000 metric tons.
We have identified a number of additional plant and overhead cost
reduction projects. One of the major projects is employee benefit plan redesign.
We have redesigned and implemented changes in our retiree medical insurance plan
and our U.S. retirement and savings plans for active and retired employees.
These benefit plan changes resulted in annual cost savings of $2 million in 2001
and will result in annual cost savings of more than $14 million in 2002 and
thereafter. We expect that about half of the other plant and overhead cost
reduction projects will be completed in 2002.
The corporate realignment of our subsidiaries is expected to be
substantially completed in the 2002 first half and result in substantial tax
savings. As a result of the corporate realignment of our subsidiaries, the
effective income tax rate for 2002, excluding non-recurring charges or benefits
associated with the realignment, is expected to be 35%.
We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years. We anticipate that the
aggregate estimated pre-tax, cash proceeds from these sales will total $75
million by the end of 2003. The non-strategic businesses contributed net sales
of about $25 million in 2001.
We estimate that the 2002 plan will generate cumulative cost savings of
about $45 million by the end of 2002, $120 million by the end of 2003 and $200
million by the end of 2004, and recurring annual cost savings of $80 million by
the end of 2004. These savings are additive to those which we achieved by the
end of 2001 under the 1998 plan that is now completed. The following table
summarizes the targeted savings under the 2002 plan:
SUMMARY OF TARGETED ANNUAL COST SAVINGS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2003 2004 CUMULATIVE
---- ---- ---- ----------
(PRE-TAX DOLLARS IN MILLIONS)
Cost of sales:
Graphite Power Systems Division................... $ 24 $ 43 $ 43 $ 110
Advanced Energy Technology Division............... 4 4 4 12
----- ----- ----- -------
Total cost of sales................................... 28 47 47 122
Overhead costs........................................ 9 10 11 30
----- ----- ----- -------
Total cost of sales and overhead costs......... 37 57 58 152
----- ----- ----- -------
Interest expense savings due to the 2002 plan......... 2 8 12 22
Tax expense........................................... 6 10 10 26
----- ----- ----- -------
Total savings.................................. $ 45 $ 75 $ 80 $ 200
===== ===== ===== =======
58
We believe that the 2002 plan will:
o further strengthen our position and our competitive advantage as a
low cost supplier to the steel and other metals industries;
o better enable us to largely maintain our gross profit margin and
operating margin during the current global economic downturn;
o rationalize our capacity to manufacture both higher value added
"supersize" ultra-high power graphite electrodes as well as cost
competitive high power small diameter graphite electrodes for
ladle furnaces;
o further improve our position to benefit, in terms of operations,
earnings and cash flow from operations, from the expected cyclical
recovery in electric arc furnace steel production; and
o enable us to further reduce total debt, which should result in
reductions in interest expense (interest expense reductions do not
take into account higher interest expense resulting from the sale
of the Notes).
We completed, ahead of schedule, the mothballing of our Italian
graphite electrode operations during the 2002 first quarter. As expected and
previously announced, working capital requirements temporarily increased similar
to what we experienced with the closure of our U.S. graphite electrode
operations, and net debt levels increased during the 2002 first half as a result
of these working capital needs and lower graphite electrode sales, due to both
seasonal factors and economic conditions.
We believe that implementation of the 2002 plan will require about $20
million of cash exit costs and result in about $29 million of non-cash
restructuring charges and impairment losses on long-lived assets. These costs
are additive to the $3 million of cash exit costs and $57 million of non-cash
restructuring charges and impairment losses on long-lived assets related to the
shutdown of our U.S. graphite electrode operations.
The mothballing of our graphite electrode operations in Italy will
enable us to avoid annually an average of $2 million of otherwise necessary
capital expenditures. We expect to make the planned incremental expansions of
graphite electrode manufacturing capacity for capital expenditures of $15
million and complete such expansion within the next twelve months.
1998 PLAN. The key elements of our global restructuring and
rationalization plan announced in September 1998 and enhanced in October 1999
included:
o the shutdown of our graphite electrode manufacturing operations at
our facilities in Canada and Germany; and
o the consolidation of administrative functions with the relocation
of our corporate headquarters to Tennessee (which have
subsequently been relocated to Delaware) and our European
headquarters to Switzerland.
We also downsized our graphite electrode manufacturing operations at
our facilities in Russia. As a result of the 1998 plan and other cost savings
initiatives, we have reduced our average graphite electrode production cost per
metric ton by the end of 2001 by 15% since the 1998 fourth quarter.
59
OTHER COST REDUCTION ACTIVITIES. Since 1998, we have initiated other
cost reduction activities. Some of these activities will continue while the 2002
plan is being implemented.
We have evaluated every aspect of our supply chain and improved and
continue to improve performance through realignment and standardization of
critical business processes, standardization of enterprise wide systems, and
improvement of information technology infrastructures and interfaces with
trading partners. We reduced inventory levels from 1998 by about 33%, or to
about $180 million, by the end of 2001 and reduced our cash cycle time, as
compared to 1998, by about 25% by the end of 2001.
During late 1999 and into the 2000 first quarter, our graphite
specialties business, which now is part of our Advanced Graphite Materials
business unit, experienced significant adverse change that indicated the need
for assessing the recoverability of the long-lived assets of this business.
These assets were located primarily at our plant in Clarksburg, West Virginia.
We estimated the future undiscounted cash flows expected to result from the use
of these assets and concluded they were below the respective carrying amounts.
Accordingly, we recorded an impairment loss of $35 million in the 1999 fourth
quarter for the unrecoverable portion of these assets, effectively writing down
the carrying value of the long-lived assets to their estimated fair value of $6
million. In 2000, we restructured the business. The key elements of the
restructuring included elimination of certain product lines and rationalization
of operations of the remaining product lines. Accordingly, in the 2000 first
quarter, we recorded a restructuring charge of $6 million. In the 2000 third
quarter, based on subsequent developments, we decided not to demolish certain
buildings. Accordingly, we reversed $4 million of the charge related thereto.
The $2 million balance of the charge related primarily to severance costs.
In the 2000 third quarter, we recorded an impairment loss of $3 million
on long-lived cathode assets in connection with the re-sourcing of our U.S.
cathode production to our facilities in Brazil and France and the related
reduction of certain graphite electrode manufacturing capacity in those
facilities.
In the 2000 fourth quarter, we recorded a $4 million charge in
connection with a corporate restructuring involving a workforce reduction of
about 85 employees. The functional areas affected include finance, accounting,
sales, marketing and administration. The charge consists primarily of severance
costs.
In the 2001 second quarter, we recorded a $58 million charge for
restructuring and impairment loss on long-lived assets related to the shutdown
of our graphite electrode manufacturing operations at our facilities in
Clarksville and Columbia, Tennessee. In 2000, these operations were our highest
cost graphite electrode manufacturing operations. We expect that the shutdown
will result in total annual cost savings of $18 million and will enable us to
avoid about $9 million in otherwise necessary capital expenditures. Certain of
these cost savings were realized in 2001 and the balance will be delivered in
2002. The shutdown was completed on schedule near the end of the 2001 third
quarter. We incrementally expanded graphite electrode manufacturing capacity at
our facilities in Mexico, Spain and South Africa for a capital investment of
about $3 million.
In the 2001 third quarter, we recorded a $2 million charge for
restructuring and impairment loss on long-lived assets related to the
realignment of our businesses into our Advanced Energy Technology Division and
Graphite Power Systems Division, the relocation of our corporate headquarters
and the shutdown of our coal calcining operations located in Niagara Falls, New
York. We are shutting down our coal calcining operations primarily because we
have entered into a five-year agreement to purchase calcined coal from a third
party at a lower net effective cost than we can produce it for ourselves. The
shutdown was completed at the end of 2001. As part of the business realignment,
we have centralized management functions of our Advanced Energy Technology
Division in Cleveland, Ohio, and management functions of our Graphite Power
Systems Division in Etoy, Switzerland. On December 21,
60
2001, we relocated our corporate headquarters, consisting of about 10 employees,
from Nashville, Tennessee, to Wilmington, Delaware. The charge relates primarily
to a workforce reduction of 24 employees.
In the 2001 third quarter, we reversed $2 million of prior
restructuring charges based on revised lower estimates of workforce reductions
and plant closure costs and we reclassified $4 million of prior restructuring
charges related to on-site waste disposal post monitoring costs to the other
long term obligations.
In the 2001 fourth quarter, we recorded an impairment loss on
long-lived and other assets of $27 million, $24 million of which was associated
with the mothballing of our Italian graphite electrode operations. We also
recorded a $7 million non-cash restructuring charge, $5 million of which was
associated with our Italian graphite electrode operations and $2 million of
which was associated with the shutdown of our U.S. graphite electrode operations
in addition to the charge recorded in the 2001 second quarter.
POWER OF ONE BUSINESS TRANSFORMATION INITIATIVE
We began to implement in 2000 and are continuing to implement a global
business transformation initiative entitled POWER OF ONE. POWER OF ONE is a
coordinated global self-assessment and business process rationalization and
transformation initiative driving one consistent theme throughout our
organization: "BECOMING THE BEST." We believe that the initiative is
accelerating development and implementation of business opportunities and
developing leadership skills more broadly within all management levels as well
as supporting our efforts to reduce costs and working capital needs, improve
efficiencies and product quality, shorten cycle times and achieve "BEST IN
CLASS" performance. Through December 31, 2001, our investment in the initiative
included about $4 million of consulting fees and $3 million of capital
expenditures, primarily for advanced planning and scheduling supply chain
software and global treasury management systems. We believe that most of the
future investment for this initiative will be funded from realized cost savings.
Effective April 2001, we entered into a ten year service contract with
CGI Group Inc. pursuant to which CGI became the delivery arm for our global
information technology service requirements, including the design and
implementation of our global information and advanced manufacturing and demand
planning processes, using J.D. Edwards software. Through this contract, we are
transforming our information technology service capability into an efficient,
high quality enabler for our global supply chain initiatives as well as a
contributor to our cost reduction objectives. Under the outsourcing provisions
of this contract, CGI manages our data center services, networks, desktops,
telecommunications and legacy systems. Through this contract, we believe that we
will be able to leverage the resources of CGI to assist us in achieving our
information technology goals and our targeted cost savings.
As part of the 2002 plan, we are also implementing global work process
changes, including consolidating and streamlining our order fulfillment,
purchasing, finance and accounting and human resource processes, along with the
identification and implementation of outsourcing opportunities, targeted for
completion by the end of 2003.
GLOBAL ECONOMIC CONDITIONS AND OUTLOOK
We are impacted in varying degrees, both positively and negatively, as
global, regional or country conditions affecting the markets for our products
fluctuate.
61
Throughout 1998 and the 1999 first quarter, electric arc furnace steel
production declined as a result of adverse global and regional economic
conditions. A recovery began in the 1999 second quarter that lasted through
mid-2000. Beginning in mid-2000, economic conditions began to weaken in North
America, becoming more severe in the 2000 fourth quarter. Even with this
weakening, worldwide electric arc furnace steel production was 285 million
metric tons in 2000 (about 34% of total steel production).
The economic weakening in North America continued and became more
severe in 2001. More than 24 steel companies in the U.S. filed for protection
under the U.S. Bankruptcy Code since January 1, 2000. Moreover, notwithstanding
a substantial decrease in steel production in the U.S., steel inventories,
particularly those held by steel service centers, remain high relative to
shipments. In March 2002, President Bush announced his decision to impose
tariffs of up to 30% on most imported steel as part of a broader plan to rescue
the nation's financially troubled steel industry. We cannot predict at this time
whether and to what extent this development will impact us.
The impact of the economic weakness in North America on other regional
economies became more severe during 2001. Steel production declined in Brazil in
the 2001 second and third quarters by about 10% as compared to the 2000 second
and third quarters. This decline was caused both by shortages of electricity
brought on by a drought that reduced hydroelectric power generation (although
Brazil is now beginning to experience some relief from the drought) as well as
by the weakening in global economic conditions. Brazil may also be impacted by
the recent currency crisis occurring in Argentina (which could impact both our
net sales and collections of accounts receivable in both those countries). There
was also a weakening in the demand for steel in Asia (except for China
where electric arc furnace steel production has remained relatively stable).
This global economic weakness has been exacerbated by the impact on
economic conditions of the terrorist acts in the U.S. in September 2001. We
believe that worldwide electric arc furnace steel production declined in 2001 by
about 2% as compared to 2000 and is about 5% higher as compared to 1999 (a total
of about 279 million metric tons, about 33% of total steel production).
These fluctuations in electric arc furnace steel production resulted in
corresponding fluctuations in demand for graphite electrodes. We estimate that
worldwide graphite electrode demand increased by about 4% in 2000 as compared to
1999, but declined by about 10% in 2001 as compared to 2000. Overall pricing
worldwide was weak throughout most of this period. However, we implemented
increases in local currency selling prices of our graphite electrodes in 2000
and early 2001 in Europe, the Asia Pacific region, the Middle East and South
Africa. Recently, we have not been able to maintain all of these price
increases. We continue to face pricing pressures worldwide.
We are experiencing intense competition in the graphite electrode
industry. One of our U.S. competitors, The Carbide/Graphite Group, Inc., filed
for protection under the U.S. Bankruptcy Code in October 2001. In order to seek
to minimize our credit risks, we have reduced our sales of, or refused to sell
(except for cash on delivery), graphite electrodes to some customers and
potential customers in the U.S. and, to a limited extent, elsewhere. Our unpaid
trade receivables from steel companies in the U.S. that have filed for
protection under the U.S. Bankruptcy Code since January 1, 2000 have aggregated
only 1.4% of net sales of graphite electrodes in the U.S. during the same
period. Our volume of graphite electrodes sold increased by 5% in 2000 as
compared to 1999, but declined by about 20% in 2001 as compared to 2000. The
decline in our volume of graphite electrodes sold in 2001 as compared to 2000
was due to the decline in electric arc furnace steel production as well as our
efforts to implement and maintain local currency selling price increases and our
efforts to seek to minimize credit risks.
62
In 1998 and 1999, demand and prices for most of our other products sold
to the metals and transportation industries were adversely affected by the same
global and regional economic conditions that affected graphite electrodes. In
the 1999 second quarter, however, worldwide demand by customers for many of
these products began to gradually recover. During 2000, demand for most of these
products as a group was relatively stable. Overall pricing did not strengthen.
The global and regional economic conditions that have impacted demand and prices
for graphite electrodes since mid-2000 have also similarly impacted demand and
prices for most of these products (other than graphite cathodes). Demand and
prices for graphite cathodes has remained relatively strong since the recovery
began in 1999 primarily due to construction of new aluminum smelters using
graphite cathodes, even as old smelters using carbon cathodes are removed from
service.
We believe that business conditions for most of our products (other
than cathodes) will remain challenging through 2002 and that a recovery in the
steel, metals and transportation industries will not occur until the 2002 second
half, at the earliest. Assuming economic conditions are the same in 2002 as they
were in the 2001 fourth quarter, we expect a modest increase in our volume of
graphite electrodes sold in the 2002 second half primarily due to an increase in
our market share as we continue to implement our enterprise selling and other
strategies. We expect prices to weaken in 2002 as compared to 2001, primarily in
North America. Our cathode capacity is completely sold out for the 2002 first
half and we have booked over 80% of our cathode capacity for the 2002 second
half.
We expect our cost reductions to largely mitigate the impact on gross
profit of continued pressure on net sales. As the current economic downturn
continues, and its impact on foreign countries becomes more pronounced, we
cannot assure you that we will have the same success in minimizing our credit
risks relating to sales of graphite electrodes in the future that we have had in
the U.S. in the past.
Our outlook could be significantly impacted by changes in interest
rates by the U.S. Federal Reserve Board and the European Central Bank, changes
in tax and fiscal policies by the U.S. and other governments, the occurrence of
further terrorist acts and developments (including increases in security,
insurance, data back-up, transportation and other costs, transportation delays
and continuing or increased economic uncertainty and weakness) resulting from
the terrorist acts in the U.S. in September 2001 and the war on terrorism, and
changes in global and regional economic conditions.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items in 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:
FOR THE YEAR ENDED PERCENTAGE INCREASE
DECEMBER 31, (DECREASE)
------------ ----------
1999 2000 2001 1999 TO 2000 2000 TO 2001
---- ---- ---- ------------ ------------
(DOLLARS IN MILLIONS)
Net sales...................................... $ 831 $ 776 $ 654 (7)% (16)%
Cost of sales.................................. 573 560 469 (2) (16)
-------- ------- ------- --------- --------
Gross profit................................... 258 216 185 (16) (14)
Research and development....................... 9 11 12 22 9
Selling, administrative and other expenses..... 86 86 78 - (9)
Other (income) expense, net.................... (9) - 1 N/M N/M
Operating profit............................... 130 111 (10) (15) (109)
---------------------
N/M: Not Meaningful
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The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain items in the Consolidated
Statements of Operations:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
---- ---- ----
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales................................. 69.0 72.2 71.7
----- ----- -----
Gross profit.................................. 31.0 27.8 28.3
Research and development...................... 1.1 1.4 1.8
Selling, administrative and other expenses.... 10.3 11.0 11.9
Other (income) expenses, net.................. (1.1) - .2
Operating profit.............................. 15.6 14.3 (1.5)
The following table sets forth, for the periods indicated, certain
items in the Consolidated Statements of Operations and certain information as to
gross profit margins related to our two business segments, our Graphite Power
Systems Division and Advanced Energy Technology Division:
GRAPHITE POWER SYSTEMS DIVISION ADVANCED ENERGY TECHNOLOGY
DIVISION
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1999 2000 2001 1999 2000 2001
---- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
Net sales............................... $ 700 $ 651 $ 525 $ 131 $ 125 $ 129
Cost of sales........................... 464 467 378 109 93 91
------ ----- ------ ------ ------ ------
Gross profit............................ $ 236 $ 184 $ 147 $ 22 $ 32 $ 38
====== ===== ====== ====== ====== ======
Gross profit margin..................... 33.7% 28.3% 28.0% 16.8% 25.6% 29.6%
2001 COMPARED TO 2000. Net sales in 2001 were $654 million, a decrease
of $122 million, or 16%, from net sales in 2000 of $776 million. Gross profit in
2001 was $185 million, a decrease of $31 million, or 14%, from gross profit in
2000 of $216 million. Gross profit margin in 2001 was 28.3% of net sales as
compared to gross profit margin in 2000 of 27.8% of net sales. The decrease in
net sales and gross profit was primarily due to lower sales volume of most of
our products, particularly graphite electrodes, which represented about $104
million of the decrease in net sales, primarily due to depressed steel industry
conditions. Cost of sales declined due primarily to lower production levels and
benefits from our cost savings activities. The increase in gross profit margin
was primarily due to the fact that the percentage decrease in net sales was less
than the percentage decrease in cost of sales.
GRAPHITE POWER SYSTEMS DIVISION. Net sales decreased 19%, or $126
million, to $525 million in 2001 from $651 million in 2000. The decrease was
primarily attributable to a decrease in average sales revenue per metric ton of
graphite electrodes and lower sales volumes for graphite electrodes and
cathodes. The volume of graphite electrodes sold decreased 43,000 metric tons,
or 20%, to 174,000 metric tons in 2001 as compared to 217,000 metric tons in
2000. The decrease in volume of graphite electrodes sold represented a decrease
in net sales of about $104 million. The decrease was primarily a result of
continued lower North American steel production, weaker demand in Europe and
Brazil and actions taken to manage credit risk. The average sales revenue per
metric ton (in U.S. dollars and net changes in currency exchange rates) of our
graphite electrodes was $2,341 in 2001 as compared to $2,379 in 2000. The
reduced average sales revenue per metric ton of graphite electrodes represented
a decrease of about $6 million in net sales. Unfavorable changes in currency
exchange rates represented a reduction of about $15 million in net sales of
graphite electrodes, more than offsetting the benefits of increases in
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selling prices in local currencies in certain foreign countries. Volume of
cathodes sold was 33,000 metric tons in 2001 as compared to 35,000 metric tons
in 2000. Cost of sales decreased 19%, or $89 million, to $378 million in 2001
from $467 million in 2000. The decrease in cost of sales was primarily due to
lower production levels due to volumes sold and a lower average graphite
electrode cost of sales per metric ton. The average graphite electrode cost of
sales per metric ton was $1,691 in 2001 as compared to $1,725 in 2000. The
reduction in average graphite electrode cost of sales per metric ton was
primarily due to cost savings and lower average fixed cost per metric ton due to
facility closures and, to lesser extent, changes in currency exchange rates.
Gross profit decreased 20%, or $37 million, to $147 million (28.0% of net sales)
in 2001 from $184 million (28.3% of net sales) in 2000. The decrease in gross
profit margin was primarily due to the fact that the percentage decrease in net
sales was greater than the percentage decrease in cost of sales.
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales increased 3%, or $4
million, to $129 million in 2001 from $125 million in 2000. The increase was
primarily due to cyclical increases in volume of refractories sold and in sales
of products to customers in the aerospace industry, new business sales and an
increase in technical service and technology license fees, partially offset by a
decrease in volume of flexible graphite sold for gasket applications due to
lower demand from the automotive industry as well as a decrease in products sold
to the semiconductor and industrial sectors. Cost of sales decreased 2%, or $2
million, to $91 million in 2001 from $93 million in 2000. The decline was
primarily due to changes in product mix and cost savings activities. Gross
profit increased 19%, or $6 million, to $38 million (29.6% of net sales) in 2001
from $32 million (25.6% of net sales) in 2000. The increase in gross profit
margin was due to the increase in net sales and decrease in cost of sales.
OPERATING PROFIT (LOSS) OF US AS A WHOLE. Operating loss was $10
million in 2001 as compared to operating profit of $111 million in 2000.
Operating profit in 2001 was impacted by a $80 million impairment loss on
long-lived and other assets, a $12 million restructuring charge, primarily
related to our U.S. and Italian graphite electrode operations, a $10 million
charge related to antitrust investigations and related lawsuits and claims, and
a $2 million charge related to the corporate realignment of our subsidiaries.
Operating profit in 2000 was impacted by a $2 million write-off of costs
incurred in connection with a proposed initial public offering by Graftech that
was withdrawn as well as an aggregate of $8 million in special items including a
$1 million credit related to securities class action and stockholder derivative
lawsuits, a net restructuring charge relating to our advanced graphite materials
business, an impairment loss on long-lived cathode assets and a corporate
restructuring involving a workforce reduction.
Selling, administrative and other expense declined $8 million to $78
million in 2001 from $86 million in 2000, primarily due to reduced corporate
spending.
Other (income) expense, net was $1 million in 2001 as compared to nil
in 2000. We recorded other (income) expense in both periods resulting from
various non-operational activities, including gains from currency transactions.
Excluding the impact of the special charges, items and costs described
above, operating profit would have been $94 million (14.4% of net sales) in 2001
as compared to $121 million (15.6% of net sales) in 2000.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense decreased to $60
million in 2001 from $75 million in 2000. The decrease was due to lower average
annual interest rates and lower average total debt outstanding. Our average
outstanding total debt was $683 million in 2001 as compared to $780 million in
2000 and our average annual interest rate was 8.1% in 2001 as compared to 9% in
2000. These average annual interest rates exclude imputed interest on antitrust
fines.
65
Provision for income taxes was $15 million for 2001 as compared to $10
million for 2000. During 2001, the provision for income taxes reflected a 35%
effective rate, excluding the impact of impairment losses on long-lived and
other assets, restructuring charges, the charge related to antitrust
investigations and related lawsuits and claims, and the charge related to the
corporate realignment of our subsidiaries. For 2000, the provision for income
taxes reflected a 30% effective rate. The increase in the effective rate in 2001
was primarily due to a high proportion of income from higher tax jurisdictions.
As a result of the changes described above, net loss was $87 million in
2001, a decrease of $97 million from net income of $10 million in 2000.
2000 COMPARED TO 1999. Net sales in 2000 were $776 million, a decrease
of $55 million, or 7%, from net sales in 1999 of $831 million. Gross profit in
2000 was $216 million, a decrease of $42 million, or 16%, from gross profit in
1999 of $258 million. Gross profit margin in 2000 was 27.8% of net sales as
compared to gross profit margin in 1999 of 31.0% of net sales. The decrease in
net sales and gross profit was primarily due to lower average sales revenue per
metric ton of graphite electrodes and the impact of currency exchange rate
changes. The impact of those factors was partially offset by lower cost of sales
per metric ton of graphite electrodes and higher volumes of graphite electrodes
sold. The lower average sales revenue per metric ton was due primarily to
changes in regional economic conditions, which resulted in a higher percentage
of the volume of our graphite electrodes being sold in non-North American
markets that have lower pricing structures than North American markets, as well
as competitive pricing pressures. The lower cost of sales per metric ton was
primarily due to cost savings and lower average fixed cost per metric ton due to
higher average annual production levels. The decrease in gross profit margin was
primarily due to the fact that the percentage decrease in net sales was greater
than the percentage decrease in costs of sales.
GRAPHITE POWER SYSTEMS DIVISION. Net sales decreased 7%, or $49
million, to $651 million in 2000 from $700 million in 1999. The decrease was
primarily attributable to a decrease in average sales revenue per metric ton of
electrodes offset by higher sales volumes for electrodes and cathodes. The
volume of graphite electrodes sold increased 11,000 metric tons, or 5%, to
217,000 metric tons in 2000 as compared to 206,000 metric tons in 1999. The
increase in volume of graphite electrodes sold represented an increase in net
sales of about $28 million. The average sales revenue per metric ton (in U.S.
dollars and net changes in currency exchange rates) of our graphite electrodes
was $2,379 in 2000 as compared to $2,676 in 1999. The reduced average sales
revenue of graphite electrodes per metric ton represented a decrease of about
$60 million in net sales. This reduction was largely attributable to lower
graphite electrode selling prices and, to a lesser extent, changes in product
mix. Currency exchange rate changes for electrode and cathode sales,
particularly the decline in the euro against the dollar, represented a decrease
of about $45 million in net sales. Volume of cathodes sold was 35,000 metric
tons in 2000 as compared to 31,000 metric tons in 1999. Cost of sales increased
1%, or $3 million, to $467 million in 2000 from $464 million in 1999. The
increase in cost of sales was primarily due to higher volume produced, partially
offset by lower average cost of sales per metric ton for graphite electrodes.
The average graphite electrode cost of sales per metric ton was $1,725 in 2000
as compared to $1,783 in 1999. The reduction in average graphite electrode cost
of sales per metric ton was primarily due to cost savings and lower average
fixed cost per metric ton due to higher production levels and, to lesser extent,
changes in currency exchange rates. Gross profit decreased 22%, or $52 million,
to $184 million (28.3% of net sales) in 2000 from $236 million (33.7% of net
sales) in 1999. The decrease in gross profit margin was primarily due to the
fact that the percentage decrease in net sales was greater than the percentage
decrease in cost of sales.
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales decreased 5%, or $6
million, to $125 million in 2000 from $131 million in 1999. The decrease was
primarily attributable to a decrease in net sales of advanced graphite materials
due to the elimination of certain product lines in connection with the
66
restructuring of our advanced graphite materials business and, to a lesser
extent, lower prices for advanced graphite materials. Cost of sales decreased
15%, or $16 million, to $93 million in 2000 from $109 million in 1999. The
decline was primarily due to the write-down of advanced graphite materials
inventory in 1999 and the elimination of certain advanced graphite materials
product lines. As a result of the changes described above, gross profit
increased 45%, or $10 million, to $32 million (25.6% of net sales) in 2000 from
$22 million (16.8% of net sales) in 1999. Excluding the $8 million write-down of
advanced graphite materials inventory in 1999, gross profit margin increased to
25.6% in 2000 from 22.9% in 1999. The increase in gross profit margin was due to
the fact that the decline in cost of sales exceeded the decline in net sales.
OPERATING PROFIT OF US AS A WHOLE. Operating profit was $111 million,
or 14.3% of net sales, in 2000 as compared to $130 million, or 15.6% of net
sales, in 1999. Operating profit in 2000 was impacted by a $2 million write-off
of costs incurred in connection with a proposed initial public offering by
Graftech that was withdrawn as well as an aggregate of $9 million in special
items consisting of a net restructuring charge relating to our advanced graphite
materials business, an impairment loss on long-lived cathode assets and a
corporate restructuring involving a workforce reduction. Operating profit in
1999 was impacted by a $35 million impairment loss on long-lived advanced
graphite materials assets, a $13 million charge for the settlement of securities
class action and stockholder derivative lawsuits, and a $6 million restructuring
credit related to plant closure activities. Excluding these special items,
operating profit in 2000 was $50 million lower than in 1999 due mainly to lower
gross profit and lower other (income) expense, net.
Selling, administrative and other expense was relatively stable at $86
million in both 2000 and 1999.
Other (income) expense, net was nil in 2000 as compared to income of $9
million in 1999. The change was primarily due to the incurrence in 2000 of $4
million in consulting fees associated with our POWER OF ONE initiative, $3
million of legal expenses associated with our lawsuit against our former parents
and $2 million in costs associated with the proposed initial public offering by
Graftech that were not incurred in 1999. We recorded income in both periods
resulting from various activities, including gains from currency transactions,
asset sales and insurance and financial instrument related activities.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense decreased to $75
million in 2000 from $84 million in 1999. The decrease primarily resulted from
our refinancing completed in February 2000, which resulted in a decrease in our
average annual interest rate. Our average outstanding total debt was $780
million in 2000 as compared to $782 million in 1999 and our average annual
interest rate was 9.0% in 2000 as compared to 10.7% in 1999. These average
annual interest rates exclude imputed interest on the antitrust fines.
Provision for income taxes was $10 million for 2000 as compared to $1
million in 1999. During 2000, the provision for income taxes reflected a 30%
effective rate, excluding the impact of the write-off of costs incurred in
connection with the proposed initial public offering by Graftech that was
withdrawn and the impact of restructuring charges (credits) and impairment
losses. This is lower than the U.S. federal income tax rate of 35% primarily as
a result of tax planning strategies, earnings repatriation plans, tax
settlements, re-assessment of valuation allowances, and earnings resulting from
consolidated entities with lower effective rates. For 1999, the provision for
income taxes reflected a 23% effective rate. The increase in the effective rate
in 2000 was primarily due to a high proportion of income from higher tax
jurisdictions, which was partially offset by a $20 million reduction in the
deferred tax asset valuation allowance on foreign tax credits. This reduction
was based on a re-assessment in 2000 of our U.S. tax profile and associated tax
planning strategies.
67
As a result of the changes described above, net income was $10 million
in 2000, a decrease of $32 million from net income of $42 million in 1999.
STRATEGIC ALLIANCES
We are pursuing strategic alliances that enhance or complement our
existing or related businesses and have the potential to generate strong cash
flow. Strategic alliances may be in the form of joint venture, licensing, supply
or other arrangements that leverage our strengths to achieve cost savings,
improve margins and cash flow, and increase net sales and earnings growth.
We have developed a strategic relationship with Conoco. In December
2000, we entered into a license and technical services agreement with Conoco to
license our proprietary technology for use at the carbon fiber manufacturing
facility that Conoco is building in Ponca City, Oklahoma. We also will continue
to provide a wide variety of technical services to Conoco. Under a separate
manufacturing tolling agreement entered into in February 2001, we are providing
manufacturing services to Conoco at our facility in Clarksburg, West Virginia
for carbon fibers. Under the three-year manufacturing tolling agreement, we are
using raw materials provided by Conoco to manufacture carbon fibers. Conoco's
new carbon fiber technology could be used in portable power applications, such
as batteries for personal computers and cell phones, as well as a wide range of
other electronic devices and automotive applications.
We have developed a strategic alliance in the cathode business with
Pechiney, the world's recognized leader in aluminum smelting technology. To
broaden our alliance, in March 2001, we contributed our Brazilian cathode
manufacturing operations to Carbone Savoie. Pechiney, the 30% minority owner of
Carbone Savoie, contributed approximately $9 million in cash to Carbone Savoie
as part of this transaction. The cash contribution is being used to upgrade
manufacturing operations in Brazil and France, which is expected to be completed
by the end of the 2002 first quarter. Ownership in Carbone Savoie remains 70% by
us and 30% by Pechiney. Under our now broadened alliance, Carbone Savoie holds
our entire cathode manufacturing capacity.
In April 2001, we entered into a joint venture agreement with Jilin to
produce and sell high-quality graphite electrodes in China. The joint venture is
expected to utilize renovated capacity at Jilin's main facility in Jilin City,
and complete additions at another site in Changchun that were begun by Jilin.
The new joint venture facility is expected to commence operations in 2003. We
will contribute $6 million of cash plus technical assistance for a 25% ownership
interest in the joint venture. The completion of the parties' capital
contributions to the joint venture is subject to the receipt of required Chinese
governmental approvals and satisfaction of other conditions.
We have been working with Ballard Power Systems since 1992 on
developing natural graphite-based materials for use in Ballard Power Systems
fuel cells for power generation. In June 2001, our subsidiary, Graftech, entered
into a new exclusive development and collaboration agreement and a new exclusive
long term supply agreement with Ballard Power Systems, which significantly
expand the scope and term of the prior agreements. In addition, Ballard Power
Systems became a strategic investor in Graftech, investing $5 million in shares
of Ballard Power Systems common stock for a 2.5% equity ownership interest, to
support the development and commercialization of natural graphite-based
materials and components for proton exchange membrane fuel cells.
The scope of the new exclusive development and collaboration agreement
includes natural graphite-based materials and components, including flow field
plates and gas diffusion layers, for use in proton exchange membrane fuel cells
and fuel cell systems for transportation, stationary and portable applications.
The initial term of this agreement extends through 2011. Under the new supply
agreement, we will be the exclusive manufacturer and supplier of natural
graphite-based materials for Ballard Power Systems fuel cells and fuel cell
systems. We will also be the exclusive manufacturer of natural graphite-based
components, other than those components that Ballard Power Systems manufactures
for itself. The initial term of this agreement, which contains customary terms
and conditions, extends through 2016. We have the right to manufacture and sell,
after agreed upon release dates, natural graphite-based materials and components
for use in proton exchange membrane fuel cells to other parties in the fuel cell
industry.
2002 PRIVATE SENIOR NOTE OFFERING
In February 2002, we completed a private offering of $400 million
aggregate principal amount of Initial Notes at a price of 100% of the principal
amount of the Initial Notes. The Notes bear interest at an
68
annual rate of 10.25% and mature in 2012. The net proceeds from that offering
were $387 million. We used net proceeds from the first $250 million of Initial
Notes and 50% of the net proceeds from the balance of the Initial Notes sold to
repay term loans under the Senior Facilities. We used the balance of the net
proceeds to reduce amounts outstanding under our revolving credit facility under
the Senior Facilities. At December 31, 2001, on an as adjusted basis after
giving effect to the issuance of the Initial Notes, the application of the
proceeds therefrom and the corporate realignment of our subsidiaries, the Senior
Facilities would have constituted $238 million of our total debt of $651
million.
Repayments of the principal of term loans under the Senior Facilities,
consisting of Tranche A Term Loans and Tranche B Term Loans, with net proceeds
from the Initial Notes were applied to the repayment of each tranche in
proportion to the principal amounts thereof then outstanding (except to the
extent that Tranche B lenders elected to decline their proportional prepayment)
and to scheduled maturities of each tranche in the order in which they were due.
After repayment, the aggregate principal amount payable each year under the
Tranche A and Tranche B Term Loans is as follows: no payments in 2002, 2003 or
2004, $26 million in 2005, $26 million in 2006 and $164 million in 2007.
2001 PUBLIC EQUITY OFFERING
In July 2001, we completed a public offering of 10,350,000 shares of
common stock at a public offering price of $9.50 per share. The net proceeds
from that offering were $91 million. 60% of the net proceeds was used to prepay
term loans under the Senior Facilities. The balance of the net proceeds will be
used to fund growth and expansion of our Advanced Energy Technology Division,
including growth through acquisitions, and, pending such use, has been applied
to reduce outstanding balance under our revolving credit facility.
REFINANCING AND DEBT RECAPITALIZATION
In November 1998, our prior senior secured credit facilities were
refinanced and the Indenture governing our previously outstanding senior
subordinated notes was amended. In connection with the refinancing, we obtained
additional term debt of $210 million. We undertook the refinancing to enable us
to pay antitrust fines, liabilities and expenses and to strengthen our financial
condition by extending maturities of some of our debt.
In February 2000, we completed a debt recapitalization. We obtained the
Senior Facilities, which were amended in October 2000, April 2001, July 2001,
December 2001 and February 2002. The Senior Facilities consist of a six year
term loan facility in the initial amount of $137 million and [euro]161 million,
an eight year term loan facility in the initial amount of $350 million and a six
year revolving credit facility in the amount of [euro] 250 million. We used the
net proceeds from the Senior Facilities to repay and terminate our prior senior
secured credit facilities, to redeem our previously outstanding senior
subordinated notes at a redemption price of 104.5% of the principal amount
redeemed, plus accrued interest, to repay certain other debt and to pay related
expenses. We recorded an extraordinary charge in 2000 of $13 million, net of
tax, in connection with our debt recapitalization. The charge includes the
redemption premium on the senior subordinated notes, bank, legal, accounting,
filing and other fees and expenses, and write-off of deferred debt issuance
costs. The debt recapitalization lowered our average annual interest rate,
extended the average maturities of our debt and replaced our financial and other
covenants. In light of changes in conditions affecting our industry, changes in
global and regional economic conditions, our recent financial performance and
other factors, we closely monitor our compliance with those covenants.
69
In October 2000, the Senior Facilities were amended to, among other
things, increase the maximum leverage ratio permitted thereunder through June
30, 2001. In connection therewith, we paid an amendment fee of $2 million and
our interest rates increased by 25 basis points.
In April 2001, the Senior Facilities were amended to, among other
things, exclude certain expenses incurred in connection with the lawsuit
initiated by us against our former parents and certain charges and payments in
connection with antitrust fines, settlements and expenses from the calculation
of financial covenants through June 30, 2002 and in certain cases thereafter.
In July 2001, the Senior Facilities were amended to, among other
things, change our financial covenants so that they are less restrictive through
2006 than would otherwise have been the case. In connection therewith, we agreed
that our investments in Graftech and any of our other unrestricted subsidiaries
after this amendment will be made in the form of secured loans, which will
become collateral under the Senior Facilities, and that the maximum amount of
capital expenditures permitted under the Senior Facilities will be reduced in
2001 and 2002. We do not expect that our capital expenditures will exceed such
maximums. In connection therewith, we paid an amendment fee of $2 million and
our interest rates increased by 25 basis points.
In December 2001, the Senior Facilities were amended to, among other
things, permit the corporate realignment of our subsidiaries. In connection
therewith, we paid an amendment fee of $1 million.
In January 2002, the Senior Facilities were amended to, among other
things, permit us to issue the Notes. In connection with this amendment and
completion of the offering of the Notes, we expect to record an extraordinary
charge of $3 million ($2 million after tax) in the 2002 first quarter relating
primarily to write-off of fees incurred in the 2000 first quarter relating to
the portion of the Tranche A and Tranche B Term Loans that were repaid with net
proceeds from that offering.
LITIGATION AGAINST OUR FORMER PARENT COMPANIES INITIATED BY US
In February 2000, we commenced a lawsuit against our former parents,
Mitsubishi and Union Carbide. In the lawsuit, we allege, among other things,
that certain payments made to our former parents in connection with the
recapitalization were unlawful under the General Corporation Law of the State of
Delaware, that our former parents were unjustly enriched by receipts from their
investments in UCAR and that our former parents aided and abetted breaches of
fiduciary duties owed to us by our former senior management in connection with
illegal graphite electrode price fixing activities. We are seeking to recover
more than $1.5 billion in damages, including interest. The defendants have filed
motions to dismiss this lawsuit and a motion to disqualify certain of our
counsel from representing us in this lawsuit. We are vigorously opposing those
motions. Oral hearings were held on those motions in the 2001 first and second
quarters. No decision on those motions has been rendered. We expect to incur $10
million to $20 million for legal expenses to pursue this lawsuit from the date
of filing the complaint through trial. Through December 31, 2001, we had
incurred about $4 million of these legal expenses.
Successful prosecution of this litigation is subject to risks,
including:
o failure to successfully defend against motions to dismiss and
other procedural motions prior to trial;
o failure to successfully establish our theories of liability and
damages or otherwise prove our claims at trial;
70
o successful assertion by the defendants of substantive defenses,
including statute of limitations defenses, to liability at
trial or on appeal; and
o successful assertion by the defendants of counterclaims or cross
claims, including claims for indemnification, at trial or on
appeal.
We cannot predict the ultimate outcome of this litigation, including
the possibility, timing or amount of any recovery of damages by us or any
liability we may have in connection with any counterclaims or cross claims. In
addition, we cannot assure you as to the possibility, timing or amount of any
settlement or the legal expenses to be incurred by us or as to the effect of
this lawsuit on management's focus and time available for our on-going
operations.
Litigation such as this lawsuit is complex. Complex litigation can be
lengthy and expensive. This lawsuit is in its earliest stages. The ultimate
outcome of this lawsuit is subject to many uncertainties. We may at any time
settle this lawsuit.
ANTITRUST AND OTHER LITIGATION AGAINST US
Since 1997, we have been subject to antitrust investigations by
antitrust authorities in the U.S., the European Union, Canada, Japan and Korea.
In addition, civil antitrust lawsuits have been commenced and threatened against
us and other producers and distributors of graphite and carbon products in the
U.S., Canada and elsewhere. We recorded a pre-tax charge against results of
operations for 1997 in the amount of $340 million as a reserve for estimated
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims.
In April 1998, UCAR pled guilty to a one count charge of violating U.S.
federal antitrust law in connection with the sale of graphite electrodes and was
sentenced to pay a fine in the aggregate amount of $110 million, payable in six
annual installments of $20 million, $15 million, $15 million, $18 million, $21
million and $21 million, commencing July 23, 1998. The payments due in 1998,
1999 and 2000 were timely made. In January 2001, at our request, the due date of
each of the remaining three payments was deferred by one year. We have finalized
discussions with the U.S. Department of Justice to restructure the payment
schedule for the remaining $60 million due. The revised payment schedule
requires a $2.5 million payment in 2002, a $5.0 million payment in 2003 and,
beginning with the 2004 second quarter, quarterly payments ranging from $3.25
million to $5.375 million through the 2007 first quarter. Beginning in 2004, the
U.S. Department of Justice may ask the court to accelerate the payment schedule
based on a change in our ability to make such payments. Interest will begin to
accrue on the unpaid balance, commencing with the 2004 second quarter, at the
statutory rate of interest then in effect. In January 2002, the statutory rate
of interest was 2.13% per annum. Of the $110 million aggregate amount and before
giving effect to the restructured payment schedule, $90 million is treated as a
fine and $20 million is treated as imputed interest for accounting purposes. In
March 1999, our Canadian subsidiary pled guilty to a one count charge of
violating Canadian antitrust law in connection with the sale of graphite
electrodes and was sentenced to pay a fine of Cdn. $11 million. The payment was
timely made.
In October 1999, we became aware that the Korean antitrust authority
had commenced an investigation as to whether there had been any violations of
Korean antitrust law by producers and distributors of graphite electrodes. In
March 2002, we were advised that the Korean antitrust authority, after holding a
hearing on this matter, assessed a fine against us in the amount of 676 million
KRW (approximately $510,000 at currency exchange rates in effect on March 21,
2002). Five other graphite electrode producers were also fined by the Korean
antitrust authority in amounts ranging up to 4,396 million KRW (approximately
$3.3 million at currency exchange rates in effect on March 21, 2002). Our fine,
which represented 0.5% of our sales during the relevant time period and was the
lowest fine as a
71
percentage of sales imposed by the Korean antitrust authority, reflected a
substantial reduction as a result of our cooperation with that authority during
its investigation. We are required to pay this fine within 60 days of the
decision, regardless of whether or not we appeal the decision.
In January 2000, the antitrust authority of the European Union issued a
statement of objections initiating proceedings against us and other producers of
graphite electrodes. The statement alleged that we and other producers violated
antitrust laws of the European Community and the European Economic Area in
connection with the sale of graphite electrodes. In July 2001, that authority
issued its decision. Under the decision, that authority assessed a fine of
[euro] 50.4 million ($45 million, at currency exchange rates in effect at
December 31, 2001) against UCAR resulting from the role of our former management
in a graphite electrode price fixing cartel. That authority also assessed fines
against seven other graphite electrode producers under the decision, with fines
ranging up to [euro] 80.2 million. As a result of the assessment of the fine
against us, we recorded a pre-tax charge of $10 million against results of
operations in the 2001 second quarter as an additional reserve for potential
liabilities and expenses in connection with antitrust investigations and related
lawsuits and claims. This decision brought to a conclusion our last major
antitrust liability. From the initiation of its investigation, we have
cooperated with the antitrust authority of the European Union. As a result of
our cooperation, our fine reflects a substantial reduction from the amount that
otherwise would have been assessed. It is the policy of that authority to
negotiate appropriate terms of payment of antitrust fines, including extended
payment terms. We have had discussions regarding payment terms with that
authority. After an in-depth analysis of the decision, however, in October 2001,
we filed an appeal to the court challenging the amount of the fine. The fine or
collateral security therefor would typically be required to be paid or provided
at about the time the appeal was filed. We are currently in discussions with
that authority regarding the appropriate form of security during the pendency of
the appeal. If the results of these discussions are not acceptable to us, we may
file an interim appeal to the court to waive the requirement for security or to
allow us to provide alternative security for payment. We cannot predict how or
when the court would rule on such interim appeal.
In the 2001 second quarter, we became aware that the Brazilian
antitrust authority had requested written information from various steelmakers
in Brazil. In April 2002, our Brazilian subsidiary received a request for
information from that authority. We intend to provide that information.
We are continuing to cooperate with the U.S. and Canadian antitrust
authorities in their continuing investigations of other producers and
distributors of graphite electrodes.
It is possible that antitrust investigations seeking, among other
things, to impose fines and penalties could be initiated against us by
authorities in Brazil or other jurisdictions. It is also possible that
additional antitrust lawsuits and claims could be asserted against us in the
U.S. or other jurisdictions.
We have settled, among others, virtually all of the graphite electrode
antitrust claims by steel makers in the U.S. and Canada as well as antitrust
claims by certain other customers. Payment of virtually all of the settlements
has been made. None of the settlement or plea agreements contains restrictions
on future prices of our graphite electrodes. There remain, however, certain
pending claims as well as pending lawsuits in the U.S. relating to the sale of
carbon electrodes and carbon cathodes as well as graphite electrodes sold to
foreign customers.
Through December 31, 2001, we have paid an aggregate of $249 million of
fines and net settlement and expense payments and $11 million of imputed
interest. At December 31, 2001, $101 million remained in the reserve. The
balance of the reserve is available for the balance of the fine payable by us to
the U.S. Department of Justice that was imposed in 1998 (excluding imputed
interest thereon), the fine assessed against us by the antitrust authority of
the European Union in July 2001, the fine
72
assessed against us by the Korean antitrust authority in March 2002 and other
antitrust related matters. The aggregate amount of remaining committed payments
for imputed interest at December 31, 2001 (without giving effect to the more
favorable restructured payment schedule for the fine payable to the U.S.
Department of Justice established in January 2002) was about $9 million.
We cannot assure you that remaining liabilities and expenses in
connection with antitrust investigations, lawsuits and claims will not
materially exceed the remaining uncommitted balance of the reserve or that the
timing of payment thereof will not be sooner than anticipated. In the aggregate
(including the assessment of the fine by the antitrust authority of the European
Union and the additional $10 million charge), the fines and settlements
described above and related expenses, net, are within the amounts we used to
evaluate the $350 million charge. To the extent that aggregate liabilities and
expenses, net, are known or reasonably estimable, $350 million represents our
estimate of these liabilities and expenses. The guilty pleas and the decision by
the antitrust authority of the European Union make it more difficult to defend
against other investigations, lawsuits and claims. Our insurance has not and
will not materially cover liabilities that have or may become due in connection
with antitrust investigations or related lawsuits or claims.
UCAR had been named as a defendant in a stockholder derivative lawsuit
and as a defendant in a securities class action lawsuit, each of which was
based, in part, on the subject matter of the antitrust investigations, lawsuits
and claims. In October 1999, UCAR and the other defendants settled these
lawsuits for an aggregate of $40.5 million, of which $11 million was paid by us.
These settlements have become final. We recorded a charge of $13 million, which
included $2 million of unreimbursed expenses, in the 1999 third quarter in
connection with these settlements. In the 2000 second quarter, we reversed $1
million of this charge because expenses were lower than expected.
CUSTOMER BASE
We are a global company and serve all major geographic markets. Sales
of our products to customers outside the U.S. accounted for about 70% of our net
sales in 2001. Our customer base includes both steel makers and non-steel
makers. In 2001, three of our ten largest customers were purchasers of
non-graphite electrode products. In 2001, five of our ten largest customers were
based in Europe, two were in the U.S. and one was in each of South Africa,
Canada and Brazil. No single customer or group of affiliated customers accounted
for more than 6% of our net sales in 2001.
EFFECTS OF INFLATION
In general, our results of operations and financial condition are
affected by the inflation in each country in which we have a manufacturing
facility. During 1999 through the 2000 first half, the effects of inflation on
our cost of sales in the U.S. and foreign countries (except for highly
inflationary countries) have been generally mitigated by a combination of
improved operating efficiency and permanent on-going cost savings. Accordingly,
during that period, these effects were not material to us. From mid-2000 through
mid-2001, we experienced higher energy and raw material costs primarily due to
the substantial increase in the worldwide market price of oil and natural gas.
During the latter part of that period, we were able to similarly mitigate the
effects of those increases on our cost of sales. We have not experienced
significant inflation since mid-2001. We cannot assure you that future increases
in our costs will not exceed the rate of inflation or the amounts, if any, by
which we may be able to increase prices for our products.
We account for our non-U.S. subsidiaries under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." Accordingly, their assets and liabilities are translated into
dollars for consolidation and reporting purposes. Foreign currency translation
73
adjustments are generally recorded as part of stockholders' equity and
identified as accumulated other comprehensive income (loss) in the Consolidated
Balance Sheets until such time as their operations are sold or substantially or
completely liquidated.
We maintain operations in Brazil, Russia and Mexico, countries which
have had in the past, and may have now or in the future, highly inflationary
economies, defined as cumulative inflation of about 100% or more over a
three-calendar year period. In general, the financial statements of foreign
operations in highly inflationary economies have been remeasured as if the
functional currency of their economic environments were the dollar and
translation gains and losses relating to these foreign operations are included
in other (income) expense, net in the Consolidated Statements of Operations
rather than as part of stockholders' equity in the Consolidated Balance Sheets.
In light of significant increases in inflation in Mexico, effective
January 1, 1997, Mexico was considered to have a highly inflationary economy.
Accordingly, translation gains and losses for our Mexican operations were
included in the Consolidated Statements of Operations for 1998. In 1999, we
began to account for our Mexican subsidiary using the dollar as its functional
currency, irrespective of Mexico's inflationary status, because its sales and
purchases are predominantly dollar-denominated.
We have always considered Russia to have a highly inflationary economy.
Accordingly, translation gains and losses for our Russian operations are
included in the Consolidated Statements of Operations in 1999, 2000 and 2001.
Prior to August 1, 2000, our Swiss subsidiary used the dollar as its
functional currency. Beginning August 1, 2000, our Swiss subsidiary began using
the euro as its functional currency because its operations became predominantly
euro-denominated.
Foreign currency translation adjustments decreasing stockholders'
equity amounted to $48 million, including $33 million associated with our
Brazilian subsidiary, in 1999, $35 million, including $23 million associated
with our South African subsidiary, in 2000 and $29 million, including $21
million associated with our South African subsidiary, in 2001.
EFFECTS OF CHANGES IN CURRENCY EXCHANGE RATES
We incur manufacturing costs and sell our products in multiple
currencies. As a result, in general, our results of operations, cash flows and
financial condition are affected by changes in currency exchange rates as well
as by inflation in countries with highly inflationary economies where we have
manufacturing facilities. To manage certain exposures to risks caused by changes
in currency exchange rates, we use various off-balance sheet financial
instruments. To account for translation of foreign currencies into dollars for
consolidation and reporting purposes, we record foreign currency translation
adjustments in accumulated other comprehensive income (loss) as part of
stockholders' equity in the Consolidated Balance Sheets, except in the case of
operations in highly inflationary economies (or which use the dollar as their
functional currency) where we record foreign currency translation gains and
losses as part of other (income) expense, net in the Consolidated Statement of
Operations. We also record foreign currency transaction gains and losses as part
of other (income) expense, net.
When the local currencies of foreign countries in which we have a
manufacturing facility decline (or increase) in value relative to the dollar,
this has the effect of reducing (or increasing) the 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 us, which is priced in dollars. We price products manufactured
at our facilities for sale in local and certain export markets in local
currencies. Accordingly, when the local currencies increase (or decline) in
value relative to the
74
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.
Over the past three years, many of the foreign countries in which we
have a manufacturing facility, particularly Brazil, have been subject to
significant economic pressures, which have impacted inflation and currency
exchange rates affecting those countries. As a result, many of the currencies in
which we manufacture and sell our products weakened against the dollar. During
1999, the Brazilian real substantially devalued. During 2000, the South African
rand declined about 19%, the euro declined about 6% and the Brazilian real
declined about 8%. During 2001, the euro declined about 5%, the Brazilian real
declined about 16% and the South African rand declined about 36%. The net impact
of currency changes included in other (income) expense, net was a gain of $2
million in 1999, a gain of $4 million in 2000 and a gain of $2 million in 2001.
In the case of net sales of graphite electrodes, the impact was a reduction of
$19 million in 1999 (excluding $24 million in 1999 due to the lowering of prices
by our Brazilian subsidiary because of competitive cost advantages resulting
from the decline in the Brazilian real), a reduction of $36 million in 2000 and
a reduction of $15 million in 2001. We sought to mitigate these adverse impacts
on net sales by increasing local currency prices for some of our products in
various regions as circumstances permitted. We cannot predict changes in
currency exchange rates in the future or whether those changes will have
positive or negative impacts on our net sales or cost of sales. We cannot assure
you that we would be able to mitigate any adverse effects of such changes.
To manage certain exposures to specific financial market risks caused
by changes in currency exchange rates, we use various financial instruments. The
amount of currency exchange contracts used by us to minimize these risks was $69
million at December 31, 2000 and $37 million at December 31, 2001.
Total outstanding dollar-denominated debt of our foreign subsidiaries
(excluding our Russian and Mexican subsidiaries (and, since December 31, 1999,
our Swiss subsidiary), which used the dollar as their functional currency) was
nil at December 31, 2000 and 2001. Changes in the currency exchange rates
between the dollar and the currencies in the countries in which these excluded
subsidiaries are located result in foreign currency gains and losses that are
reported in other (income) expense, net in the Consolidated Statements of
Operations.
Our foreign subsidiaries with dollar-denominated debt have entered into
currency exchange contracts to protect against changes in currency exchange
rates. The amount of such contracts was $61 million at December 31, 2000 and nil
at December 31, 2001. We believe that such contracts may reduce our exposure to
changes in currency exchange rates related to such borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of funds have consisted principally of invested capital,
cash flow from operations, debt financing and, since July 2001, net proceeds
from our public offering of common stock. Our uses of those funds (other than
for operations) have consisted principally of debt reduction, capital
expenditures, payment of fines, liabilities and expenses in connection with
investigations, lawsuits and claims and payment of restructuring costs.
We are highly leveraged and have substantial obligations in connection
with antitrust investigations, lawsuits and claims. We had total debt of $638
million and a stockholders' deficit of $332 million at December 31, 2001 as
compared to total debt of $735 million and a stockholders' deficit of $316
million at December 31, 2000. At December 31, 2001, a substantial portion of our
debt had variable interest rates. In addition, if we are required to pay or
issue a letter of credit to secure payment of the fine assessed by the antitrust
authority of the European Union pending resolution of our appeal regarding the
amount of the fine, the payment would be financed by borrowing under (or secured
by a letter of credit
75
that would constitute a borrowing under) our revolving credit facility. Our
leverage and obligations, as well as changes in conditions affecting our
industry, changes in global and regional economic conditions and other factors,
have adversely impacted our recent operating results.
Cash and cash equivalents were $38 million at December 31, 2001 as
compared to $47 million at December 31, 2000. Net debt (which is total debt, net
of cash, cash equivalents and short-term investments) was $600 million at
December 31, 2001 as compared to $688 million at December 31, 2000.
DEBT REDUCTION. As a result of our high leverage and substantial
obligations in connection with antitrust investigations, lawsuits and claims,
changes in conditions affecting our industry, changes in global and regional
economic conditions and other factors, we have placed high priority on efforts
to manage cash and reduce debt. During 2000, we were able to generate $43
million of positive cash flow from working capital. As a result, during 2000, we
reduced our net debt by more than $14 million while, at the same time, paying
$30 million of antitrust fines and net settlement and expense payments and
restructuring payments. During 2001, we were able to maintain a relatively
stable net debt level (excluding the net proceeds from our equity offering in
July 2001) while, at the same time, paying $34 million in restructuring payments
and antitrust fines and net settlement and expense payments.
CASH FLOW AND PLANS TO MANAGE LIQUIDITY
For at least the past five years, we have had positive annual cash flow
from operations, excluding payments in connection with restructurings and
investigations, lawsuits and claims. Typically, the first quarter of each year
results in neutral or negative cash flow from operations (after deducting cash
used for capital expenditures and excluding payments in connection with
restructurings and investigations, lawsuits and claims and payment of interest
on our previously outstanding senior subordinated notes (which have since been
redeemed)) due to various factors. These factors include customer order
patterns, customer buy-ins in advance of annual price increases, fluctuations in
working capital requirements and payment of variable compensation with respect
to the immediately preceding year. Typically, the other three quarters result in
significant positive cash flow from operations (before deducting cash used for
capital expenditures). The third quarter tends to produce relatively less
positive cash flow primarily as a result of scheduled plant shutdowns by our
customers for vacations. Following a recovery in the steel and other metals and
transportation industries, we believe that our cash flow would follow this
historical pattern.
We use, and are dependent on, funds available under our revolving
credit facility, including continued compliance with the financial covenants
under the Senior Facilities, as well as monthly or quarterly cash flow from
operations as our primary sources of liquidity. We believe that our cost savings
initiatives will, over the next one to two years, continue to improve our cash
flow from operations for a given level of net sales. Improvements in cash flow
from operations resulting from these initiatives are being partially offset by
associated cash implementation costs, while they are being implemented.
Our high leverage and substantial obligations in connection with
antitrust investigations, lawsuits and claims could have a material impact on
our liquidity. Cash flow from operations services payment of our debt and these
obligations, thereby reducing funds available to us for other purposes. Our
leverage and these obligations make us more vulnerable to economic downturns or
in the event that these obligations are greater or timing of payment is sooner
than expected.
Our ability to service our debt as it comes due is dependent on our
future financial and operating performance. Our ability to maintain compliance
with the covenants under the Senior Facilities is also dependent on our future
financial and operating performance. This performance, in turn is subject to
various factors, including certain factors beyond our control, such as changes
in conditions affecting our
76
industry, changes in global and regional economic conditions, changes in
interest and currency exchange rates, developments in antitrust investigations,
lawsuits and claims involving us and inflation in raw material, energy and other
costs.
We cannot assure you that our cash flow from operations and capital
resources will be sufficient to enable us to meet our debt service and other
obligations when due. Even if we are able to meet our debt service and other
obligations when due, we may not be able to comply with the financial covenants
under the Senior Facilities. The breach of any of the covenants under the Senior
Facilities, unless waived by the lenders, would be a default under the Senior
Facilities. This would permit the lenders to accelerate the maturity of the
Senior Facilities. It would also permit the lenders to terminate their
commitments to extend credit under our revolving credit facility. This would
have an immediate material adverse effect on our liquidity. An acceleration of
maturity of the Senior Facilities or a breach of the covenants contained in the
Notes would permit the holders of the Notes to accelerate the maturity of the
Notes. Acceleration of maturity of the Indenture would permit the lenders to
accelerate the maturity of the Senior Facilities and terminate their commitments
to extend credit under our revolving credit facility. If we were unable to repay
our debt to the lenders or holders, the lenders and holders could proceed
against the collateral securing the Senior Facilities and the Notes,
respectively, and exercise all other rights available to them. If we were unable
to repay our debt to the lenders or the holders, or otherwise obtain a waiver
from the lenders or the holders, we could be required to limit or discontinue,
temporarily or permanently, certain of our business plans, activities or
operations, reduce or delay certain capital expenditures, sell certain of our
assets or businesses, restructure or refinance some or all of our debt or incur
additional debt, or sell additional common stock or other securities. We cannot
assure you that we would be able to obtain any such waiver or take any of such
actions on favorable terms or at all.
As described above, we are dependent on our revolving credit facility
and continuing compliance with the financial covenants under the Senior
Facilities for liquidity. The Senior Facilities require us to, among other
things, comply with specified minimum interest coverage and maximum leverage
ratios that become more restrictive over time. At December 31, 2001, we were in
compliance with the financial covenants under the Senior Facilities. If we were
to believe that we would not continue to comply with such covenants, we would
seek an appropriate waiver or amendment from the lenders thereunder. There can
be no assurance that we would be able to obtain such waiver or amendment on
acceptable terms or at all.
While our revolving credit facility provides for maximum borrowings of
up to [EURO]250 million ($223 million, based on currency exchange rates in
effect at December 31, 2001), our ability to borrow under this facility may
effectively be substantially less because of the impact of additional borrowings
upon our compliance with the maximum leverage ratio permitted under the Senior
Facilities. At March 31, 2002, we had full availability under our revolving
credit facility. In addition, payment of the fine or issuance of a letter of
credit to secure payment of the fine assessed by the antitrust authority of the
European Union would significantly reduce remaining funds available under our
revolving credit facility for operating and other purposes.
We believe that the long term fundamentals of our business continue to
be sound. Accordingly, although we cannot assure you that such will be the case,
we believe that, based on our expected cash flow from operations, our expected
resolution of our remaining obligations in connection with antitrust
investigations, lawsuits and claims, and existing capital resources, and taking
into account our efforts to reduce costs and working capital needs, improve
efficiencies and product quality, generate growth and earnings and maximize
funds available to meet our debt service and other obligations, we will be able
to manage our working capital and cash flow to permit us to service our debt and
meet our obligations when due.
77
RELATED PARTY TRANSACTIONS AND SPECIAL PURPOSE ENTITIES. We have not,
during the past three years, and are not now engaged in any material
transactions with affiliates or related parties other than transactions with our
subsidiaries (including Carbone Savoie), compensatory transactions (including
employee benefits, stock option and restricted stock grants, compensation
deferral and executive employee loans and stock purchases) with directors or
officers, and transactions with our 25%-owned joint venture with Jilin.
We have not been during the past three years and are not now affiliated
with or related to any special purpose entity other than UCAR Finance.
OFF-BALANCE-SHEET FINANCINGS AND COMMITMENTS. We do not have any
material off-balance-sheet financing arrangements or other commitments
(including non-exchange traded contracts) other than:
o interest rate caps and currency exchange rate contracts which are
described in "Quantitative and Qualitative Disclosures About
Market Risk;"
o commitments under non-cancelable operating leases that, at
December 31, 2001, total less than $3 million in each year and
$10 million in the aggregate; and
o commitments under our information technology outsourcing services
agreement with CGI Group Inc. that, at December 31, 2001, total
less than $8 million in each year and about $60 million in the
aggregate.
As part of our cash management activities, we seek to manage accounts
receivable credit risk, collections, and accounts payable and payments thereof
to maximize our free cash at any given time.
Careful management of credit risk has allowed us to avoid significant
accounts receivable losses in light of the poor financial condition of many of
our potential and existing customers. In light of current and prospective global
and regional economic conditions, we cannot assure you that we will not be
materially adversely affected by accounts receivable losses in the future.
We typically discount or factor a substantial portion of our accounts
receivable. Certain of our subsidiaries sold accounts receivable aggregating $79
million in 1999 and $152 million in 2000. Certain of our subsidiaries sold
accounts receivable totaling $223 million in 2001, of which we estimate that $45
million would have been outstanding at December 31, 2001. Accounts receivable
sold and remaining on the Consolidated Balance Sheet aggregated $1 million at
December 31, 2001. Our average days payables outstanding increased by about 13
days at the end of 2001 as compared to the end of 2000. Over the same period,
our days sales outstanding increased by about 3 days.
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
Cash flow provided by operations was $17 million in 2001 as compared to
cash flow provided by operations of $94 million in 2000. This decline of $77
million resulted primarily from an increase of $75 million in the use of cash
flow for working capital. EBITDA was $110 million in 2001, a decrease of $47
million from $157 million in 2000.
Working capital was a use of $32 million of cash flow in 2001, a change
of $75 million from a source of $43 million of cash flow in 2000. The change
occurred primarily due to a $38 million increase in inventories, a $20 million
increase in accounts payable and accruals, a $11 million increase in
restructuring payments, and a $3 million increase in prepaid expenses, partially
offset by a $7 million reduction in payments for antitrust fines and net
settlements and expenses. Inventory levels increased in
78
our Graphite Power Systems Division primarily due to transitioning activities in
connection with the shutdown of our U.S. graphite electrode manufacturing
operations and lower than expected volume of graphite electrodes sold. Accounts
payable increased primarily due to our cash management activities, partially
offset by lower spending, including lower purchases of petroleum coke as excess
inventories stockpiled following the explosion at one of Conoco's petroleum coke
plants were reduced and lower production levels as demand for graphite
electrodes and certain other products weakened during 2001.
Cash flow provided by operations was $94 million in 2000 as compared to
cash flow provided by operations of $80 million in 1999. This improvement of $14
million resulted primarily from a lower use of cash flow for working capital of
approximately $91 million, partially offset by lower net income (including
non-cash items).
Working capital was a source of $43 million of cash flow in 2000, an
increase of $91 million from a use of $48 million of cash flow in 1999. The
increase occurred primarily due to a $22 million increase in accounts payable
and accruals, a $41 million reduction in payment of fines and net settlements
and expense payments in connection with antitrust investigations and related
lawsuits and claims, a $16 million reduction in restructuring payments, and the
use of $12 million for settlement of the securities class action and stockholder
derivative lawsuits in 1999 that was not used in 2000.
CASH FLOW USED IN INVESTING ACTIVITIES
We used $39 million of cash flow in investing activities during 2001 as
compared to $50 million during 2000, in each case primarily for capital
expenditures. The net reduction of $11 million was primarily due to reduction in
capital expenditures as compared to 2000. We are focusing our capital
expenditures on strategic capital investments and essential maintenance.
We used $50 million of cash flow in investing activities during 2000 as
compared to $39 million during 1999, in each case primarily for capital
expenditures. The net increase of $11 million was primarily due to decline in
cash proceeds from the sale of assets of $8 million in 2000 as compared to 1999.
Capital expenditures decreased to $52 million in 2000 from $56 million in 1999.
Capital expenditures in 2000 related primarily to our new flexible graphite
manufacturing line, our POWER OF ONE initiative and capital equipment
replacement.
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES
Cash flow provided by financing activities was $15 million during 2001
as compared to cash flow used in financing activities of $13 million in 2000.
During 2001, we received net proceeds of $91 million from our public offering of
common stock in July 2001 and $9 million from an additional minority investment
in connection with the broadening of our strategic alliance in the cathode
business with Pechiney, and made $84 million in net debt repayments. During
2000, we incurred $28 million of costs, fees and expenses in connection with our
debt recapitalization in February 2000 and had an increase in net borrowings of
$13 million.
Cash flow used in financing activities was $13 million in 2000 as
compared to $80 million in 1999. The change was primarily due to lower
borrowings in 2000 as compared to 1999. We made $14 million in net debt
repayments in 2000 as compared to $80 million of net borrowings in 1999. This
$94 million change was offset by $28 million in costs related to our debt
recapitalization in February 2000.
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USE OF PROCEEDS FROM OUR 2001 EQUITY OFFERING AND NET DEBT
We completed a public offering of common stock in July 2001. Net
proceeds from the offering were $91 million. We plan to use approximately 40% of
the net proceeds for growth and expansion. In the interim, those proceeds have
been used to reduce debt. Net debt (which is total debt, net of cash, cash
equivalents and short-term investments) declined $60 million from the end of the
2001 second quarter to $600 million at the end of 2001. Cash used for increases
in working capital, antitrust payments of $8 million and restructuring payments
of $13 million, and a currency translation adjustment increasing our
euro-denominated debt by $10 million, offset some of the debt reduction from use
of those net proceeds.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses were $9 million 1999, $11 million
in 2000 and $12 million in 2001.
RESTRICTIONS ON DIVIDENDS AND STOCK REPURCHASES
Under the Senior Facilities, we are generally permitted to pay
dividends on common stock and repurchase common stock in an aggregate annual
amount of between $25 million and $50 million, depending on our leverage ratio
and excess cash flow. Under the Indenture, we are generally permitted to pay
dividends on common stock and repurchase common stock in an aggregate cumulative
(from February 15, 2002) amount of $25 million, plus certain consolidated net
income, equity proceeds and investment gains.
CRITICAL ACCOUNTING POLICIES
The SEC recently issued disclosure guidance for critical accounting
policies. The SEC defines critical accounting policies as those that require
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 2 to the
Consolidated Financial Statements. Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments
or estimates. However, the following accounting policies could be deemed to be
critical.
USE OF ESTIMATES. In preparing the Consolidated Financial Statements,
we use estimates in determining the economic useful lives of our assets,
obligations under our employee benefit plans, provisions for doubtful accounts,
provisions for restructuring charges, tax valuation allowances and various other
recorded or disclosed amounts. Estimates require us to use our judgment. While
we believe that our estimates for these matters are reasonable, if the actual
amount is significantly different than the estimated amount, our assets,
liabilities or results of operations may be overstated or understated.
CONTINGENCIES. We account for contingencies in accordance with SFAS No.
5, "Accounting for Contingencies." SFAS No. 5 requires that we record an
estimated loss from a loss contingency when information available prior to
issuance of the Consolidated Financial Statements indicates that it is probable
that an asset has been impaired or a liability has been incurred at the date of
the Consolidated Financial Statements and the amount of the loss can be
reasonably estimated. Accounting for contingencies such as environmental, legal
and income tax matters requires us to use our judgment. While
80
we believe that our accruals for these matters are adequate, if the actual loss
from a loss contingency is significantly different from the estimated loss, our
results of operations may be overstated or understated.
IMPAIRMENTS OF LONG-LIVED ASSETS. We record impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted future cash flows estimated to
be generated by those assets are less than the carrying amount of those assets.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If the asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed are reported at the
lower of the carrying amount or fair value less costs to sell. If the actual
value is significantly less than the estimated value, our assets may be
overstated.
INVENTORIES. We record the value of inventory at the lower of cost or
market, and periodically review the book value of products and product lines to
determine if they are properly valued. We also periodically review the
composition of our inventories and seek to identify slow-moving inventories. In
connection with those reviews, we seek to identify products that may not be
properly valued and assess the ability to dispose of them at a price greater
than cost. If it is determined that cost is less than market value, then cost is
used for inventory valuation. If a write down to current market value is
necessary, the market value cannot be greater than the net realizable value,
sometimes called the ceiling (defined as selling price less costs to complete
and dispose), and cannot be lower than the net realizable value less a normal
profit margin, sometimes called the floor. Generally, we do not experience
issues with obsolete inventory due to the nature of our products. If the actual
value is significantly less than the recorded value, our assets may be
overstated.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, excluding
goodwill and other intangible assets not being amortized pursuant to SFAS No.
142, and certain other assets. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. We will
adopt SFAS No. 144 effective January 1, 2002. We anticipate that the adoption of
SFAS No. 144 will not have a significant impact on our consolidated financial
position or results of operations.
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143, which requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. SFAS
No. 143 will be effective for all financial statements for fiscal years
beginning after June 15, 2002. We anticipate that SFAS No. 143 will not, upon
adoption, have a significant impact on our consolidated financial position or
results of operations.
In July 2001, FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets", both of which are
effective for all fiscal years beginning after December 15, 2001. These
statements establish accounting and reporting standards for business
combinations, goodwill and intangible assets. We will adopt SFAS Nos. 141 and
142 effective January 1, 2002. We anticipate that the adoption of SFAS Nos. 141
and 142 will not have a significant impact on our consolidated financial
position or results of operations except that we will no longer amortize
goodwill.
In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," a
replacement of SFAS No. 125, which has the
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same title. SFAS No. 140 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings, and requires certain additional disclosures. SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001, and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
adoption of SFAS No. 140 did not have a significant impact on our consolidated
financial position or results of operations.
COSTS RELATING TO PROTECTION OF THE ENVIRONMENT
We have been and are subject to increasingly stringent environmental
protection laws and regulations. In addition, we have an on-going commitment to
rigorous internal environmental protection standards. The following table sets
forth certain information regarding environmental expenses and capital
expenditures.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1999 2000 2001
---- ---- ----
(DOLLARS IN MILLIONS)
Expenses relating to environmental
protection......................... $13 $14 $12
Capital expenditures related to
environmental protection........... 4 6 3
ASSESSMENT OF THE EURO
On January 1, 1999, eleven of the member countries of the European
Union established fixed conversion rates between their existing currencies
(called "LEGACY CURRENCIES") and one common currency called the euro. The euro
trades on currency exchanges and may be used in business transactions. Beginning
in January 2002, the legacy currencies are being withdrawn from circulation. Our
subsidiaries affected by the conversion have established plans to address issues
raised by the conversion. We believe that, under current conditions, the
conversion of legacy currencies into the euro will not have a materially adverse
affect on us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks primarily from changes in interest rates
and currency exchange rates. To manage our exposure to these changes, we
routinely enter into various transactions that have been authorized according to
documented policies and procedures. We do not use derivatives for trading
purposes or to generate income, and we do not use leveraged derivatives.
Our exposure to changes in interest rates results primarily from
floating rate long term debt tied to LIBOR or euro LIBOR. We enter into
agreements with financial institutions, which are intended to limit, or cap, our
exposure to the incurrence of additional interest expense due to increases in
variable interest rates. During 2001, we purchased interest rate caps on up to
$100 million of debt, limiting the floating interest rate factor on this debt to
a weighted-average rate of 5.0% for the period commencing June 2001 and
continuing through June 2002. At December 31, 2001, we had outstanding interest
rate caps of $100 million and [euro] 200 million limiting our floating interest
rate factor on related debt to a weighted-average rate of 5.0% (where the
interest on the debt is based on LIBOR) and 5.0% (where the interest on the debt
is based on euro LIBOR) through various dates ending June 2002. Fees related to
these agreements are charged to interest expense over the term of the
agreements.
Our exposure to changes in currency exchange rates results primarily
from:
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o investments in our foreign subsidiaries and in our share of the
earnings of those subsidiaries, which are denominated in local
currencies;
o raw material purchases made by our foreign subsidiaries in a
currency other than the local currency; and
o export sales made by our subsidiaries in a currency other than the
local currency.
When we deem it appropriate, we may attempt to limit our risks
associated with changes in currency exchange rates through both operational and
financial market activities. Financial instruments are used to attempt to hedge
existing exposures, firm commitments and, potentially, anticipated transactions.
We use forward, option and swap contracts to reduce risk by essentially creating
offsetting currency exposures. We held contracts against these risks with an
aggregate notional amount of about $69 million at December 31, 2000 and $37
million at December 31, 2001. All of our contracts mature within one year. All
of our contracts are marked to market monthly. Unrealized gains and losses on
outstanding foreign currency contracts were nil at December 31, 2000 and 2001.
We used a sensitivity analysis to assess the potential effect of
changes in currency exchange rates and interest rates on reported earnings at
December 31, 2001. Based on this analysis, a hypothetical 10% weakening or
strengthening in the dollar across all other currencies would have changed our
reported gross profit for 2001 by about $12 million. A hypothetical increase in
interest rates of 100 basis points across all maturities would have increased
our interest expense for 2001 by about $7 million.
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BUSINESS
We are one of the world's largest manufacturers and providers of high
quality natural and synthetic graphite- and carbon-based products and services,
offering energy solutions to industry-leading customers worldwide. We
manufacture graphite and carbon electrodes and cathodes, used primarily in
electric arc furnace steel production and aluminum smelting. We also manufacture
other natural and synthetic graphite and carbon products used in, and provide
services to, the fuel cell power generation, electronics, semiconductor and
transportation markets. We believe that we have the leading market share in all
of our major product lines. We have over 100 years of experience in the research
and development of graphite and carbon technology, and currently hold numerous
patents related to this technology.
We are a global business, selling our products and engineering and
technical services in more than 70 countries. We have 13 manufacturing
facilities strategically located in Brazil, Mexico, South Africa, France, Spain,
Russia and the U.S., and a planned joint venture manufacturing facility located
in China, which, subject to receipt of required Chinese governmental approvals
and satisfaction of other conditions, is expected to commence operations in
2003. Our customers include industry leaders such as Nucor and Arcelor in steel,
Alcoa and Pechiney in aluminum, Ballard Power Systems in fuel cells, Intel in
electronics, MEMC Electronic Materials in semiconductors and Boeing in
transportation.
In 2001, we realigned our businesses into two new operating divisions,
our Graphite Power Systems Division and our Advanced Energy Technology Division.
We believe that the realignment will allow each division to develop and
implement strategies uniquely designed to maximize the value of its businesses,
enter into strategic alliances and identify and implement manufacturing and
sales rationalization and cost savings initiatives. We also believe that the
realignment will allow us to identify opportunities to improve efficiencies in
intellectual property management, global cash management and other corporate
services.
GRAPHITE POWER SYSTEMS DIVISION
Our Graphite Power Systems Division manufactures and delivers high
quality graphite and carbon electrodes and cathodes and related services that
are key components of the conductive power systems used to produce steel,
aluminum and other non-ferrous metals. Graphite electrodes are consumed in the
production of steel in electric arc furnaces, the steel making technology used
by all "mini-mills." Mini-mills constitute the higher long term growth sector of
the steel industry. Our graphite electrodes accounted for about 79% of this
division's net sales during 2001. Electrodes act as conductors of electricity in
a furnace, generating sufficient heat to melt scrap metal and other raw
materials. We believe there is currently no commercially viable substitute for
graphite electrodes in electric arc furnaces. Graphite electrodes are also used
for refining steel in ladle furnaces and in other smelting processes.
Carbon electrodes are used in the production of silicon metal, a raw
material primarily used in the manufacture of aluminum. Graphite and carbon
cathodes are used in aluminum smelting.
Because of its strong competitive position, we believe that this
division is well positioned to benefit from the expected cyclical recovery in
production of steel and other metals.
BUSINESS STRATEGIES
To maintain our strong competitive position, we have instituted a
number of strategic initiatives to improve the cost structure, increase the
revenues and maximize the cash flow generated by this division. These strategic
initiatives include:
84
PURSUING COST SAVINGS. We are focused on continuous cost improvement.
We have aggressively reduced our graphite electrode production cost by closing
higher cost facilities and redeploying much of that capacity to our larger,
lower cost, strategically located facilities. Completed actions include the
shutdown of graphite electrode manufacturing capacity in Canada, Germany and the
U.S., coupled with incremental expansion of graphite electrode manufacturing
capacity in Mexico, South Africa and Spain. As a result of our actions, we have
reduced our average graphite electrode production cost per metric ton at the end
of 2001 by about 15% since the 1998 fourth quarter. We believe that key actions
identified under our 2002 plan will enable us to reduce our average graphite
electrode production cost per metric ton by an additional 15% by 2004 as
compared to 2001. These actions include:
o the mothballing of our graphite electrode manufacturing capacity
in Caserta, Italy, completed during the 2002 first quarter, ahead
of schedule, combined with the redeployment of much of that
capacity to our larger, lower cost graphite electrode
manufacturing facilities in Mexico, France and Spain; and
o the delivery of the balance of the full benefits from the
completed closure of our U.S. graphite electrode manufacturing
operations.
We believe that our graphite electrode production cost structure is the
lowest of all major producers and that these shutdowns and our other cost
reduction activities along with the expansion of our facilities in low cost
jurisdictions will further enhance our position as a low cost supplier. In
addition, our planned joint venture in China with Jilin should provide us with
access to low cost manufacturing capacity for high quality graphite electrodes
in Asia for the first time.
We believe that the barriers to entrants in the graphite and carbon
electrode industries are high. There have been no significant entrants since
1950. We estimate that our average capital investment to incrementally increase
our annual graphite electrode manufacturing capacity would be less than 10% of
the initial investment for "greenfield" capacity. We also believe that
production of these materials requires a significant amount of expertise and
know-how, which we believe is difficult for entrants to replicate in order to
compete effectively.
LEVERAGING OUR GLOBAL PRESENCE WITH INDUSTRY LEADING CUSTOMERS.
Capitalizing on our global leadership position and the continuing consolidation
within the steel and other metals industries, we are prioritizing our sales and
marketing efforts toward the world's larger global steel and other metals
producers. These efforts focus on offering consistently high quality electrodes
and technical services on a global basis at competitive prices. We believe that,
as a result of these efforts and our diverse geographic locations, we are the
producer of graphite electrodes best positioned to serve the global graphite
electrode purchasing requirements of these steel producers.
We believe that this division, which represented 80% of our total net
sales in 2001, has the leading market share in its major product lines. We
believe that, in 2001, its global market share was:
o about 19% in graphite electrodes;
o about 28% in carbon electrodes; and
o about 18% in graphite and carbon cathodes.
We are one of only two global producers of graphite and carbon
electrodes and cathodes. This division sells its products in every major
geographic market. Sales of this division's products outside the U.S. accounted
for about 80% of its net sales in 2001. No single customer or group of
affiliated customers
85
accounted for more than 6% of our net sales in 2001. We believe that our network
of state-of-the-art manufacturing facilities in diverse geographic regions,
including Brazil, France, Mexico, Russia, South Africa and Spain, coupled with a
planned joint venture manufacturing facility located in China, which, subject to
governmental approval and satisfaction of other conditions, is expected to
commence operations in 2003, provides us with significant operational
flexibility and a significant competitive advantage. Our investments in, among
other things, incremental expansion of capacity in lower cost jurisdictions as
well as the planned joint venture in China are intended to maintain and enhance
this global competitive advantage.
We have a strategic alliance with Pechiney in the cathode business,
which has allied us with the world's recognized leader in aluminum smelting
technology and which we believe positions us as the quality leader in the low
cost production of high quality graphite cathodes. We believe that our improved
graphite cathode technology will enable us to incrementally increase our market
share of graphite cathodes sold upon the commencement of operation of the new,
more efficient aluminum smelting furnaces that are being built, even as older
furnaces are being shut down. Our cathode capacity is completely sold out for
the 2002 first half and we have booked over 80% of our cathode capacity for
the 2002 second half.
EXPANDING VALUE-DRIVEN ENTERPRISE SELLING. The electric arc furnace
steel production industry has experienced significant consolidation in recent
years, and this trend is expected to continue. This consolidation has led to the
creation of fewer but larger global producers. We have expanded our sales and
marketing efforts directed toward these producers, focused on offering
consistently high quality electrodes and technical services on a global basis at
competitive prices. We believe that we are the only graphite electrode
manufacturer in the world that is positioned to offer global high quality
supply. As a result of these efforts, for example, we believe that we have
increased our market share of graphite electrodes sold to the ten largest
electric arc furnace steel producers by about 4 percentage points in 2001 as
compared to 2000. In 2001, six of our top ten graphite electrode customers were
among the ten largest purchasers of graphite electrodes worldwide. In addition
to increased volumes, this shift in our customer base enables us to further
optimize production efficiencies and costs.
We expect that the larger producers will be the survivors of the
continuing consolidation and rationalization within the steel industry. As a
result, we believe that, in many cases, the larger producers are more
creditworthy than smaller producers and that we are able to better manage our
exposure for uncollectible trade receivables as we increase the percentage of
our total net sales sold to them. Sales of our graphite electrodes to the ten
largest electric arc furnace steel producers constituted 31% of our total net
sales of graphite electrodes in 2001.
DELIVERING EXCEPTIONAL AND CONSISTENT QUALITY. We believe that we
operate the world's premier electrode and cathode research and development
laboratories and that our products are among the highest quality available. We
have worked diligently in recent years to improve the quality and uniformity of
our products on a worldwide basis, providing significant production efficiencies
for our customers and the flexibility to source most orders from the facility
that optimizes our profitability. We believe that the consistently high quality
of our products enables customers to achieve significant production
efficiencies, which we believe provides us with an important competitive
advantage.
PROVIDING SUPERIOR TECHNICAL SERVICE. We believe that this division is
the recognized industry leader in providing value added technical services to
customers. We believe that we have the most extensive technical and customer
service organization in our industry, which we use strategically to service key
customers to our competitive advantage. We employ about 30 engineers who provide
technical services to customers globally in all areas of electric arc and
aluminum smelting furnace specification, design and operation. We believe that
this division has more technical service engineers
86
located in more countries than any of its competitors. In addition to providing
operating and processing technical services, we are frequently called upon to
provide advisory services to companies that are commissioning a new electric arc
or aluminum smelting furnace. We believe that the attractiveness of the services
we can provide while a furnace is being commissioned frequently results in our
obtaining these companies as customers for our products.
STRATEGIC ALLIANCES
We are pursuing strategic alliances that enhance or complement our
existing or related businesses and have the potential to generate strong cash
flow. Strategic alliances may be in the form of joint venture, licensing, supply
or other arrangements that leverage our strengths to achieve cost savings,
improve margins and cash flow, and increase net sales and earnings growth.
We have developed a strategic alliance with Pechiney in the cathode
business, which includes our relationship with it as a significant customer
under a long term supply contract. Our joint venture with Pechiney has allied us
with the recognized leader in aluminum smelting technology worldwide.
To broaden our alliance, in March 2001, we contributed our Brazilian
cathode manufacturing operations to Carbone Savoie. Pechiney, the 30% minority
owner of Carbone Savoie, contributed approximately $9 million in cash to Carbone
Savoie as part of this transaction. The cash contribution is being used to
upgrade manufacturing operations in Brazil and France, which is expected to be
completed by the end of the 2002 first quarter. Ownership in Carbone Savoie
remains 70% by us and 30% by Pechiney. Under our now broadened alliance, Carbone
Savoie holds our entire cathode manufacturing capacity, which is about 40,000
metric tons of cathodes annually. With these upgrades, we believe that we will
be positioned as the quality leader in the low cost production of graphite
cathodes, the preferred technology for deployment in new aluminum smelting
furnaces due to their ability to provide substantial improvements in process
efficiency.
We are using Pechiney's smelting technology and our graphite technology
and expertise in high temperature industrial applications to develop further
improvements in graphite cathodes. Our graphite cathodes are used by Pechiney in
its own plants and marketed to its licensees as well as to third parties.
In April 2001, we entered into a joint venture agreement with Jilin to
produce and sell high-quality graphite electrodes in China. We believe that
China is the largest market for graphite electrodes in the world, representing
about 40% of the world's graphite electrode market. We also believe that China
has the fastest growing electric arc furnace steel industry in the world, with
estimated average growth at about double the world rates. Jilin is the largest
producer of graphite electrodes and other graphite and carbon products in China.
It currently produces about 50,000 metric tons of graphite electrodes annually.
This joint venture is expected to provide us, for the first time, with access to
graphite electrode manufacturing capability in Asia. We believe that our share
of the Asian market for graphite electrodes was only about 3% in 2001 as
compared to our worldwide market share (excluding the Asian market) of about 24%
in 2001. We believe that this low cost facility will provide us with an
excellent platform to expand our market share, both in China and the rest of
Asia.
Over the past several decades, the leading electric arc furnace
steelmakers have upgraded, and most other steelmakers (including those in China)
are upgrading, their furnaces to more modern and efficient ones. These furnaces
require larger and higher quality graphite electrodes, typically in diameters of
22 inches and above. Jilin currently makes 22 inch and 24 inch graphite
electrodes as well as smaller sizes. Under the joint venture agreement, Jilin
has agreed that the new joint venture facility will be its exclusive facility
for manufacturing 22 inch and 24 inch ultra high power graphite electrodes
required by the more modern and efficient electric arc furnaces, which
steelmakers are installing in China and the rest
87
of Asia as they upgrade their operations. As a result, Jilin will be replacing a
portion of its existing production with production by the joint venture.
The joint venture is expected to:
o have capacity to manufacture about 20,000 metric tons of graphite
electrodes annually;
o configure its facilities so as to be expandable to about 30,000
metric tons;
o utilize renovated capacity at Jilin's main facility in Jilin
City; and
o complete additions at another site in Changchun that were begun
by Jilin.
The new joint venture facility is expected to commence operations in
2003. We expect to contribute $6 million of cash plus technical assistance for a
25% ownership interest in the joint venture. The completion of the parties'
capital contributions to the joint venture is subject to the receipt of required
Chinese governmental approvals and satisfaction of other conditions.
In the 2001 fourth quarter, we entered into a strategic alliance with
AMI GE, S.A. de C.V., a Mexican company that is 50%-owned by General Electric
Company. AMI GE is a supplier of furnace regulators and other furnace equipment.
Based in Mexico, AMI GE is seeking to expand its services globally. Under the
alliance, AMI GE will market our technical services to steel producers and
others. We believe that the range and quality of our technical services will
provide a competitive advantage to AMI GE, and AMI GE will provide us with
opportunities to increase sales of our products and services to new and existing
customers.
MARKETS AND INDUSTRY OVERVIEW
We estimate that, in 2001, the worldwide market for graphite and carbon
electrodes and cathodes was about $3 billion. These products are sold primarily
to customers in the steel, silicon metal, ferronickel, thermal phosphorous,
titanium dioxide, aluminum and other metals industries. Customers in these
industries are located in all major geographic markets.
USE OF GRAPHITE ELECTRODES IN ELECTRIC ARC FURNACES. There are two
primary technologies for steel making:
o basic oxygen furnace steel production (sometimes called
"integrated steel production"); and
o electric arc furnace steel production.
Electric arc furnace steel makers are called "mini-mills" because of
their historically smaller capacity as compared to basic oxygen furnace steel
makers and because they historically served more localized markets. Graphite
electrodes are used primarily in electric arc furnace steel production. They are
also used to refine steel in ladle furnaces and in other smelting processes such
as production of titanium dioxide.
Electrodes act as conductors of electricity into the furnace,
generating sufficient heat to melt scrap metal, iron ore or other raw materials
used to produce steel, silicon metal or other metals. The electrodes are
gradually consumed in the course of that production. Electric arc furnaces
typically range in size from those that produce about 25 metric tons of steel
per production cycle to those that produce about 150 metric tons per production
cycle. Electric arc furnaces operate using either alternating or direct
88
electric current. The vast majority of electric arc furnaces use alternating
current. Each of these furnaces typically uses nine electrodes (in three columns
of three electrodes each) at one time. The other electric arc furnaces, which
use direct current, typically use one column of three electrodes. The size of
the 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 using alternating current and operating at a typical number of
production cycles per day, one of the nine electrodes is fully consumed
(requiring the addition of a new electrode), on average, every eight to ten
operating hours. The actual rate of consumption and addition of electrodes for a
particular furnace depends primarily on the efficiency and productivity of the
furnace. Therefore, demand for graphite electrodes is directly related to the
amount and efficiency of electric arc furnace steel production.
Electric arc furnace steel production requires significant heat (as
high as 5,000 degrees Fahrenheit, which we believe is the hottest operating
temperature in any industrial or commercial manufacturing process worldwide) to
melt scrap metal, iron ore or other raw materials. Heat is generated as
electricity (as much as 150,000 amps) passes through the electrodes and creates
an electric arc between the electrodes and the raw materials.
Graphite electrodes are currently the only products available that have
the high levels of electrical conductivity and the capability of sustaining the
high levels of heat generated in an electric arc furnace producing steel.
Therefore, graphite electrodes are essential for electric arc furnace steel
production. We believe that there are currently no commercially viable
substitutes for graphite electrodes in electric arc furnace steel making. We
estimate that, on average, the cost of graphite electrodes represents about 3%
of the cost of producing steel in a typical electric arc furnace.
Electric arc furnace steel production has, for many years, been the
higher long term growth sector of the steel industry, at an estimated average
annual growth rate of about 3%. Graphite electrode demand is expected to grow
over the long term at an average estimated annual growth rate of about 1% to 2%.
There are currently in excess of 2,000 electric arc furnaces operating
worldwide. Worldwide electric arc furnace steel production grew from about 90
million metric tons (about 14% of total steel production) in 1970 to about 279
million metric tons (about 33% of total production) in 2001. We estimate that
steel makers worldwide added net new electric arc furnace steel production
capacity of about 18 million metric tons in 1999, about 13 million metric tons
in 2000 and about 11 million metric tons in 2001. We believe that a portion of
the new capacity added in the past three years has not yet become operational.
We are aware of about 29 million metric tons of announced new electric arc
furnace production capacity that is scheduled to be added in 2002 through 2005.
After an electric arc furnace has been commissioned, the cost and time
required to suspend and recommence production due to operational, economic or
other factors is relatively low and short as compared to a basic oxygen furnace.
As a result, electric arc furnace steel producers are better enabled to reduce
and increase production to respond to changes in demand and prices for steel.
This ability has resulted in significant fluctuations in electric arc furnace
steel production over the past five years, as economic conditions affecting
demand for steel have fluctuated. The following table illustrates the growth in
electric arc steel production over the past 31 years:
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WORLDWIDE STEEL PRODUCTION
(MILLIONS OF METRIC TONS)
[Insert the Worldwide Steel Production chart here]
Sources: International Iron and Steel Institute and UCAR estimates
We believe that, in a strong recovery from the current global economic downturn,
electric arc furnace steel production will rebound significantly.
RELATIONSHIP BETWEEN GRAPHITE ELECTRODE DEMAND AND ELECTRIC ARC FURNACE
STEEL PRODUCTION. We believe that the worldwide growth in electric arc furnace
steel production has been due primarily to improvements in the cost
effectiveness and operating efficiency of electric arc furnace steel making. We
believe that growth has also been due to the fact that, as a result of recent
technical advances, electric arc furnace steel makers are capable of producing
the majority of the product lines that are produced by basic oxygen furnace
steel makers.
The improved efficiency of electric arc furnaces has resulted in a
decrease in specific consumption. We estimate that specific consumption declined
from about 4.3 kilograms of graphite electrodes per metric ton of steel produced
in 1990 to about 2.4 kilograms per metric ton in 2001. We believe that, on
average, as the costs (relative to the benefits) increase for electric arc
furnace steel makers to achieve significant further efficiencies in specific
consumption, the decline in specific consumption will continue at a more gradual
pace. We further believe that the rate of decline in the future will be impacted
by the addition of new electric arc furnace steel making capacity. To the extent
that this new capacity replaces old capacity, it has the effect of reducing
industry wide specific consumption due to the efficiency of new electric arc
furnaces. To the extent that this new capacity increases industry wide electric
arc furnace steel production capacity and that capacity is utilized, it creates
additional demand for graphite electrodes. While we believe that the rate of
decline of specific consumption over the long term has become lower, we believe
that there was a slightly more significant decline in 2001 than would otherwise
have been the case due to the shutdown of older, less efficient electric arc
furnaces due to the severe downturn affecting the steel industry.
90
PRODUCTION CAPACITY AND PRICING. Currently, there is one other global
manufacturer and about ten other notable regional or local manufacturers of
graphite electrodes. There have been no significant entrants in the manufacture
of graphite electrodes since 1950.
The fluctuations in electric arc furnace steel production reflected in
the preceding table resulted in corresponding fluctuations in demand for
graphite electrodes. Other than in China, for which reliable information is
generally not available, we believe that the graphite electrode manufacturing
capacity utilization rate was about 86% in 1999, about 93% in 2000 and about 89%
in 2001.
As part of our global restructuring and rationalization plan initiated
in September 1998, we closed our graphite electrode manufacturing operations in
Canada and Germany and downsized our graphite electrode operations in Russia.
This reduced our annual graphite electrode manufacturing capacity by about
30,000 metric tons. In 2000, we re-sourced some of our global manufacturing
capacity for graphite electrodes to our other product lines. In response to
growing global demand for graphite cathodes from the aluminum industry, we
re-sourced our U.S. cathode production to our facility in Brazil and one of our
facilities in France. In addition, in connection with the restructuring of our
advanced graphite materials business, we transferred the majority of our
advanced graphite materials production from our facility in Clarksburg, West
Virginia to the same facility in France. As a result, certain equipment
previously used in Brazil and France to produce graphite electrodes is now being
used to produce graphite cathodes and advanced graphite materials. This reduced
our annual graphite electrode manufacturing capacity by about another 15,000
metric tons, to about 230,000 metric tons in 2000 from about 275,000 metric tons
in 1998.
In the 2001 third quarter, we shut down our graphite electrode
manufacturing operations in our facilities in Clarksville and Columbia,
Tennessee. These operations were our highest cost graphite electrode
manufacturing operations. These operations had the capacity to manufacture about
40,000 tons of graphite electrodes annually. We incrementally expanded graphite
electrode manufacturing capacity at our facilities in Mexico, South Africa and
Spain. After the shutdown and incremental expansion, our total annual graphite
electrode manufacturing capacity was reduced from about 230,000 metric tons to
about 210,000 metric tons.
In the 2002 first quarter, we mothballed our graphite electrode
manufacturing operations in our facility in Caserta, Italy. The mothballing is
part of our 2002 major cost savings plan. After the shutdown of our operations
in Tennessee, these operations were our highest cost graphite electrode
manufacturing operations. These operations had the capacity to manufacture about
26,000 tons of graphite electrodes annually. We expect to further incrementally
expand graphite electrode manufacturing capacity at our facilities in Mexico,
France and Spain over the next twelve months. After the mothballing and
incremental expansion, we expect that our total annual graphite electrode
manufacturing capacity will remain about 210,000 metric tons.
We are not aware of any construction of new graphite electrode
manufacturing facilities, excluding incremental expansion of existing capacity.
Since September 1998, two of our competitors have reduced their annual graphite
electrode manufacturing capacity. Their announced reductions total more than
35,000 metric tons.
We believe that together the capacity reductions by us and our
competitors described above represented about 8% of estimated worldwide graphite
electrode manufacturing capacity in 1998.
OUR GRAPHITE ELECTRODE MARKET SHARE. We estimate that about 70% of the
electric arc furnace steel makers (other than in Russia and China, for which
reliable information is not generally available) and about 78% of the electric
arc furnace steel makers in markets where we have manufacturing facilities,
purchased all or a portion of their graphite electrodes from us in 2001. We
further estimate that we
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supplied about 39% of all graphite electrodes purchased in markets where we
have manufacturing facilities and about 19% worldwide, in each case in 2001.
Sales of graphite electrodes in markets where we have manufacturing facilities
accounted for about 80% of our net sales of graphite electrodes in 2001. We
estimate that the global market for graphite electrodes was about $2.2 billion
in 2001.
We estimate that, in 2001, sales in the U.S. accounted for about 17% of
our total net sales of graphite electrodes and that we sold graphite electrodes
in over 60 countries, with no other country accounting for more than 12% of our
total net sales of graphite electrodes.
CARBON ELECTRODES. Carbon electrodes are used primarily to produce
silicon metal, which is used in the manufacture of aluminum. Carbon electrodes
are also used in the production of ferronickel and thermal phosphorous. Carbon
electrodes are used and consumed in a manner similar to that of graphite
electrodes, although at lower temperatures and with different consumption rates.
We believe that demand for carbon electrodes fluctuates based primarily on
changes in silicon metal production. We also believe that the silicon metal
industry is a relatively stable industry and that silicon metal production is
directly impacted by changes in global and regional economic conditions. We
estimate that demand for carbon electrodes was about 82,000 metric tons in 1999,
about 86,000 metric tons in 2000 and about 69,000 metric tons in 2001.
We estimate that we sold about 28% of the carbon electrodes in the
world in 2001. We estimate that the worldwide market for carbon electrodes was
about $120 million in 2001. We are the only manufacturer of carbon electrodes in
North America. We are currently restructuring our carbon electrode production to
improve profitability.
CATHODES. Cathodes consist primarily of blocks used as lining for, and
conductors of electricity in, furnaces (called "pots") used to smelt aluminum.
In a typical aluminum smelting furnace operating at a typical rate and
efficiency of production, the cathodes must be replaced every 5 to 8 years. As a
result of our acquisition of 70% of Carbone Savoie, we are the largest
manufacturer of cathodes and are allied with Pechiney, which is one of the
world's leading producers of aluminum and the leading supplier of smelting
technology to the aluminum industry. We are using Pechiney's smelting technology
and our graphite technology and expertise in high temperature industrial
applications to develop further improvements in graphite cathodes. We believe
that use of graphite cathodes (instead of carbon cathodes) allows a substantial
improvement in process efficiency. There are five producers of cathodes in the
world.
We believe that worldwide demand for aluminum will continue to grow
over the long term at an average annual rate of about 3%, primarily because of
greater use of aluminum by the transportation industry. We also believe that,
over the long term, new aluminum smelting furnaces will need to be built to meet
the growth in demand. We believe, therefore, that demand for graphite cathodes
will continue to grow, both for new smelting furnaces as well as for
substitution for carbon cathodes in existing smelting furnaces.
We estimate that we sold about 18% of the carbon and graphite cathodes
sold in the world in 2001. We estimate that the worldwide market for graphite
and carbon cathodes was about $425 million in 2001.
MANUFACTURING PROCESSES
The manufacture of a graphite electrode takes, on average, about 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).
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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 about 1,400
degrees Fahrenheit in specially designed furnaces
to purify and solidify the pitch and burn off
impurities. 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
solidify the special pitch and burn off
impurities, thereby adding strength to the
electrodes.
GRAPHITIZING: Using a process that we developed, the rebaked
electrodes are heated in longitudinal electric
resistance furnaces at about 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 (called
"PINS").
We believe that we provide the broadest range of sizes in graphite
electrodes and that the quality of our graphite electrodes is competitive with
or better than that of comparable products of any other major manufacturer.
Carbon electrodes (which can be up to 55 inches in diameter) and
graphite and carbon cathodes are manufactured by a comparable process
(excluding, in the case of carbon electrodes and cathodes, impregnation and
graphitization).
We generally warrant to our customers that our electrodes and cathodes
will meet our specifications. Electrode and cathode returns and replacements
have aggregated less than 1% of net sales in each of the last three years. As a
result of improvements in the quality of our graphite electrodes, we have
reduced returns and replacements of graphite electrodes by about 65% over the
past three years.
Prior to the mothballing of our graphite electrode operations in Italy
in the 2002 first quarter, we had the capacity to manufacture about 210,000
metric tons of graphite electrodes annually. After the mothballing of those
operations and incremental expansion of capacity in other countries as part of
the 2002 plan, we will have about the same capacity. We have the capacity to
manufacture about 30,000 metric tons of carbon electrodes annually and about
40,000 metric tons of cathodes annually. The following table sets forth certain
information regarding our sales volumes:
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FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
---- ---- ----
(METRIC TONS)
Volume of graphite electrodes sold... 206,000 217,000 174,000
Volume of carbon electrodes sold..... 22,000 23,000 19,000
Volume of cathodes sold.............. 31,000 35,000 33,000
We have 13 manufacturing facilities located in Brazil, Mexico, South
Africa, France, Spain, Russia and the U.S., and a planned joint venture
manufacturing facility located in China, which, subject to receipt of required
Chinese governmental approvals and satisfaction of other conditions, is expected
to commence operations in 2003. Graphite electrodes are manufactured in each of
those countries (other than the U.S.). Carbon electrodes are manufactured in the
U.S. Cathodes are manufactured in France and Brazil.
We believe that our multiple fully integrated state-of-the-art
electrode and cathode manufacturing facilities in diverse geographic regions
provide us with significant operational flexibility. We use robotics and
statistical process controls in manufacturing processes and have a total quality
control program that involves significant in-house training. We have installed
and continue to install and upgrade proprietary process technologies at our
electrode and cathode manufacturing facilities. We practice "lean" manufacturing
techniques and deploy synchronous manufacturing work processes at most of these
facilities. We have developed and installed, and continue to install, J.D.
Edwards One World advanced planning and production scheduling capabilities and
related software solution for managing our global supply chains. These efforts
have improved and continue to improve product quality, waste and inventory
minimization in the manufacturing process, efficiency in utilization of
manufacturing personnel and equipment, efficiency in customer order processing,
manufacturing cycle times, and coordination between production scheduling and
forecast sales. We have reduced our average time required to produce a graphite
electrode by about 19% in 2001 as compared to 2000 and expect to reduce it by
about a further 12% by 2003 as compared to the end of 2001.
Through our restructuring and re-engineering projects and plans, we
have sought to modularize our graphite electrode and graphite and carbon cathode
manufacturing capacity. This enables us to seek to incrementally adjust capacity
in use, as well as related costs, to accommodate anticipated changes in sales
volume. The advanced planning capabilities that we have developed for our global
electrode and cathode manufacturing capacity allow us to seek to optimize, under
then current conditions, changes in variables affecting profitability, including
variable production costs, changes in currency exchange rates, changes in
product mix and plant capacity utilization. In addition, generally we seek to
manage our manufacturing operations on a global basis, allocating production
among our worldwide manufacturing facilities to minimize the number of products
made at each facility and to maximize capacity utilization at as many of our
facilities as possible. This enables us to, among other things, seek to minimize
our fixed costs per metric ton produced. We also believe that our global
manufacturing base helps us to minimize risks associated with dependence on any
single economic region.
We estimate that we have adequate existing permanent graphite and
carbon electrode and cathode manufacturing capacity to meet any increased demand
over the near term. We believe that our average capital investment to
incrementally increase our annual graphite electrode manufacturing capacity
would be less than 10% of the initial investment for "greenfield" capacity.
Major maintenance at our facilities is conducted on an ongoing basis.
Manufacturing operations at any facility may be subject to curtailment due to
new laws or regulations, changes in interpretations of existing laws or
regulations or changes in governmental enforcement policies.
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INTELLECTUAL PROPERTY
We own or have obtained licenses to various domestic and foreign
patents, patent applications and trademarks related to the products, processes
and businesses of this division. These patents expire at various times over the
next 16 years. These patents and patent applications, in the aggregate, are
important to this division's competitive position and growth opportunities.
The tradename and trademark UCAR are owned by Union Carbide Corporation
(which has been acquired by Dow Chemical Company) and licensed to us on a
royalty-free basis under a license expiring in 2015. This license automatically
renews for successive ten-year periods. It permits non-renewal by Union Carbide
commencing after the first ten-year renewal period upon five years' notice of
non-renewal. The tradename and trademark CARBONE SAVOIE are owned by Carbone
Savoie and used in connection with cathodes manufactured by it. It is a
registered trademark in Europe.
We have know-how and proprietary information that is important to this
division's competitive position and growth opportunities. We seek to protect our
know-how and proprietary information, as we believe appropriate, through written
confidentiality and restricted use agreements with employees, consultants and
others and through various operating and other procedures.
We cannot assure you that protection for our intellectual property
under our patents and our measures to protect know-how and proprietary
information will be effective or that our use of intellectual property does not
infringe the rights of others.
RESEARCH AND DEVELOPMENT
We have two dedicated technology centers, one in Parma, Ohio, which is
used by both of our divisions, and the other in France, which is used by Carbone
Savoie. Past developments by us include larger and stronger electrodes, new
chemical additives to enhance raw materials used in the manufacture of graphite
electrodes and cold pastes with reduced environmental impact for use with
cathodes. We have received recognition for the high quality of our products
under several programs around the world and have been awarded preferred or
certified supplier status by many major steel and other manufacturing companies.
In 2001, we received an award from Alcoa for "Best Supplier" in South America.
Alcoa has ordered from us 100% of its requirements for cathodes in South America
for 2002.
Two areas of current focus by this division are further quality
improvements in supersize graphite electrodes and in graphite cathodes.
Supersize electrodes are used in the modern high-powered, larger electric arc
furnaces that constitute the majority of newly built furnaces. Graphite cathodes
can be used instead of carbon cathodes in smelting aluminum. Use of graphite
cathodes allows for substantial improvements in process efficiency. We believe
that the market for supersize graphite electrodes and graphite cathodes
represent growth sectors of the graphite electrode and cathode businesses. There
are about five other manufacturers of supersize graphite electrodes and two
other manufacturers of graphite cathodes in the world.
SALES AND CUSTOMER SERVICE
This division sells products in every major geographic market through
its direct sales force, whose members are trained and experienced with our
products. Its direct sales force operates from about 17 sales offices located in
the U.S., Europe and other markets. This division also sells products through
independent sales agents and distributors.
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We have a strong commitment to provide a high level of technical
service to customers and this division has customer technical service personnel
based in the U.S., Europe and other markets. This division assists its customers
to maximize their production and minimize their costs. It employs about 30
engineers to provide technical services to customers globally in, among other
things, all areas of electric arc furnace design and operation, electrode
specification and use and related matters. This technical service includes
periodically monitoring certain customers' electric arc furnace efficiency
levels. We believe that this division has more technical service engineers
located in more countries than any of its competitors.
This division's sales and service groups include those dedicated to
cathodes who are employed by Carbone Savoie. Carbone Savoie's sales and service
groups work closely with those of Pechiney to maximize use of their respective
products and technologies.
RAW MATERIALS AND SUPPLIERS
The primary raw materials for electrodes and cathodes are engineered
by-products and residues of the petroleum and coal industries. We use these raw
materials because of their high carbon content. The primary raw materials for
graphite electrodes and graphite cathodes are calcined petroleum cokes (needle
coke for electrodes and regular grade cokes for cathodes), coal tar pitch and
petroleum pitch. The primary raw materials for carbon electrodes and carbon
cathodes are calcined anthracite coal and coal tar pitch and, in some instances,
a petroleum coke-based material.
Typically, we purchase the raw materials for this division from a
variety of sources, under short term contracts or on the spot market, in each
case at fluctuating prices. We believe that adequate supplies of these raw
materials are available at market prices. We purchase the majority of our
petroleum coke from Conoco. Since the beginning of 2001, these purchases have
been made pursuant to a seven year supply agreement. In addition, in 2001, we
shut down our coal calcining operations primarily because we entered into a
five-year agreement to purchase calcined coal from a third party at a lower net
effective cost than we could produce it for ourselves. These agreements contain
customary terms and conditions. We believe that the quality and cost of this
division's raw materials on the whole is competitive with or better than those
available to its major competitors and that, under current conditions, this
division's raw materials are available in adequate quantities. Since electrodes
and cathodes use the same primary raw materials, we believe that we are able to
purchase these raw materials on a more cost efficient basis than some of this
division's competitors with more limited product lines and production volumes.
Electric power or natural gas used in manufacturing processes is purchased from
local suppliers under short-term contracts or in the spot market.
DISTRIBUTION
Our graphite electrode customers generally seek to negotiate prices and
anticipated volumes on an annual basis. Our customers then generally place
orders for graphite electrodes three to six months prior to the specified
delivery date. Such orders are cancelable by the customer. Therefore, we
manufacture graphite electrodes and seek to manage graphite electrode inventory
levels to meet rolling sales forecasts. We generally seek to maintain an
appropriately low level of finished graphite electrode inventories, taking into
account these factors and the length of graphite electrode manufacturing cycles.
Other electrode and cathode products are generally manufactured or fabricated to
meet customer orders. Accordingly, inventory levels will vary with demand for
these finished products. Recently, we have entered into long term supply
contracts with purchasers of our carbon electrodes. We may, from time to time in
the future, enter into long term supply contracts with purchasers of our other
products.
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Finished products are generally stored at our manufacturing facilities.
We ship our finished products to customers primarily by truck and ship, using
"just in time" techniques where practical.
Proximity of manufacturing facilities to customers can provide a
competitive advantage in terms of cost of delivery of electrodes and cathodes.
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. We believe that we
are generally better positioned globally in terms of such proximity than our
major competitors to supply graphite electrodes and graphite and carbon
cathodes.
COMPETITION
Competition in the graphite and carbon electrode and cathode business
is based primarily on price, product quality and customer service.
There is one other global manufacturer and about ten other notable
regional or local manufacturers of graphite electrodes, including SGL Carbon AG
(whose plants are located in North America and Europe), The Carbide/Graphite
Group, Inc. (whose plants are located in the U.S.) and four manufacturers in
Japan (one of whom, Showa Denko Carbon, Inc., has a plant located in the U.S.).
The downturn in global and regional economic conditions and the
antitrust investigations, lawsuits and claims are having an impact on the
graphite electrode industry. We believe that, at a minimum these impacts include
increased price competition and increased debt or cost burdens, or both, for
most manufacturers in the industry. In December 1998, the U.S. subsidiary of SGL
Carbon AG filed for protection under the U.S. Bankruptcy Code. This proceeding
was dismissed in March 2000 on the grounds that it was not commenced in good
faith. In October 2001, Carbide/Graphite Group filed for protection under the
U.S. Bankruptcy Code. It is possible that other competitors could make similar
bankruptcy filings. It is also possible that, as a result of these bankruptcy
filings or increased debt or costs, one or more of our competitors could divest
graphite electrode manufacturing facilities. This could increase the number or
change the capabilities of our competitors. It is not uncommon for companies
subject to bankruptcy filings to enjoy, at least temporarily, a cost advantage
as compared to their competitors. This advantage enables them to compete more
aggressively on price.
In addition to the external circumstances described above, our
competitive position could be impacted by internal circumstances. These include
decisions by us with respect to increasing prices or maintaining profit margins
rather than market share or with respect to other competitive or market
strategies.
All of the circumstances described above could adversely affect our
market share or results of operations. They could also affect our ability to
institute price increases or compel us to reduce prices or increase spending on
research and development or marketing and sales, all of which could adversely
affect us.
There are two significant manufacturers of carbon electrodes in the
world. We believe that we are the largest and SGL Carbon is the second largest.
There are six manufacturers of cathodes in the world. We believe that
we are the largest and SGL Carbon is the second largest.
The manufacture of high quality graphite and carbon products is a
mature, capital intensive business that requires extensive process know-how
regarding working with various raw materials and
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with raw material suppliers, furnace manufacturers and steel, aluminum or other
metal producers or other end users (including working on the specific
applications for finished products). It also requires high quality raw material
sources and a developed energy supply infrastructure. There have been no
significant entrants in the manufacture of graphite electrodes since 1950. We
believe that it is unlikely that new "greenfield" graphite electrode
manufacturing facilities will be built during the next several years due to,
among other things, the relatively high cost of building a new facility and the
need for extensive manufacturing process know-how.
ADVANCED ENERGY TECHNOLOGY DIVISION
Our Advanced Energy Technology Division develops, manufactures and
sells high quality, highly engineered natural and synthetic graphite- and
carbon-based energy technologies, products and services for both established and
high-growth-potential markets. We currently sell these products primarily to the
transportation, chemical, petrochemical, fuel cell power generation and
electronic thermal management markets. In addition, we provide cost effective
technical services to a broad range of markets and license our proprietary
technology in markets where we do not anticipate engaging in manufacturing
ourselves. We believe that this division will be successful because of our
patented and proprietary technologies related to graphite and carbon materials
science and our processing and manufacturing technology.
Natural graphite-based products, including flexible graphite, are
developed and manufactured by our subsidiary, Graftech. We are the world's
leading manufacturer of natural graphite-based products, including flexible
graphite. Flexible graphite is an excellent gasket and sealing material that to
date has been used primarily in high temperature and corrosive environments in
the automotive, chemical and petrochemical markets. Advanced flexible graphite
can be used in the production of materials, components and products for proton
exchange membrane ("PEM") fuel cells and fuel cell systems, electronic thermal
management applications, industrial thermal management applications, and battery
and supercapacitor power storage applications. Our synthetic graphite- and
carbon-based products are developed and manufactured by our Advanced Graphite
Materials and Advanced Carbon Materials business units, respectively. Their
products range from established products, such as graphite and carbon
refractories, graphite molds and rocket nozzles and cones, to new carbon
composites used in fuel cell power generation and electronic thermal management
markets. Our technology licensing and technical services are marketed and sold
by our HT2 business unit.
BUSINESS STRATEGIES
We are focused on leveraging our strengths to build the value of this
division through the development and commercialization of proprietary
technologies into high-growth-potential markets. These strengths include:
o developing intellectual property;
o developing and commercializing prototype and next generation
products and services; and
o establishing strategic alliances with leading customers and
suppliers well as key technology focused companies.
We seek to identify technologies where this division's products and
services offer advantages in performance or cost as compared to competitive
technologies, materials, products or services.
DEVELOPING INTELLECTUAL PROPERTY. Development of intellectual property
is an integral part of our corporate philosophy, and we aggressively seek
worldwide patent coverage for our technical innovations.
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We filed about 34 U.S. patent applications in 2001 and expect to file an
additional 40 U.S. patent applications in 2002.
We believe that our proprietary technology, experience, know-how and
other intellectual property give us a competitive advantage in the development
of graphite-based products. At our technology center located in Parma, Ohio, at
our five manufacturing facilities engaged in the business of this division and
at the facilities of our strategic partners, we conduct a focused technology
development program to enable us to provide new technologies, products and
services, expand and develop existing products and services and develop cost
effective manufacturing processes. We believe that our facility in Parma is the
premier facility for the development of graphite and carbon products and
technologies. We also operate a state-of-the-art testing facility capable of
conducting physical and analytical testing to develop natural and synthetic
graphite and carbon products and process technology.
DEVELOPING AND COMMERCIALIZING PROTOTYPE AND NEXT GENERATION PRODUCTS
AND SERVICES. This division is currently focusing its technology development
efforts in the following key areas:
o materials and components for proton exchange membrane fuel cells
and fuel cell systems, including flow field plates and gas
diffusion layers, for the fuel cell power generation market;
o electronic thermal management products, including thermal
interface products, heat spreaders, heat sinks and heat pipes, for
computer, communications, industrial, military, office equipment
and automotive electronic applications;
o fire retardant products for transportation applications and
building and construction materials applications;
o industrial thermal management products for direct solidification,
semiconductor, heat treating and other high temperature process
applications; and
o conductive products for battery and supercapacitor power storage
applications.
We use a highly disciplined stage gate process for selecting product
and service opportunities to be developed into commercial businesses.
In December 2000, we introduced and began selling our new line of
eGraf(TM) thermal management products designed to aid the cooling of chip sets
and other heat generating components in computers, communications equipment and
other electronic devices. In December 2001, we announced the development of our
new, advanced eGraf(TM) HiTherm series of thermal interface products designed to
provide lower thermal resistance and superior thermal conductivity. We expect
these products to become commercially available in the 2002 second quarter.
ESTABLISHING STRATEGIC ALLIANCES WITH CUSTOMERS, SUPPLIERS AND OTHER
THIRD PARTIES. We intend to accelerate the development and commercialization of
proprietary technologies into high-growth-potential markets through strategic
alliances in the form of collaborations, joint ventures, licensing, supply or
other arrangements that leverage our strengths. Since December 2000, this
division has entered into strategic alliances with Ballard Power Systems, the
world's leader in fuel cell development, and leading chip makers in electronic
thermal management. This division has also entered into a strategic alliance
with Conoco Inc. for carbon fiber technology and manufacturing facilities.
BALLARD POWER SYSTEMS. We have been working with Ballard Power Systems
since 1992 on developing natural graphite-based materials for use in Ballard
Power Systems fuel cells. We expect
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significant growth from this opportunity in the second half of this decade.
Advances in fuel cell technology, growth in worldwide power demand and
deregulation of power utilities as well as environmental problems created from
other sources of energy are driving the market. Potential fuel cell applications
include transportation, stationary and portable applications.
Ballard Power Systems is the world leader in developing zero-emission
fuel cells known as proton exchange membrane fuel cells, including direct
methanol fuel cells. Eleven out of the fourteen prototype fuel cell vehicles in
the California Fuel Cell Partnership are powered by Ballard Power Systems fuel
cells, including the FC5 developed by Ford Motor Company and the NECAR 4A, Jeep
Commander and, most recently, NECAR 5 developed by DaimlerChrysler. In 2001, the
California Air Resource Board reiterated its mandate that, between the years of
2003 and 2008, a minimum of 10% of the vehicles sold in California meet low or
zero-emission vehicle standards.
In 1999, we entered into a collaboration agreement with Ballard Power
Systems to coordinate our respective research and development efforts on flow
field plates and a supply agreement for flexible graphite materials. In 2000,
Ballard Power Systems launched its Mark 900 proton exchange membrane fuel cell
stack and announced that it was the foundation for Ballard Power Systems fuel
cells for transportation, stationary and portable applications. The flow field
plates used in the Mark 900 are made from our GRAFCELL(R) advanced flexible
graphite products.
In October 2001, Ballard Power Systems launched its most advanced fuel
cell platform to date, the Mark 902. GRAFCELL(R) advanced flexible graphite is a
strategic material for the Mark 902. Building upon the Mark 900, the advantages
of the Mark 902 include lower cost, improved design for volume manufacturing,
improved reliability, higher power density and enhanced compatibility with
customer system requirements. The unit cell design of the Mark 902 allows
scalable combinations to achieve a variety of power outputs ranging from 10
kilowatt to 300 kilowatt and is designed to allow configuration for stationary
and transportation applications. Ballard Power Systems reported that the Mark
902 will power the DaimlerChrysler ten-city European Union bus program scheduled
for 2002 and 2003.
GRAFCELL(R) advanced flexible graphite will also be included in the
Cdn. $34.5 million sale by Ballard Power Systems of Mark 900 series fuel cells
to Ford, the largest single fuel cell stack order in the industry to date. It
will also be included in the Cdn. $25.9 million sale by Ballard Power Systems of
fuel cells to Honda Motor Co. Ltd. GRAFCELL(R) advanced flexible graphite is
included in Ballard Power Systems' 60 kilowatts engineering prototype stationary
fuel cell power generator that incorporates the Mark 900 architecture. We
believe that there may be additional opportunities, beyond the fuel cell stack,
to participate in heat management systems for the entire fuel cell system as a
result of Ballard Power Systems' acquisition of Ecostar Electric Drive Systems
LLC and XCELLSIS GmbH.
In June 2001, our subsidiary, Graftech, entered into a new exclusive
development and collaboration agreement and a new exclusive long term supply
agreement with Ballard Power Systems, which significantly expand the scope and
term of the 1999 agreements. In addition, Ballard Power Systems became a
strategic investor in Graftech, investing $5 million in shares of Ballard Power
Systems common stock for a 2.5% equity ownership interest, to support the
development and commercialization of natural graphite-based materials and
components for proton exchange membrane fuel cells. As an investor in Graftech,
Ballard Power Systems has rights of first refusal with respect to certain equity
ownership transactions, tag along and drag along rights, and preemptive and
other rights to acquire additional equity ownership under certain limited
circumstances.
The scope of the new exclusive development and collaboration agreement
includes natural graphite-based materials and components, including flow field
plates and gas diffusion layers, for use in proton exchange membrane fuel cells
and fuel cell systems for transportation, stationary and portable
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applications. The initial term of this agreement extends through 2011. As part
of this agreement, Graftech has agreed to develop and manufacture prototype
graphitic materials and components and provide early stage testing of these
prototypes in an on-site fuel cell testing center. Under the new supply
agreement, Graftech be the exclusive manufacturer and supplier of natural
graphite-based materials for Ballard Power Systems fuel cells and fuel cell
systems. Graftech will also be the exclusive manufacturer of natural
graphite-based components, other than those components Ballard Power Systems
manufactures for itself. The initial term of this agreement, which contains
customary terms and conditions, extends through 2016. We have the right to
manufacture and sell, after agreed upon release dates, natural graphite-based
materials and components for use in proton exchange membrane fuel cells to other
parties in the fuel cell industry. In connection with the manufacture and sale
of components, Ballard Power Systems will grant Graftech a royalty-bearing
license for related manufacturing process technology.
CONOCO. We have developed a strategic relationship with Conoco. In
December 2000, we entered into a license and technical services agreement with
Conoco to license our proprietary technology for use at the carbon fiber
manufacturing facility that Conoco is building in Ponca City, Oklahoma. We also
will continue to provide a wide variety of technical services to Conoco. Under a
separate manufacturing tolling agreement entered into in February 2001, we are
providing manufacturing services to Conoco at our facility in Clarksburg, West
Virginia for carbon fibers. Under the three-year manufacturing tolling
agreement, we are using raw materials provided by Conoco to manufacture carbon
fibers. Conoco's new carbon fiber technology could be used in portable power
applications, such as batteries for personal computers and cell phones, as well
as a wide range of other electronic devices and automotive applications. We are
working with Conoco to expand our strategic relationship in supply chain and
other areas.
OTHERS. In July 2001, Graftech entered into a thermal design joint
development agreement with Menova Engineering Inc. relating to the design and
development of thermal components and heat solution products for the computer
and communications industries using eGraf(TM) thermal management products.
Menova will work exclusively with Graftech in the design and testing of new,
graphite-based thermal solutions. In May 2001, Graftech also entered into a
product manufacturing services agreement with JBC Seals, Packing & Kits Inc.,
which expands Graftech's ability to produce high volume, custom eGraf(TM)
thermal interface and other electronic thermal management products.
In the 2001 second quarter, Graftech entered into a joint development
program with a leading chip manufacturer to introduce thermal interface products
for the next generation hand-held and portable devices.
SETTING AND ACHIEVING MILESTONES. We believe that success at
commercializing proprietary technologies and services into high-growth-potential
markets is dependent upon this division's ability to aggressively set and
consistently achieve its own milestones and the milestones set by its strategic
partners and customers. These milestones are established to allocate resources
and to be leading indicators of progress toward this division's strategic goal.
This division's milestones for 2002 include targets for revenue growth,
intellectual property development and protection, expansion of strategic
alliances, and new prototype and next generation product development.
MARKETS AND INDUSTRY OVERVIEW
We currently sell natural and synthetic graphite- and carbon-based
products to the transportation, fuel cell power generation, electronics and
other markets. We are currently one of the largest producers of flexible
graphite for use in the automotive, chemical and petrochemical markets. We also
produce extruded and molded synthetic graphite products for use in products in
transportation and other markets and natural graphite-based products for use in
the fuel cell power generation and electronics markets.
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For the fuel cell power generation market, we are developing materials
and components for proton exchange membrane fuel cells and fuel cell systems,
including flow field plates and gas diffusion layers. For the electronic thermal
management market, we are developing and selling thermal interface products and
developing and introducing prototype and next generation heat spreaders, heat
sinks and heat pipes for computer, communications, industrial, military, office
equipment and automotive electronic applications. Other identified markets
include: fire retardant products for transportation applications and building
and construction materials applications; industrial thermal management products
for direct solidification, semiconductor, heat treating and other high
temperature process applications; and conductive products for battery and
supercapacitor power storage applications.
FUEL CELL POWER GENERATION. Fuel cells were invented in 1839 and were
first used in practical applications in the 1960s in the Gemini and Apollo space
programs to provide electricity aboard spacecrafts. Fuel cells efficiently
convert fuel to electricity. Recently, the potential for pollution free power
has been the major driver behind the development of fuel cell technology for
transportation, stationary and portable applications.
A fuel cell is an environmentally clean power generator, which combines
hydrogen (which can be obtained from a variety of sources such as methanol,
natural gas and other fuels) with oxygen (from air, not necessarily pure) to
produce electricity through an electrochemical process without combustion. The
only by-products from this process are water and heat. We believe that proton
exchange membrane fuel cells have emerged as the leading fuel cell technology
because they offer high power density, reduced weight, lower cost and improved
performance relative to alternative fuel cell technologies. Proton exchange
membrane fuel cells have the potential for use as replacements for existing
power generation systems in the following applications:
o power generation for transportation applications, including
automobiles, buses and other vehicles;
o stationary power generation applications for residences,
commercial buildings and industrial operations; and
o portable power generators for equipment and electronic devices.
TRANSPORTATION MARKET. Currently, manufacturers of automobiles, buses
and other vehicles are searching for a viable alternative to the internal
combustion engine. Proton exchange membrane fuel cells have the potential to
provide the power of an internal combustion engine, to reduce or eliminate
polluting emissions, and to lower vehicle operating costs through higher fuel
efficiency and lower maintenance costs. The use of fuel cells in the U.S. in
light vehicles for transportation applications has been projected by Frost &
Sullivan to reach 2.6 million vehicles by 2010.
We believe, based on statements by Ballard Power Systems' customers and
other automobile manufacturers, that initial commercial sales of proton exchange
membrane fuel cells for use in automobiles will occur sometime in 2003 to 2005.
We also believe that there are significant market opportunities for proton
exchange membrane fuel cell vehicles and that the strength of these markets will
be supported by regulatory pressures for cleaner, lower-emission vehicles.
Commercial sales are expected to begin with bus applications in 2002 to 2003. We
estimate that, in 2000, global production of automobiles and light vehicles was
about 55 million units. In January 2002, the Bush administration launched a new
program called Freedom Cooperative Automotive Research aimed at spurring the
growth of hydrogen fuel cells for the next generation of cars and trucks. In
March 2002, Honda announced that it intends to begin selling a limited number of
fuel cell vehicles to fleet customers in 2003.
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STATIONARY POWER MARKET. Fuel cells may be a potential replacement for
residential, commercial and industrial stationary electric power applications.
Increases in demand are expected to be driven by increasing adoption by the U.S.
and other countries of new digital and communications systems and
infrastructures, industrialization of developing nations, expanding worldwide
economies, population growth and per capita income growth. Commercial sales are
expected to begin with residential and general stationary systems in 2003.
According to the U.S. Department of Energy, sales of electric power and electric
power equipment in the U.S. in 1999 were about $217 billion.
We believe that power quality and reliability will become increasingly
important factors for customers involved with all aspects of technology and
communications applications and that distributed generation technologies such as
fuel cells will be favored due to their ability to deliver high quality,
reliable power. We believe that expansion of the existing electric power
infrastructure may not reliably meet the growth in demand for electric power.
Not only is there a shortage of generating assets in some areas, but recent
experience suggests that an aging transmission and distribution grid is not
keeping pace with the growth in demand, resulting in bottlenecks and load
pockets. Increasing the existing and aging infrastructure to meet capacity
requirements is expected to be capital intensive and time consuming, and may be
restricted by environmental concerns. We believe that fuel cells offer a
solution for overcoming many of these obstacles because they provide energy, in
the form of heat and electric power, at the point of demand rather than relying
on large, capital-intensive central generation facilities.
PORTABLE POWER MARKET. Portable power markets include products for
construction, marine and industrial applications as well as for a wide variety
of consumer products. The fastest growing segment is expected to be portable
electronic devices, including laptop computers, cell phones and handheld
devices. Commercial sales are expected to begin with small portable system
applications in 2002 to 2003.
Fuel cells may be a potential replacement for power needs currently
served by rechargeable and nonrechargeable batteries in many portable electronic
devices. According to Allied Business Intelligence, Inc., over 40 billion
batteries are produced worldwide each year, including rechargeable and
nonrechargeable batteries. In 1999, according to Allied Business Intelligence,
the global rechargeable battery market was estimated to be about $4 billion
alone, with annual growth rates approaching 16%.
ELECTRONIC THERMAL MANAGEMENT. As electronics manufacturers develop
highly advanced integrated circuits, processing chips and power supplies, their
ability to dissipate heat is constrained by the limitations of current thermal
management products and technology. We are developing and introducing high
quality, highly engineered products, designs and solutions for thermal
management in computer communications, industrial, military, office equipment
and automotive electronic applications.
We are developing thermal interface products, heat sinks, heat
spreaders and heat pipe products. Thermal interface products are those products
that reside between the chip set or other heat generating device and the
remaining components in the heat dissipation system. Heat sinks are finned
devices that dissipate heat into the surrounding environment either through
being mounted on processors or elsewhere in the electronic enclosure. Heat
spreaders are engineered plates that move heat from hot spots, such as processor
chips, to desired locations for dissipation into the external environment. Heat
pipes are also devices that move heat, through a tube, from heat sources to the
edge of the device where the heat can be dissipated into the environment.
We expect that our products' superior ability to manage heat will allow
engineers to redesign electronics to reduce cost, size and weight while
improving performance. Our products offer many advantages over competitive
products, such as copper or aluminum, in the market for mobile communications
and other electronic devices. These advantages include our products':
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o excellent ability to conduct heat;
o mechanical and thermal stability;
o lightweight, compressible and conformable nature;
o cost competitiveness; and
o ease of handling.
We believe that the thermal component market for computer,
communication, industrial, military, office equipment and automotive electronic
applications was about $3.25 billion in 2000. We are targeting:
o thermal interface products, with a projected market of about $400
million in annual sales by 2005 and an annual growth rate of
about 17% through 2005;
o heat sink products, with a projected market of about $850 million
in annual sales by 2005 and an annual growth rate of about
10% through 2005; and
o heat spreader and heat pipe products, with a projected market of
about $585 million in annual sales by 2005 and an annual
growth rate of about 20% through 2005,
in each case as projected by Business Communications Company, Inc.
FIRE RETARDANT PRODUCTS FOR TRANSPORTATION APPLICATIONS AND BUILDING
AND CONSTRUCTION MATERIALS APPLICATIONS. Our GRAFGUARD(R) expandable graphite
flake is a fire retardant additive for materials that require improved fire
protection characteristics, including wood products, foam, plastics and other
construction and building materials. Expandable graphite can be used to improve
the performance of traditional fire retardant additives, including phosphates,
halogens and nitrogen compounds. We believe that the growing use of expandable
graphite will be driven by increasingly stringent performance requirements for
fire retardant materials. According to SRI Consulting, the worldwide market for
flame retardants in 1998 was about $2.1 billion and the market is expected to
grow at an average annual rate of about 3.5% through 2003.
INDUSTRIAL THERMAL MANAGEMENT PRODUCTS FOR HIGH TEMPERATURE PROCESS
APPLICATIONS. We believe that industrial thermal management products for high
temperature processing was nearly a $600 million market worldwide in 2001. We
intend to target the high temperature processing market segment and the direct
solidification component (metallurgical high temperature processing) segment of
this market. We believe that our engineered graphite products can provide
superior heat management solutions for insulation packages, induction furnaces,
high temperature vacuum furnaces and direct solidification furnaces.
CONDUCTIVE PRODUCTS FOR BATTERY AND SUPERCAPACITOR POWER STORAGE
APPLICATIONS. We have modified the performance characteristics of our natural
graphite materials to provide solutions for conductive products for battery and
supercapacitor power storage applications.
According to Allied Business Intelligence, over 40 billion batteries
are produced worldwide each year, including rechargeable and nonrechargeable
batteries. In addition, according to Allied Business Intelligence, the global
rechargeable battery market was about $4 billion in 1999, with annual growth
rates approaching 16%. Rechargeable lithium-ion batteries are used in a growing
number of portable
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electronics applications, including laptop computers and cell phones.
Lithium-ion batteries can store more power and be recharged more times than
other battery technologies. Graphite powders are a critical component of
alkaline and lithium-ion batteries since they provide the electrical
conductivity necessary to optimize battery performance.
We believe that the emergence of supercapacitors is based on the need
for energy storage devices in the electronics industry. Capacitors have been
used for many years in electrical circuits to store small amounts of charge and
regulate the flow of current. Supercapacitors are now being developed that can
store thousands of times more power in a smaller space, and can be recharged
hundreds of thousands of times.
We believe that natural graphite can perform better than synthetic
graphite in alkaline and lithium-ion batteries and that it may also prove useful
as a highly conductive component of supercapacitors. As a result, we believe
that the lithium-ion battery and supercapacitor markets offer high growth
opportunities for our products.
PRODUCTS AND SERVICES
This division currently produces a wide variety of natural and
synthetic graphite- and carbon-based products, including:
o synthetic graphite-based products, including molded and extruded
graphite products;
o natural graphite-based products, including expandable graphite,
flexible graphite and advanced flexible graphite products; and
o graphite and carbon refractories.
The versatility of this division's proprietary processes and equipment
enables it to modify its synthetic and natural graphite-based products to meet a
variety of customer specifications. This division works with its customers to
develop technologically advanced solutions, utilizing its knowledge and
expertise in the production of these products. This division also provides
technology licensing and technical services.
SYNTHETIC GRAPHITE. We use a variety of proprietary processes to
convert petroleum coke into primary and machined graphite specialty products,
including molded or extruded graphite products. We market our molded and
extruded specialty products in a wide range of grades. Synthetic graphite is
used in a wide variety of markets, primarily the transportation markets.
EXPANDABLE GRAPHITE. We use a proprietary process to convert natural
graphite flake into expandable graphite. During this process, we can manufacture
expandable graphite with a number of specific properties. For example, by
changing expandable graphite's sensitivity to temperature, modifying its
particle size and giving it long term stability, we created GRAFGUARD(R)
graphite flake for use in fire retardant applications. The expansion property of
our GRAFGUARD(R) graphite flake is the basis for its use in a growing number of
fire retardant applications.
FLEXIBLE GRAPHITE. We produce flexible graphite from expandable
graphite flake, and can further fabricate the flexible graphite into a variety
of sheet, laminate and tape products. Flexible graphite is lightweight,
conformable, temperature-resistant and inert to most chemicals. Due to these
characteristics, it is an excellent sealing material that to date has been used
primarily in high temperature and corrosive environments in the automotive,
chemical and petrochemical industries. For example, automotive
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applications for our flexible graphite products include head gaskets and exhaust
gaskets as well as engine and exhaust heat shields. We market our flexible
graphite products under the GRAFOIL(R) name.
In December 2000, we introduced our new line of eGraf(TM) thermal
management products designed to aid the cooling of chip sets and other heat
generating components in computers, communications equipment and other
electronic devices. We can provide custom or off-the-shelf thermal interface
products, heat sinks, heat spreaders and heat pipes and sophisticated thermal
solutions for cooling complex devices. Our new product line offers advantages
for portable electronic devices over competitive products such as copper,
aluminum and other current thermal interface materials. These advantages include
our new products' excellent ability to conduct heat, their mechanical and
thermal stability, their lightweight, compressible and conformable nature, their
cost competitiveness, and their ease of handling.
ADVANCED FLEXIBLE GRAPHITE. We produce advanced flexible graphite by
subjecting expandable or flexible graphite to additional proprietary processing.
These additional processing steps alter the properties and characteristics of
the graphite to make materials with modified electrical, thermal and strength
characteristics. Advanced flexible graphite can be used in the production of
materials, components and products for proton exchange membrane fuel cells and
fuel cell systems, electronic thermal management applications, industrial
thermal management applications and battery and supercapacitor power storage
applications. We market our advanced flexible graphite products under the
GRAFCELL(R) name for fuel cell applications and under the GRAFSHIELD(R) name for
high temperature industrial furnace applications.
In December 2001, we announced the development of our new, advanced
eGraf(TM) HiTherm series of thermal interface products designed to provide lower
thermal resistance and superior thermal conductivity. We expect these products
to become commercially available in the 2002 second quarter. Tests on the new
product series conducted by us, and confirmed by customers such as IBM and
Intel, indicate about a 40% improvement in thermal conductivity and a 45%
reduction in thermal resistance as compared to the earlier eGraf(TM) thermal
interface product lines.
GRAPHITE AND CARBON REFRACTORIES. We produce a wide variety of graphite
and carbon refractory grade brick for chemical industry tank and reactor lining
and blast furnace and submerged arc furnace hearth wall applications. Our hot
pressed brick manufacturing capability is located at our facility in
Lawrenceburg, Tennessee. Carbon brick, used primarily in blast furnace and
submerged arc furnace hearth walls, is one of the established standards for
North American blast furnace hearth walls. Our semi-graphite brick is used where
higher conductivity is required or when additional abrasion resistance is
desired. Carbon brick is also widely used in the chemical industry for tank and
reactor linings because it has excellent resistance to corrosion and abrasion.
Hot pressed bricks are made in a multitude of standard shapes and sizes, and can
also be cut to custom sizes.
Carbon refractory blocks are manufactured in our facility in Columbia,
Tennessee. The largest application for these carbon refractory blocks is hearth
bottom pads in blast furnaces and submerged arc furnaces, for which they are
machined to shape and assembled in a variety of designs. Our facility is also
capable of providing special shapes (such as sidewall blocks, tap blocks, tuyere
surrounds and runner liners) for blast furnaces, submerged arc furnaces and
cupola furnaces.
Graphite refractory grade brick is used primarily for its high thermal
conductivity and the ease with which it can be machined to large or complex
shapes. Common applications in blast furnaces and submerged arc furnaces are
cooling courses in the hearth bottoms for heat distribution and removal, backup
linings in hearth walls for improved heat transfer and safety, and lintels over
copper cooling plates where a single brick cannot span the cooling plate.
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HT2 AND OUR TECHNOLOGY LICENSING AND TECHNICAL SERVICES
We have over 100 years of product and process technology and know-how
in a wide range of carbon and graphite industries. This division offers, through
licensing contracts, rights to use our intellectual property to other firms
developing or manufacturing products. This division also provides, through
service supply contracts, research and development services, extensive product
testing services, and graphite and carbon process and product technology
information services to customers, suppliers and universities to assist in their
development of new or improved process and product technology. In 2000, we
entered into an agreement with Conoco for carbon fiber technology and
manufacturing services. We are a leader in the development of carbon and
graphite technology, including high temperature processing technology. To
realize the value of this technology outside of this division's product lines,
we launched our new HT2 technology licensing and services business unit in 2001.
This business unit provides cost-effective technical services for a broad range
of markets and licenses our proprietary technology for a broad range of
applications.
In the 2001 third quarter, our HT2 business unit launched its
information and services web site: www.HT2.com. This web site offers technology
solutions and technical services built on our extensive expertise in high
temperature production and carbon technology to a broad range of customers. The
web site includes technical papers on graphite and carbon science, technical
literature, searches, industry news, and access to services like high
temperature testing and analysis, high temperature heat treating, consulting for
process and product development and technology licensing.
MANUFACTURING PROCESSES
This division operates five state-of-the-art manufacturing facilities
at locations in the U.S. and Europe. Our facilities for manufacturing carbon and
synthetic graphite products have the capability to process a wide range of raw
materials, mill, mix and extrude or mold small to very large carbon and graphite
blocks, impregnate, bake process and graphitize the blocks, extensively purify
the blocks to reduce the impurities to parts per million levels, and provide
products finished to high tolerances by advanced machining stations. Our
facilities for manufacturing natural graphite products have the capability to
chemically treat natural graphite flake, bake flake in high temperature furnaces
to expand the graphite flake, mechanically form and calender the expanded flake,
and form and shape the final products.
In August 2001, Graftech's advanced flexible graphite line for fuel
cell component and electronic thermal management product manufacturing
successfully began production.
We believe that our multiple fully integrated state-of-the-art
electrode and cathode manufacturing facilities in diverse geographic regions
provide us with significant operational flexibility. We use robotics and
statistical process controls in manufacturing processes and have a total quality
control program that involves significant in-house training. We have installed
and continue to install and upgrade proprietary process technologies at our
electrode and cathode manufacturing facilities. We utilize sophisticated
"pipeline" manufacturing and logistical systems at most of these manufacturing
facilities. These efforts have improved and continue to improve product quality,
waste and inventory minimization in the manufacturing process, efficiency in
utilization of manufacturing personnel and equipment, efficiency in customer
order processing, manufacturing cycle times and coordination between production
scheduling and forecast sales.
INTELLECTUAL PROPERTY
We own or have obtained licenses to various domestic and foreign
patents, patent applications and trademarks related to the products, processes
and businesses of this division. These patents expire at
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various times over the next 16 years. These patents and patent applications, in
the aggregate, are important to this division's competitive position and growth
opportunities, particularly in connection with its natural graphite business. In
2001, we were awarded 13 patents worldwide and filed an additional 61 patent
applications worldwide for these technologies. This division currently holds
about 160 of our issued patents and about 270 of our pending patent applications
and perfected patent application priority rights worldwide. We hold the highest
number of patents worldwide for flexible graphite for proton exchange membrane
fuel cell applications. We also hold patents and pending patent applications for
electronic thermal management products, electronic thermal management
applications, fire retardant products, industrial thermal management products
and conductive products.
We own various tradenames and trademarks used in the businesses of this
division. We have know-how and proprietary information that is important to the
competitive position and growth opportunities of this division. We seek to
protect our know-how and proprietary information, as we believe appropriate,
through written confidentiality and restricted use agreements with employees,
consultants and others and through various operating and other procedures.
We cannot assure you that protection for our intellectual property
under our patents and our measures to protect know-how and proprietary
information will be effective or that our use of intellectual property does not
infringe the rights of others.
RESEARCH AND DEVELOPMENT
We conduct our research and development program both independently and
in conjunction with our strategic partners. Currently, about 55 of our technical
professionals located at our technology development facility in Parma, which is
used by both of our divisions, are directly involved in research and development
primarily for this division. A significant portion of this division's research
and development program is focused on our alliance with Ballard Power Systems,
on its development alliances with companies that use thermal management
technologies, on its technology licensing and technical services business and on
new product development. These activities are integrated with the efforts of our
engineers at manufacturing facilities who are focused on improving manufacturing
processes.
Our facility in Parma has the capability to provide small quantity or
trial quantity production through its pilot plant facility. We operate a
state-of-the-art testing facility capable of conducting physical and analytical
testing to develop natural and synthetic graphite and carbon products and
process technology.
We believe that our research and development capabilities were an
important factor in Ballard Power Systems' selection of us to enter into an
exclusive long term product development and collaboration agreement. Our
combined development efforts have led to significant advancements in materials
and components used in Ballard Power Systems fuel cells. We also believe that
our research and development capabilities and our technology were important
factors in the selection of us as a strategic partner by other companies,
including Conoco.
SALES AND CUSTOMER SERVICE
This division sells products to customers in the U.S. and Europe
through its direct sales force, whose members have been trained and are
experienced with its products. Currently, this division has about 14 direct
field sales employees in the U.S. and about seven in Europe. This division also
sells products in Eastern Europe, Asia and South America through independent
sales agents and distributors. It
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is presently expanding, and intends to continue to expand, its international
market presence through the use of direct sales and select, full-service
distributors.
This division has a strong commitment to provide a high level of
technical service to its customers, and this division has staff in both Europe
and the U.S. to support its customers. This division assists its customers in
learning about and using its products, improving their manufacturing processes
and operations and solving their technical dilemmas. Its staff of development
scientists and manufacturing engineers are also available to support customers
as needed. This division works closely with its customers to develop and test
prototype materials. This division's customer sales team coordinates sales,
technology and manufacturing efforts to meet customer needs. It has a quality
assurance system designed to meet the most stringent requirements of its
customers. Select plants are certified and registered to QS-9000 as well as the
ISO-9002 international quality standard based on the products being supplied.
RAW MATERIALS AND SUPPLIERS
The primary raw materials for this division are petroleum coke and
natural graphite. We believe that adequate supplies of these raw materials are
available at market prices. Typically, this division purchases raw materials
from a variety of sources at market prices. We have entered into an arrangement
with Mazarin Mining Corporation Inc. to develop and commercialize a natural
graphite deposit in Canada. The initial phase of the feasibility study, relating
to the quality of the natural graphite flake in the deposit, was completed in
2000 with favorable results. The second phase of the feasibility study is
expected to be completed by the end of 2005. The feasibility study is expected
to cost about $2 million, for which we will receive a 25% interest in the mine.
After completion of the study, we may decide to commence commercial production
of the deposit with Mazarin, exercise an option to extend the period for the
development decision for five one-year periods until 2007, or terminate the
arrangement. In the case of extension, we will have to make option payments
totaling Cdn. $7.5 million if the option is extended for the full five years. We
have the right to purchase the entire production of natural graphite flake from
the deposit. We believe that at full capacity, if developed, the deposit should
produce about 50,000 tons of natural graphite flake per year, which would make
it one of the largest single sources of natural graphite flake in the world. We
believe that, if developed, the deposit would have sufficient reserves to meet
projected needs of this division for the next 10 to 15 years. Consummation of
the arrangement is subject to, among other things, the receipt of any required
governmental approvals.
DISTRIBUTION
Our products are generally manufactured or fabricated to meet customer
orders. Finished products are generally stored at our manufacturing facilities
and we seek to maintain adequate inventory levels. We ship our finished products
to customers primarily by truck and ship, using "just in time" techniques where
practical. Limited quantities of finished products are also stored at local
warehouses around the world to meet customer needs.
COMPETITION
Competitors of this division include companies located around the world
that develop and manufacture graphite- and carbon-based products, including SGL
Carbon, Toyo Tonso Co. Ltd., Le Carbone S.A. (Pty) Ltd., Tokai Carbon Co., Ltd.
and Nippon Carbon Co., Ltd., and companies that develop, manufacture or provide
substitute or alternative materials products, services or solutions.
This division's proton exchange membrane fuel cell products compete
with other graphitic products, including fibers, composites and synthetic
graphite, and metal-based products such as stainless steel. Its electronic
thermal management products compete with a wide variety of materials, including
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copper and other metals, ceramics, conductive rubbers and greases. Its fire
protection products compete with compounds containing phosphates, halogens and
hydrated aluminas as well as many other materials. Its sealing products compete
with various fiber products such as asbestos, cellulose and synthetic composites
as well as stainless steel and other metals. Its industrial thermal management
products compete with a wide variety of materials, including natural and
synthetic fibers, other carbon forms and metal-based products. Its conductive
products compete with other carbon products, such as carbon black.
Competition with respect to its existing products sold to the
transportation, semiconductor, aerospace and electronic thermal management
markets is based primarily on quality and price. Competition with respect to its
services and its new products is, and is expected to be, based primarily on
product innovation, performance and cost effectiveness as well as customer
service, with the relative importance of these factors varying among products
and customers.
ENVIRONMENTAL MATTERS
We are subject to a wide variety of federal, state, local and foreign
laws and regulations relating to the presence, storage, handling, generation,
treatment, emission, release, discharge and disposal of hazardous, toxic and
other substances and wastes governing our current and former properties and
neighboring properties and our current operations. These laws and regulations
(and the enforcement thereof) are periodically changed and are becoming
increasingly stringent. We have experienced some level of regulatory scrutiny at
most of our current and former facilities, 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. Although this has not been the case in the past,
these costs could have a material adverse effect on us in the future.
The principal U.S. laws and regulations to which we are subject include
the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery
Act, the Safe Drinking Water Act and similar state and local laws which regulate
air emissions, water discharges and hazardous waste generation, treatment,
storage, handling, transportation and disposal. In addition, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 and the Small Business
Liability Relief and Brownfields Revitalization Act of 2002, 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. Finally, 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.
Our manufacturing operations outside the U.S. 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
the impacts of industrial activities on the quality of the air, water and soil.
Regulated activities include, among other things: use of hazardous substances;
packaging, labeling and transportation of products; management and disposal of
toxic wastes; discharge of industrial and sanitary wastewater; and emissions to
the air.
We believe that we are currently in material compliance with the
federal, state, local and foreign environmental laws and regulations to which we
are subject. We have received and continue periodically to receive notices from
the U.S. Environmental Protection Agency or state environmental protection
agencies, as well as claims from others, alleging that we are 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
PRP's relative contribution of
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hazardous substances to the site. Based on information currently available to
us, we believe that any potential liability we may have as a PRP will not have a
material adverse effect on us.
We have sold or closed a number of facilities that had solid waste
landfills. In the case of sold facilities, we have retained ownership of the
landfills. We have closed these landfills, and we believe that we have done so
in material compliance with applicable laws and regulations. We continue to
monitor these landfills pursuant to applicable laws and regulations. To date,
the costs associated with the landfills have not been, and we do not anticipate
that future costs will be, material to us.
We 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. We adjust 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 we 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 our
experience to date regarding environmental matters of a similar nature and facts
currently known, we believe that costs and capital expenditures (in each case,
before adjustment for inflation) for environmental protection will not increase
materially over the next several years.
PROPERTIES
We operate the following facilities, which are owned or leased as
indicated.
OWNED OR
LOCATION OF FACILITY PRIMARY USE LEASED
-------------------- ----------- --------
U.S.
Irvine, California............... Machine Shop Leased
Wilmington, Delaware............. Corporate Headquarters and Sales Office Leased
Lakewood, Ohio................... Flexible Graphite Manufacturing Facility and Sales Office Owned
Parma, Ohio...................... Technology Center and Flexible Graphite Manufacturing Facility Owned
Clarksville, Tennessee........... Sales Office, Shared Service Center and Machine Shop Owned
Columbia, Tennessee.............. Carbon Electrode Manufacturing Facility and Sales Office Owned
Lawrenceburg, Tennessee.......... Advanced Carbon Materials Manufacturing Facility Owned
Clarksburg, West Virginia........ Advanced Graphite Materials Manufacturing Facility and Sales Owned
Office
EUROPEAN
Calais, France................... Electrode Manufacturing Facility Owned
Notre Dame, France............... Electrode and Advanced Graphite Materials Manufacturing Owned
Facility and Sales Office
Notre Dame, France............... Cathode Manufacturing Facility and Sales Office Leased
Venissieux, France............... Cathode Manufacturing Facility and Technology Center Owned
Malonno, Italy................... Machine Shop Owned
Saronno, Italy................... Sales Office Leased
Moscow, Russia................... Sales Office Leased
Vyazma, Russia................... Electrode Manufacturing Facility Owned
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OWNED OR
LOCATION OF FACILITY PRIMARY USE LEASED
-------------------- ----------- --------
Pamplona, Spain.................. Electrode Manufacturing Facility and Sales Office Owned
Etoy, Switzerland................ Sales Office and European Headquarters Owned
Sheffield, United Kingdom........ Machine Shop and Sales Office Owned
OTHER INTERNATIONAL
Salvador Bahia, Brazil........... Electrode and Cathode Manufacturing Facility Owned
Sao Paulo, Brazil................ Sales Office Leased
Welland, Canada.................. Sales Office Owned
Beijing, China................... Sales Office Leased
Hong Kong, China................. Sales Office Leased
Monterrey, Mexico................ Electrode Manufacturing Facility and Sales Office Owned
Meyerton, South Africa........... Electrode Manufacturing Facility and Sales Office Owned
---------------
We believe that our facilities, which are of varying ages and types of
construction, are in good condition, are suitable for our operations and
generally provide sufficient capacity to meet our requirements for the
foreseeable future.
EMPLOYEES
At December 31, 2001, we had 3,907 employees, of which 1,911 were in
Europe (including Russia), 796 were in Mexico and Brazil, 366 were in South
Africa, 4 were in Canada, 824 were in the U.S. and 6 were in the Asia Pacific
region. At December 31, 2001, we had 2,688 hourly employees.
At December 31, 2001, about 62% of our worldwide employees was covered
by collective bargaining or similar agreements, which expire at various times in
each of the next several years. At December 31, 2001, about 1,600 employees, or
41% of our employees, were covered by agreements, which expire, or are subject
to renegotiation, at various times through December 31, 2002. We believe that
our relationships with our unions are satisfactory and that we will be able to
renew or extend our collective bargaining or similar agreements on reasonable
terms as they expire. We cannot assure you, however, that renewed or extended
agreements will be reached without a work stoppage or strike or will be reached
on terms satisfactory to us.
Excluding our subsidiaries prior to the time when we acquired them, we
have not had any material work stoppages or strikes during the past decade.
INSURANCE
We 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 and provides
coverage that we believe is appropriate upon terms and conditions and for
premiums that we consider fair and reasonable. We believe that we have insurance
providing coverage for claims and in amounts that we believe appropriate as
described above. We cannot assure you, however, that we will not incur losses
beyond the limits of or outside the coverage of our insurance. We currently
believe that recovery under our insurance, if any, will not materially offset
liabilities that have or may become due in connection with antitrust
investigations, lawsuits or claims.
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MANAGEMENT
The following table sets forth certain information concerning our
executive officers and directors, including their ages, as of March 1, 2002.
NAME AGE POSITION
---- --- --------
Gilbert E. Playford........................... 54 Chairman of the Board, Chief Executive Officer and President
Corrado F. De Gasperis........................ 36 Vice President, Chief Financial Officer and Chief Information
Officer
Scott C. Mason................................ 42 Executive Vice President, Advanced Energy Technology Division
Karen G. Narwold.............................. 42 Vice President, General Counsel, Human Resources and Secretary
Craig S. Shular............................... 49 Executive Vice President, Graphite Power Systems Division
R. Eugene Cartledge........................... 72 Director
Mary B. Cranston.............................. 54 Director
John R. Hall.................................. 69 Director
Thomas Marshall............................... 73 Director
Ferrell P. McClean............................ 55 Director
Michael C. Nahl............................... 59 Director
EXECUTIVE OFFICERS
GILBERT E. PLAYFORD joined UCAR as President and Chief Executive
Officer in June 1998. In September 1999, Mr. Playford also became the Chairman
of the Board. From January 1996 to June 1998, he was the President and Chief
Executive Officer of LionOre Mining International Ltd., a Toronto Stock Exchange
company, which he founded and which is engaged in mining nickel in Botswana and
nickel/gold in Australia. Prior to founding LionOre Mining International Ltd.,
of which he continues to serve as a director and non-executive Deputy Chairman,
Mr. Playford spent his career with Union Carbide Corporation. We are the
successor to the Carbon Products Division of Union Carbide. Mr. Playford began
his career in 1972 with Union Carbide in Canada. In 1989, after several years in
Europe and Canada, he was appointed Corporate Vice President, Strategic Planning
of Union Carbide. In 1990, he became Vice President, Corporate Holdings of Union
Carbide. He assumed the additional responsibility of President and Chief
Executive Officer of Union Carbide's Canadian subsidiary in 1991. Mr. Playford
was named Vice President, Treasurer and Principal Financial Officer of Union
Carbide in 1992. In his capacity as Principal Financial Officer of Union
Carbide, he also served as a nominee of Union Carbide on UCAR's Board of
Directors from 1992 until our leveraged equity recapitalization in January 1995.
He took on additional duties as Vice President for Union Carbide's latex and
paint business in 1993. Mr. Playford left Union Carbide in January 1996.
CORRADO F. DE GASPERIS became Chief Financial Officer in May 2001 in
addition to his duties as Vice President and Chief Information Officer, which he
assumed in February 2000. He served as Controller from June 1998 to February
2000. From 1987 through June 1998, he was with KPMG LLP, most recently as a
Senior Assurance Manager in the Manufacturing, Retail and Distribution Practice.
KPMG had announced his admittance into their partnership effective July 1, 1998.
SCOTT C. MASON became Executive Vice President, Advanced Energy
Technology Division in February 2001. He served as Chief Financial Officer and
Vice President of Graftech and our Director of
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Mergers and Acquisitions from April 2000 to March 2001. Prior to joining us, Mr.
Mason was Vice President-Supply Chain Logistics for Union Carbide. From 1996 to
1999, Mr. Mason served as Director of Operations and then as Business Director
for the Unipol Polymers Business of Union Carbide. Mr. Mason served from 1981 to
1996 in various financial, sales and marketing, operations and mergers and
acquisition management positions at Union Carbide. He began his career in 1981
in the Chemicals and Plastics Division of Union Carbide.
KAREN G. NARWOLD became Vice President, General Counsel and Secretary
in September 1999 and also assumed responsibility for the human resources
department effective January 2002. She joined our Law Department in July 1990
and served as Assistant General Counsel from June 1995 to January 1999 and
Deputy General Counsel from January 1999 to September 1999. She was an associate
with Cummings & Lockwood from 1986 to 1990.
CRAIG S. SHULAR became Executive Vice President, Graphite Power Systems
Division in June 2001. He served as Vice President and Chief Financial Officer
from January 1999, with the additional duties of Executive Vice President,
Electrode Sales and Marketing from May 2000. From 1976 through 1998, he held
various finance and auditing positions in various divisions of Union Carbide,
including the Carbon Products Division from 1976 to 1979.
DIRECTORS
R. EUGENE CARTLEDGE became a director in February 1996. From 1986 until
his retirement in 1994, Mr. Cartledge 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 Chase Industries, Inc., Sun Company, Inc., Delta Air Lines, Inc. and
Formica Corporation. Mr. Cartledge is Chairman of the Nominating Committee and a
member of the Organization, Compensation and Pension Committee of UCAR's Board
of Directors.
MARY B. CRANSTON became a director in January 2000. Ms. Cranston is a
partner and has served since 1999 as Chairperson of Pillsbury Winthrop LLP, an
international law firm. Ms. Cranston is based in San Francisco, California. Ms.
Cranston has been practicing complex litigation, including antitrust,
telecommunications and securities litigation, with Pillsbury Winthrop LLP since
1975. She is a director of the San Francisco Chamber of Commerce and the Bay
Area Council, and a trustee of the San Francisco Ballet and Stanford University.
Ms. Cranston is a member of the Audit and Finance Committee and the Nominating
Committee of UCAR's Board of Directors.
JOHN R. HALL became a director in November 1995. From 1981 until his
retirement in 1997, Mr. Hall was Chairman of the Board and Chief Executive
Officer of Ashland Inc. Mr. Hall had served in various engineering and
managerial capacities at Ashland Inc. since 1957. He retired as Chairman of Arch
Coal Inc. in 1998. He served as a director of Reynolds Metals Company from 1985
to 2000. He currently serves as a member of the Boards of Bank One Corporation,
Canada Life Assurance Company, CSX Corporation, Humana Inc. and USEC Inc. Mr.
Hall graduated from Vanderbilt University in 1955 with a degree in Chemical
Engineering and later served as Vanderbilt's Board Chairman from 1995 to 1999.
Mr. Hall is Chairman of the Organization, Compensation and Pension Committee of
UCAR's Board of Directors.
THOMAS MARSHALL became a director in June 1998. Mr. Marshall retired in
1995 as Chairman of the Board and Chief Executive Officer of Aristech Chemical
Corporation, a spinoff of USX Corporation, which positions he had held since
1986. Mr. Marshall had previously served as President of the U.S. Diversified
Group, a unit covering 18 divisions and subsidiaries, including Manufacturing,
Fabricating and Chemicals, of USX Corporation. Mr. Marshall serves on the Board
of the National Flag Foundation. He is a trustee of
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the University of Pittsburgh and Chairman of the Thomas Marshall Foundation. Mr.
Marshall is a member of the Organization, Compensation and Pension Committee of
UCAR's Board of Directors.
FERRELL P. MCCLEAN became a director in February 2002. Ms. McClean was
the Managing Director and Senior Advisor to the head of the Global Oil & Gas
Group in Investment Banking at J.P. Morgan Chase & Co. from 2000 through the end
of 2001. Ms. McClean joined J.P. Morgan & Co. Incorporated in 1969 and founded
the Leveraged Buyout and Restructuring Group within the Mergers & Acquisitions
Group in 1986. From 1991 until 2000, Ms. McClean was the Managing Director and
co-headed the Global Energy Group within the Investment Banking Group at J.P.
Morgan & Co. Ms. McClean is a member of the Audit and Finance Committee of
UCAR's Board of Directors.
MICHAEL C. NAHL became a director in January 1999. Mr. Nahl is Senior
Vice President and Chief Financial Officer of Albany International Corp, a
manufacturer of paper machine clothing, which are the belts of fabric that carry
paper stock through the paper production process. Mr. Nahl joined Albany
International Corporation in 1981 as Group Vice President, Corporate and was
appointed to his present position in 1983. Mr. Nahl is a member of the Chase
Manhattan Corporation Northeast Regional Advisory Board. Mr. Nahl is Chairman of
the Audit and Finance Committee and a member of the Nominating Committee of
UCAR's Board of Directors.
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DESCRIPTION OF SENIOR FACILITIES
In February 2000, we completed a debt recapitalization and obtained the
Senior Facilities.
In the 2000 third quarter, pursuant to our debt recapitalization in
February 2000, our Italian subsidiary entered into a [euro] 17 million (about
$15 million, based on currency exchange rates in effect in September 2000)
long-term debt arrangement with a third party lender. We also placed on deposit
with the third party lender funds in the same amount, which secure the debt.
Since we had the legal right to set-off, and the intent to do so, such amounts
have been netted and are not reflected separately in the Consolidated Balance
Sheets. In February 2002, in connection with the corporate realignment of our
subsidiaries, we exercised our right of set-off and retired the debt
arrangement.
In October 2000, the Senior Facilities were amended to, among other
things, increase the maximum leverage ratio permitted thereunder through June
30, 2001. In connection therewith, we paid an amendment fee of $2 million and
the margin which is added to either euro LIBOR or the alternate base rate in
order to determine the interest rate payable thereunder increased by 25 basis
points.
In April 2001, the Senior Facilities were amended to, among other
things, exclude certain expenses incurred in connection with the lawsuit
initiated by us against our former parents (up to a maximum of $20 million, but
not more than $3 million in any quarter) and certain charges and payments in
connection with antitrust fines, settlements and expenses from the calculation
of financial covenants. Charges (over and above the $340 million charge recorded
in 1997) recorded on or before June 30, 2002 for antitrust fines, settlements
and expenses are excluded from the calculation of financial covenants (until
paid) up to a maximum of $130 million (reduced by the amount of certain debt
incurred by us that is not incurred under the Senior Facilities, $6 million of
which debt was outstanding at December 31, 2001). The fine assessed by the
antitrust authority of the European Union, as well as the additional $10 million
charge recorded in July 2001 and any payments related to such fine (including
payments within the $340 million charge recorded in 1997), are excluded from the
calculation of financial covenants through June 30, 2002.
In July 2001, the Senior Facilities were amended to, among other
things, change our financial covenants so that they were less restrictive
through 2006 than would otherwise have been the case. In connection therewith,
we have agreed that our investments in Graftech and any of our other
unrestricted subsidiaries after this amendment will be made in the form of
secured loans, which will be pledged to secure the Senior Facilities, and the
maximum amount of capital expenditures permitted under the Senior Facilities
would be reduced in 2001 and 2002. We do not expect that our capital
expenditures will exceed such maximums. In connection therewith, we paid an
amendment fee of $2 million and the margin which is added to either euro LIBOR
or the alternate base rate in order to determine the interest rate payable
thereunder increased by 25 basis points.
In December 2001, the Senior Facilities were amended to, among other
things, permit the corporate realignment of our subsidiaries. In connection
therewith, we paid an amendment fee of $1 million.
In January 2002, the Senior Facilities were amended to, among other
things, permit us to issue senior notes (in an amount not to exceed $400
million), to pledge certain unsecured intercompany term notes and unsecured
guarantees of those notes to secure such senior notes, to have certain U.S.
subsidiaries holding a substantial majority of our U.S. assets guarantee such
senior notes and to have those U.S. subsidiaries pledge shares of Graftech to
secure such guarantees. Furthermore, the amendment permitted the net proceeds
from the sale of such Senior Notes to be used as described elsewhere in this
prospectus.
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In connection with this amendment, our maximum permitted leverage ratio
was substantially increased and our minimum required interest coverage ratio was
substantially decreased while maintaining full availability of our revolving
credit facility. The amendment also changed the manner in which net debt and
EBITDA are calculated to exclude certain fees, costs and expenses (including
fees of counsel and experts) in connection with the lawsuit initiated by us
against our former parents as well as any letter of credit issued to secure
payment of the antitrust fine assessed against us by the antitrust authority of
the European Union. In addition, the amendment expanded our ability to make
certain investments, including investments in Graftech, and eliminate provisions
relating to a spin-off of Graftech. In connection therewith, we paid an
amendment fee of $1 million and the margin which is added to either euro LIBOR
or the alternate base rate in order to determine the interest rate payable
thereunder increased by 37.5 basis points.
The Senior Facilities are described below.
The Senior Facilities consist of:
o A Tranche A Facility providing for initial term loans of $137
million and of [euro] 161 million (equivalent to $158 million
based on currency exchange rates in effect at February 22, 2000)
to UCAR Finance. The Tranche A Facility amortizes in quarterly
installments over six years, commencing June 30, 2000, with
quarterly installments ranging from about [euro] 2 million in 2000
to about [euro] 17 million in 2005, with the final installment
payable on December 31, 2005. In October 2000, we converted $78
million of these term loans from dollar-denominated to
euro-denominated loans.
o A Tranche B Facility providing for initial term loans of $350
million to UCAR Finance. The Tranche B Facility amortizes over
eight years, commencing June 30, 2000, with nominal quarterly
installments during the first six years, and quarterly
installments of $41 million in 2006 and 2007, with the final
installment payable on December 31, 2007.
o A Revolving Facility providing for dollar and euro denominated
Revolving and swingline loans to, and the issuance of
dollar-denominated letters of credit for the account of, UCAR
Finance and certain of our other subsidiaries in an aggregate
principal and stated amount at any time not to exceed [euro]
250 million. The Revolving Facility terminates on February 22,
2006. As a condition to each borrowing under the Revolving
Facility, we are required to represent, among other things,
that the aggregate amount of payments made (excluding certain
imputed interest) and additional reserves created in
connection with antitrust, securities and stockholder
derivative investigations, lawsuits and claims do not exceed
$340 million by more than $130 million, which $130 million is
reduced by the amount of certain debt, other than the Notes,
incurred by us that is not incurred under the Senior
Facilities.
After completion of our public offering of common stock in July 2001,
our private offering of Initial Notes in February 2002 and the initial
application of the net proceeds therefrom, the aggregate principal payments due
on the Tranche A and Tranche B Term Loans are as follows: no payments in 2002,
2003 or 2004, $26 million in 2005, $26 million in 2006 and $164 million in 2007.
We are generally required to make mandatory prepayments in the amount
of:
o Either 75% or 50% (depending on our leverage ratio, which is the
ratio of our adjusted net debt to our adjusted total EBITDA) of
adjusted excess cash flow. The obligation to make these
prepayments, if any, arises after the end of each year with
respect to adjusted excess cash flow during the prior year.
117
o 100% of the net proceeds of certain asset sales or incurrence of
certain indebtedness.
o 50% of the net proceeds of the issuance of any UCAR equity
securities.
We may make voluntary prepayments under the Senior Facilities. There is
no penalty or premium due in connection with prepayments (whether voluntary or
mandatory).
UCAR Finance makes secured and guaranteed intercompany loans of the net
proceeds of borrowings under the Senior Facilities to UCAR Global's
subsidiaries. The obligations of UCAR Finance under the Senior Facilities are
secured, with certain exceptions, by first priority security interests in all of
these intercompany loans (including the related security interests and
guarantees). Following completion of the sale of the Initial Notes and certain
transactions related to the corporate realignment of our subsidiaries in
February 2002, these intercompany loans consist of intercompany revolving loans
to UCAR Carbon and our Swiss subsidiary.
UCAR has unconditionally and irrevocably guaranteed the obligations of
UCAR Finance under the Senior Facilities. This guarantee is secured, with
certain exceptions, by first priority security interests in all of the
outstanding capital stock of UCAR Global and UCAR Finance, all of the
intercompany debt owed to UCAR and UCAR's interest in the lawsuit initiated by
us against our former parents.
UCAR, UCAR Global and each of UCAR Global's subsidiaries has
guaranteed, with certain exceptions, the obligations of UCAR Global's
subsidiaries under the intercompany loans, except that our foreign subsidiaries
have not guaranteed the intercompany loans of our U.S. subsidiaries.
The obligations of UCAR Global's subsidiaries under the intercompany
loans as well as these guarantees are secured, with certain exceptions, by first
priority security interests in substantially all of our assets, except that no
more than 65% of the capital stock or other equity interests in our foreign
subsidiaries held directly by our U.S. subsidiaries and no other foreign assets
secure obligations or guarantees of our U.S. subsidiaries.
The interest rates applicable to the Tranche A and Revolving Facilities
are, at our option, either euro LIBOR plus a margin ranging from 1.375% to
3.375% (depending on our leverage ratio) or the alternate base rate plus a
margin ranging from 0.375% to 2.375% (depending on our leverage ratio). The
interest rate applicable to the Tranche B Facility is, at our option, either
euro LIBOR plus a margin ranging from 2.875% to 3.625% (depending on our
leverage ratio) or the alternate base rate plus a margin ranging from 1.875% to
2.625% (depending on our leverage ratio). The alternate base rate is the higher
of the prime rate announced by JP Morgan Chase Bank or the federal funds
effective rate, plus 0.50%. UCAR Finance pays a per annum fee ranging from
0.375% to 0.500% (depending on our leverage ratio) on the undrawn portion of the
commitments under the Revolving Facility. At December 31, 2001, the interest
rates on outstanding debt under the Senior Facilities were: Tranche A Euro
Facility, 6.4%; Tranche A USD Facility, 4.9%; Tranche B Facility, 5.6%; and
Revolving Facility, 5.2%. The weighted average interest rate on the Senior
Facilities was 8.1% during 2001.
We enter into agreements with financial institutions, which are
intended to limit, or cap, our exposure to incurrence of additional interest
expense due to increases in variable interest rates. Use of these agreements is
allowed with the Senior Facilities.
The Senior Facilities contain a number of significant covenants that,
among other things, restrict our ability to sell assets, incur additional debt,
repay or refinance other debt or amend other debt instruments, create liens on
assets, enter into sale and leaseback transactions, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures,
make intercompany dividend payments to UCAR,
118
pay intercompany debt owed to UCAR, engage in transactions with affiliates, pay
dividends to stockholders of UCAR or make other restricted payments and that
otherwise restrict corporate activities. In addition, we are required to comply
with specified minimum interest coverage and maximum leverage ratios, which
become more restrictive over time, beginning December 31, 2002.
UCAR is a holding company that derives substantially all of its cash
flow from UCAR Global. UCAR's ability to pay dividends or repurchase common
stock from earnings or cash flow from operating or investing activities is
dependent upon the earnings and cash flow from operating or investing activities
of UCAR Global and its subsidiaries and the distribution of those earnings and
cash flows by UCAR Global to UCAR. Under the Senior Facilities, UCAR is
permitted to pay dividends on common stock and repurchase common stock only in
an annual aggregate amount of $25 million, plus up to an additional $25 million
if certain leverage ratio and excess cash flow requirements are satisfied. We
are also permitted to repurchase common stock from present or former directors,
officers or employees in an aggregate amount of up to the lesser of $5 million
per year (with unused amounts permitted to be carried forward) or $25 million on
a cumulative basis since February 22, 2000. In addition, UCAR Global is
permitted to pay dividends to UCAR for those purposes and also in respect of
UCAR's administrative fees and expenses and to fund payments in connection with
antitrust, securities and stockholder derivative investigations, lawsuits and
claims. The total amount of dividends to fund those payments (in each case,
excluding certain imputed interest), plus the total amount paid on intercompany
debt owed to UCAR for the same purpose (in each case, excluding certain imputed
interest), plus the amount of additional reserves created with respect to these
investigations, lawsuits and claims may not exceed $340 million by more than
$130 million, which $130 million is reduced by the amount of certain debt,
incurred by us that is not incurred under the Senior Facilities.
In addition to the failure to pay principal, interest and fees when
due, events of default under the Senior Facilities include: failure to comply
with applicable covenants; failure to pay when due, or other defaults permitting
acceleration of, other indebtedness exceeding $7.5 million; judgment defaults in
excess of $7.5 million to the extent not covered by insurance; certain events of
bankruptcy; and certain changes in control.
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DESCRIPTION OF THE NOTES
UCAR Finance Inc. issued the Initial Notes and will issue the Exchange
Notes under the Indenture dated as of February 15, 2002 (the "Indenture")
between itself, each of the Guarantors and State Street Bank and Trust Company,
as trustee (the "Trustee"). The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act").
Certain terms used in this description are defined under "-Certain
Definitions." In this description, the word "Company" refers only to UCAR
Finance Inc. and not to any of its affiliates or subsidiaries.
The following description is only a summary of the material provisions
of the Indenture, the Registration Rights Agreement, the Graftech Pledge
Agreement, the Lien Subordination Agreement and the Intercompany Note
Obligations. You should read the Indenture, the Registration Rights Agreement,
the Graftech Pledge Agreement, the Lien Subordination Agreement and the
Intercompany Note Obligations because they, not this description, define your
rights as Holders of the Notes. You may request copies of these documents at the
address set forth under the heading "Where You Can Find More Information."
BRIEF DESCRIPTION OF THE EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and
terms of the Initial Notes, except that the Exchange Notes have been registered
under the Securities Act and therefore will not bear legends restricting the
transfer thereof.
o will be unsecured senior obligations of the Company;
o will be senior in right of payment to any future Subordinated
Obligations of the Company;
o will be guaranteed by UCAR International, UCAR Global, UCAR Carbon
and the Subsidiary Guarantors; and
o will benefit from the issuance to the Company by certain Foreign
Restricted Subsidiaries of Intercompany Notes and Intercompany
Note Guarantees, a portion of which is pledged to the Trustee.
Subject to the covenants described below under "--Certain Covenants"
and applicable law, the Company may issue additional notes ("Additional Notes")
under the Indenture. The Initial Notes, the Exchange Notes and any Additional
Notes subsequently issued will be treated as a single class for all purposes
under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Company will issue the Exchange Notes with a maximum aggregate
principal amount of $400.0 million. The Company will issue the Exchange Notes in
denominations of $1,000 and any integral multiple of $1,000. The Exchange Notes
will mature on February 15, 2012. Subject to our compliance with the covenant
described under "-Certain Covenants-Limitation on Indebtedness," the Company is
entitled to, without the consent of the Holders, issue an unlimited amount of
Notes under the Indenture on the same terms and conditions and with the same
CUSIP numbers as the Notes being offered hereby (the "Additional Notes"),
provided, however, that the Company makes one or more Intercompany Loans equal
to the gross proceeds of such Additional Notes to one or more Foreign Restricted
Subsidiaries. The Notes and the Additional Notes, if any, will be treated as a
single class for all purposes of the Indenture, including waivers,
120
amendments, redemptions and offers to purchase. Unless the context otherwise
requires, for all purposes of the Indenture and this "Description of the Notes,"
references to the Notes include any Additional Notes actually issued.
Interest on the Notes will accrue at the rate of 101/4% per annum and
will be payable semiannually in arrears on February 15 and August 15, commencing
on August 15, 2002. We will make each interest payment to the Holders of record
of the Notes on the immediately preceding February 1 and August 1. We will pay
interest on overdue principal at a rate of 1% per annum in excess of the above
rate and will pay interest on overdue installments of interest at such higher
rate to the extent lawful.
Interest on the Notes will accrue from the date of original issuance
or, if interest has already been paid, from the most recent interest payment
date. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Additional interest may accrue on the Notes in certain circumstances
pursuant to the Registration Rights Agreement.
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the Notes
at our option prior to February 15, 2007.
On and after February 15, 2007, we will be entitled at our option to
redeem all or a portion of the Notes upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed in percentages of principal
amount), plus accrued and unpaid interest to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the 12-month period
commencing on February 15 of the years set forth below:
YEAR PERCENTAGE
---- ----------
2007................................... 105.125%
2008................................... 103.417
2009................................... 101.708
2010 and thereafter.................... 100.000%
In addition, before February 15, 2005, we will be entitled at our
option on one or more occasions to redeem Notes (which includes Additional
Notes, if any) in an aggregate principal amount not to exceed 35% of the
aggregate principal amount of the Notes (which includes Additional Notes, if
any) originally issued at a redemption price (expressed as a percentage of
principal amount) of 110.25%, plus accrued and unpaid interest to the redemption
date, with the net cash proceeds from one or more Public Equity Offerings;
provided that:
(1) at least 65% of such aggregate principal amount of Notes
(which includes Additional Notes, if any) remains outstanding
immediately after the occurrence of each such redemption
(other than Notes held, directly or indirectly, by us or our
Affiliates); and
(2) each such redemption occurs within 60 days after the date of
the related Public Equity Offering.
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SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all of the Notes at any time, the
Trustee will select Notes to be redeemed on a pro rata basis or by lot.
We will redeem Notes of $1,000 or less in whole and not in part. We
will cause notices of redemption to be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to the Trustee and each
Holder of record of Notes to be redeemed at its registered address.
If any Note is to be redeemed in part only, the notice of redemption
that relates to that Note will state the portion of the principal amount thereof
to be redeemed. We will issue a new Note in a principal amount equal to the
unredeemed portion of the original Note registered in the name of the Holder
upon cancellation of the original Note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
We are not required to make any mandatory redemption or sinking fund
payments with respect to the Notes. However, under certain circumstances, we may
be required to offer to purchase Notes as described under "-Change of Control,"
"-Certain Covenants-Limitation on Sales of Assets and Subsidiary Stock" and
"-Intercompany Notes and Intercompany Note Guaranties." We are entitled at any
time and from time to time to purchase Notes in the open market or otherwise.
GUARANTIES
UCAR International, UCAR Global, UCAR Carbon and the Subsidiary
Guarantors jointly and severally have guaranteed, on a senior basis, obligations
of the Company under the Notes. All of these guarantees are unsecured, except
for the UCAR Carbon Guaranty.
UCAR International has no material assets other than the common stock
of UCAR Global and the Company and its interest in the UCC/MC Lawsuit. UCAR
International has no other material liabilities or obligations other than the
Antitrust Fines (which Antitrust Fines have been assessed against UCAR
International and not its Subsidiaries) and the related Lien filed by the U.S.
Department of Justice, an intercompany promissory note owed to UCAR Carbon
issued in connection with a leveraged equity recapitalization of UCAR
International and its Subsidiaries in 1995, its guaranties under the Credit
Agreement and certain guaranties of Indebtedness and commercial obligations of
its Subsidiaries.
UCAR Global has no material assets other than the common stock of UCAR
Carbon. UCAR Global has no other material liabilities or obligations other than
intercompany promissory notes, its guaranties under the Credit Agreement and
certain guaranties of Indebtedness and commercial obligations of its
Subsidiaries.
After the Realignment, UCAR Carbon will have no material assets other
than the common stock of the operating and other subsidiaries of UCAR
International, other than the Company, and ownership of certain of our
intellectual property. In connection with the Realignment, some foreign
subsidiaries currently owned by U.S. subsidiaries have been or will be
transferred to UCAR S.A., our Swiss subsidiary. In addition, in connection with
the Realignment, certain new U.S. subsidiaries will be formed that will be held
by UCAR Carbon and to which UCAR Carbon will transfer its operating businesses.
UCAR Carbon will continue to retain ownership of our intellectual property
(other than the intellectual property owned by Graftech), which it will continue
to license to our subsidiaries.
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The Company has no material assets other than a secured intercompany
revolving note from UCAR S.A., the Intercompany Notes, the Intercompany Note
Guarantees, other intercompany promissory notes (including Cash Flow Notes) and
assets in connection with treasury, cash management, cash pooling and hedging
activities for UCAR International and its Restricted Subsidiaries. The Company
has no material liabilities or obligations other than its obligations under the
Credit Agreement, intercompany promissory notes (including Cash Flow Notes) and
its obligations in connection with treasury, cash management, cash pooling and
hedging activities for UCAR International and its Restricted Subsidiaries. Some
or all of those Cash Flow Notes are expected to be effectively contributed to or
assumed by UCAR S.A.
The obligations of UCAR Global, UCAR Carbon and each Subsidiary
Guarantor under their respective Guaranties are limited as necessary to prevent
the UCAR Global Guaranty, the UCAR Carbon Guaranty or that Subsidiary Guaranty,
as the case may be, from being rendered voidable under fraudulent conveyance,
fraudulent transfer or similar laws affecting the rights of creditors generally.
See "Risk Factors."
Each Guarantor (other than UCAR International) that makes a payment
under its Guaranty will be entitled to a contribution from each other Guarantor
(other than UCAR International) in an amount equal to such other Guarantor's pro
rata portion of such payment based on the respective net assets of all the
Guarantors (other than UCAR International) at the time of such payment
determined in accordance with GAAP.
If the UCAR Global Guaranty, the UCAR Carbon Guaranty or a Subsidiary
Guaranty were rendered voidable, it could be subordinated by a court to all
other indebtedness (including guarantees and other contingent liabilities) of
UCAR Global, UCAR Carbon or the applicable Subsidiary Guarantor, as the case may
be, and, depending on the amount of such indebtedness, UCAR Global's, UCAR
Carbon's or a Subsidiary Guarantor's liability on its Guaranty could be reduced
to zero.
Pursuant to the Indenture, UCAR International, UCAR Global, UCAR Carbon
and any of the Subsidiary Guarantors may consolidate with, merge with or into,
or transfer all or substantially all its assets to any other Person to the
extent described under "-Certain Covenants-Merger and Consolidation"; provided,
however, that in the case of a merger, consolidation or transfer involving UCAR
International, UCAR Global or UCAR Carbon, if the resulting, surviving or
transferee Person is not UCAR International, UCAR Global or UCAR Carbon, as the
case may be, UCAR International's obligations under the UCAR International
Guaranty, UCAR Global's obligations under the UCAR Global Guaranty and UCAR
Carbon's obligations under the UCAR Carbon Guaranty, as the case may be, must be
expressly assumed by such other Person.
The Subsidiary Guaranty of a Subsidiary Guarantor will be released:
(1) upon the sale or other disposition (including by way of
consolidation or merger) of a Subsidiary Guarantor; or
(2) upon the sale or disposition of all or substantially all of
the assets of a Subsidiary Guarantor;
in each case other than a sale or disposition to UCAR International or an
Affiliate of UCAR International and as permitted by the Indenture.
The Subsidiary Guaranty of a Subsidiary Guarantor will also be released
upon:
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(1) the merger or consolidation of such Subsidiary Guarantor with
or into, or the dissolution and liquidation of such Subsidiary
Guarantor into, a Restricted Subsidiary that is or becomes a
Subsidiary Guarantor or another Person that Guarantees the
Notes; or
(2) the designation of such Subsidiary Guarantor as an
Unrestricted Subsidiary as permitted by the Indenture,
provided that such Subsidiary Guarantor does not Guarantee any
Indebtedness under the Credit Agreement from and after such
designation.
Graftech, one of our U.S. operating subsidiaries, has not Guaranteed
the Notes. In lieu of such Guarantee, UCAR Carbon has pledged the Capital Stock
of Graftech held by UCAR Carbon (the "Pledged Graftech Stock") to the Trustee
for the benefit of the Noteholders, subject to the limitation that at no time
will the value of the pledged portion of the Pledged Graftech Stock exceed
19.99% of the principal amount of the then outstanding Notes. For purposes of
the Indenture and all related documents, the terms "combined value" and "value,"
when used with respect to a pledge of shares, notes or guarantees of any issuer
thereof, will be deemed to mean the aggregate principal amount, par value or
book value thereof as carried by UCAR International, or the market value
thereof, whichever is greatest, so that, after giving effect to the 19.99%
limitation referred to herein, the shares, notes and guarantees of each issuer
of any thereof do not constitute a substantial portion of the collateral for the
then outstanding Notes within the meaning of Rule 3-16 under Regulation S-X
adopted by the SEC, as interpreted by the SEC or its staff, or any successor
rule, regulation, order, interpretation or statute. The security interest in the
Pledged Graftech Stock granted to the Trustee is junior to the security interest
in the Pledged Graftech Stock granted to the lenders under the Credit Agreement.
INTERCOMPANY NOTES AND INTERCOMPANY NOTE GUARANTIES
The Company has loaned the gross proceeds from the sale of the Initial
Notes to Foreign Restricted Subsidiaries, up to the aggregate amount of Secured
Intercompany Notes outstanding on the closing of such sale (approximately $391
million, based on currency exchange rates in effect on September 30, 2001 or
$382 million, based on currency exchange rates in effect on March 31, 2002). In
addition, the Company will lend the gross proceeds from any sale of Additional
Notes to one or more Foreign Restricted Subsidiaries. The Foreign Restricted
Subsidiaries used the loans of the gross proceeds from the sale of the Initial
Notes to repay to the Company their Secured Intercompany Notes and the Company,
in turn, used these repayments to repay term and revolving loans outstanding
under the Credit Agreement. To the extent that any gross proceeds have been
loaned to Foreign Restricted Subsidiaries, such Foreign Restricted Subsidiaries
became Intercompany Note Makers.
The Intercompany Note Makers have issued Intercompany Notes to the
Company in an aggregate principal amount equal to $391 million or 98% of the
principal amount of the Initial Notes (based on currency exchange rates in
effect on September 30, 2001) or $382 million or 96% of the principal amount of
the Initial Notes (based on currency exchange rates in effect on March 31,
2002). In addition, the Intercompany Note Makers will issue Intercompany Notes
to the Company in an aggregate principal amount equal to the amount of gross
proceeds from the sale of Additional Notes loaned to them.
Certain Foreign Restricted Subsidiaries (including certain of the
Intercompany Note Makers) have Guaranteed the obligations of all of the
Intercompany Note Makers under the Intercompany Notes. In addition, UCAR SNC
(our French operating subsidiary engaged in the graphite electrode business) has
Guaranteed only the obligations of UCAR Holdings S.A. (a French holding company,
which is the parent of UCAR SNC and which will be an Intercompany Note Maker).
Our operating subsidiary in Italy engaged in the graphite specialties business
and our operating subsidiary in Russia as well as Carbone Savoie, and certain
immaterial foreign operating and holding companies are neither Intercompany Note
Makers nor Intercompany Note Guarantors. The Intercompany Note Guaranties are
limited as required to comply with
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applicable foreign law, which, in many cases, limit the Intercompany Note
Guaranty of a particular Intercompany Note Guarantor to the net worth of such
Intercompany Note Guarantor.
The Company has pledged the Intercompany Notes and the Intercompany
Note Guaranties to the Trustee for the benefit of the Noteholders, subject to
the limitation that at no time will the combined value of the pledged portion of
any Intercompany Note Obligor's Intercompany Note and Intercompany Note
Guarantee exceed 19.99% of the principal amount of the then outstanding Notes.
Intercompany Notes with an aggregate principal amount equal to $323 million or
81% of the principal amount of the Initial Notes (based on currency rates in
effect on September 30, 2001) or $322 million or 81% of the principal amount of
the Initial Notes (based on currency exchange rates in effect on March 31, 2002)
have been pledged to secure the Notes. The remaining Intercompany Notes held by
the Company (in aggregate principal amount equal to $68 million or 17% of the
principal amount of the Initial Notes (based on currency exchange rates in
effect on September 30, 2001) or $60 million or 15% of the principal amount of
the Initial Notes (based on currency exchange rates in effect on March 31,
2002)), and any pledged Intercompany Notes that cease to be pledged due to a
reduction in the principal amount of the then outstanding Notes due to
redemption, repurchase or other events, will not be subject to any pledge and
will be available to satisfy the claims of creditors (including the lenders
under the Credit Agreement and the holders of the Notes) of the Company as their
interests may appear.
In general, Intercompany Notes cannot be prepaid unless the proceeds
received by the Company upon prepayment are (i) invested in or loaned to a
Guarantor, (ii) loaned to another Foreign Restricted Subsidiary that issues an
Intercompany Note, which the Company thereafter pledges to the Trustee, subject
to the limitation that at no time will the combined value of the pledged portion
of such Foreign Restricted Subsidiary's Intercompany Note (and Intercompany Note
Guarantee, if applicable) exceed 19.99% of the principal amount of the then
outstanding Notes or (iii) applied to a mandatory offer to purchase the Notes at
100% of the principal amount, plus accrued but unpaid interest, in compliance
with the Indenture. In connection with the mothballing and closure of our
graphite electrode manufacturing operations as part of Project Phoenix, UCAR
S.p.A., our Italian operating subsidiary engaged in the graphite electrode
business, can prepay its Intercompany Note so long as the proceeds received by
the Company are used in a manner consistent with all other Intercompany Note
prepayments, as discussed above, or applied to prepayment of the term loans
under the Credit Agreement.
The terms of the Intercompany Notes may not be changed without consent
of the Noteholders, except in limited circumstances. The Company may, however,
without consent of the Noteholders, change the rate at which interest accrues,
the interest payment date, the currency of payment of principal and interest
and, in certain circumstances, the currency in which the Intercompany Notes are
denominated (subject to certain limitations) can be amended. In addition, the
Company can amend the terms of the Intercompany Notes and Intercompany Note
Guarantees to the extent necessary in order to comply with applicable law so
long as the changes do not affect any of the material terms thereof.
The obligations of the Intercompany Note Obligors will be limited as
necessary to prevent the applicable Intercompany Note or Intercompany Note
Guaranty from being rendered voidable under fraudulent conveyance, fraudulent
transfer or similar laws affecting the rights of creditors generally. See "Risk
Factors."
If an Intercompany Note or an Intercompany Note Guaranty were rendered
voidable, it could be subordinated by a court to all other indebtedness
(including guarantees and other contingent liabilities) of the applicable
Intercompany Note Obligor and, depending on the amount of such indebtedness, an
Intercompany Note Obligor's liability on its Intercompany Obligations could be
reduced to zero.
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RANKING
SENIOR INDEBTEDNESS VERSUS NOTES, GUARANTIES AND INTERCOMPANY NOTE OBLIGATIONS
The indebtedness evidenced by the Notes, the Guaranties, the
Intercompany Notes and the Intercompany Note Guaranties is, except to the extent
of the Pledged Graftech Stock, unsecured and ranks pari passu in right of
payment to the Senior Indebtedness of the Company, the respective Guarantor or
the respective Intercompany Note Obligor, as the case may be.
At December 31, 2001, on an as adjusted basis after giving effect to
the sale of the Initial Notes, the application of the proceeds therefrom and the
Realignment (and based on currency exchange rates at December 31, 2001):
(1) Senior Indebtedness of the Company would have been
approximately $638 million, including $238 million of secured
indebtedness (all of which would have been Incurred under the
Credit Agreement);
(2) UCAR International, UCAR Global and the Subsidiary Guarantors
would have had no Senior Indebtedness (without duplication for
guaranties of Senior Indebtedness under the Credit Agreement
and the Notes, which are included in clause (1));
(3) Senior Indebtedness of UCAR Carbon would have been
approximately $168 million, all of which would have been
Incurred under secured intercompany revolving loans pledged to
secure the Credit Agreement (without duplication for
guaranties of Senior Indebtedness under the Credit Agreement
and the Notes, which are included in clause (1)); and
(4) Senior Indebtedness of the Intercompany Note Obligors would
have been approximately $416 million, including approximately
$414 million of secured indebtedness, approximately $410
million of which would have been Incurred under secured
intercompany revolving loans pledged to secure the Credit
Agreement (without duplication for the guaranties and cross
guaranties of the Senior Indebtedness under this clause (4)).
The Notes are unsecured obligations of the Company, except to the
extent of the pledge of a portion of the Intercompany Note Obligations, which
themselves are unsecured, to the Trustee for the benefit of the Noteholders.
Secured debt and other secured obligations of the Company (including obligations
with respect to the Credit Agreement) are effectively senior to the Notes to the
extent of the value of the assets securing such debt or other obligations.
The Guaranties are unsecured obligations of UCAR International, UCAR
Global, UCAR Carbon and the Subsidiary Guarantors, except to the extent of a
junior pledge of a portion of the Pledged Graftech Stock in the case of the UCAR
Carbon Guaranty. Secured debt and other secured obligations of UCAR
International, UCAR Global, UCAR Carbon and the Subsidiary Guarantors are
effectively senior to the obligations with respect to the Guaranties to the
extent of the value of the assets securing such debt or other obligations.
The Intercompany Note Obligations are unsecured obligations of the
Intercompany Note Obligors. Secured debt and other secured obligations of the
Intercompany Note Obligors are effectively senior to the obligations with
respect to the Intercompany Notes and the Intercompany Note Guaranties to the
extent of the value of the assets securing such debt or other obligations.
LIABILITIES OF SUBSIDIARIES THAT ARE NEITHER GUARANTORS NOR INTERCOMPANY NOTE
OBLIGORS VERSUS NOTES
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All of the material operations of UCAR International, UCAR Global and,
after the Realignment, UCAR Carbon are conducted through subsidiaries of UCAR
Carbon. Claims of creditors of such subsidiaries that are not Guarantors or
Intercompany Note Obligors, including trade creditors and creditors holding
indebtedness or guarantees issued by such subsidiaries, and claims of preferred
stockholders of such subsidiaries generally will have priority with respect to
the assets and earnings of such subsidiaries over the claims of creditors of the
Guarantors, the Intercompany Note Obligors and the Company, including Holders of
the Notes. Accordingly, the Notes are effectively subordinated to creditors
(including trade creditors) and preferred stockholders, if any, of subsidiaries
that are neither Guarantors nor Intercompany Note Obligors.
At December 31, 2001, the total liabilities of the subsidiaries of UCAR
International that are neither Guarantors nor Intercompany Note Obligors were
approximately $27 million, including trade payables (excluding intercompany
trade and other miscellaneous liabilities of $14 million), most of which are
attributable to Graftech and Carbone Savoie. Although the Indenture limits the
incurrence of Indebtedness and the issuance of preferred stock of such
subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any limitation on the
incurrence by such subsidiaries of liabilities that are not considered
Indebtedness under the Indenture. See "-Certain Covenants-Limitation on
Indebtedness."
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the Exchange Notes initially will be issued
in one or more global certificates in definitive, fully registered form (each a
"Global Note"). Upon issuance, each Global Note will be deposited with, or on
behalf of, the Euroclear System ("Euroclear") or Clearstream Banking, SA
("Clearstream"), in the case of Initial Notes sold in offshore transactions in
reliance on Regulation S under the Securities Act, or The Depository Trust
Company, New York, New York ("DTC") and registered in the name of a nominee of
Euroclear, Clearstream or DTC.
If a holder tendering Initial Notes so requests, such holder's Exchange
Notes will be issued as described below under "Certificated Securities" in
registered form without coupons (each, a "Certificated Security").
GLOBAL NOTE
The Company expects that, pursuant to procedures established by
Euroclear, Clearstream or DTC: (i) upon the issuance of a Global Note,
Euroclear, Clearstream or DTC or a custodian thereof will credit, on its
internal system, the principal amount of the individual beneficial interests in
the Exchange Notes represented by such Global Note to the respective accounts of
persons who have accounts with such depository and (ii) ownership of beneficial
interests in the Global Note will be shown on, and the transfer of such
ownership will be effected only through, records maintained by Euroclear,
Clearstream or DTC or their nominees (with respect to interests of participants)
and the records of participants (with respect to interests of persons other than
participants). Ownership of beneficial interests in the Global Note will be
limited to persons who have accounts with Euroclear, Clearstream or DTC
("participants") or persons who hold interests through participants.
So long as Euroclear, Clearstream, DTC or a nominee thereof is the
registered owner or holder of a Global Note, Euroclear, Clearstream, DTC or such
nominee, as the case may be, will be considered the sole owner or holder of the
Exchange Notes represented by such Global Note for all purposes under the
Indenture. No beneficial owner of an interest in the Global Note will be able to
transfer that interest except in accordance with Euroclear, Clearstream or DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
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Payments of the principal of, premium, if any, and interest (including
Additional Interest) on any Exchange Note represented by a Global Note will be
made to Euroclear, Clearstream, DTC or a nominee thereof, as the case may be, as
the registered owner thereof. None of the Company, the Trustee or any Paying
Agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Global Note or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Company expects that Euroclear, Clearstream, DTC or their nominees,
upon receipt of any payment of principal, premium, if any, and interest
(including Additional Interest) on any Exchange Note represented by a Global
Note, will credit participants' accounts with payments in amounts proportionate
to their respective beneficial interests in the principal amount of the Global
Note as shown on the records of Euroclear, Clearstream, DTC or their nominees.
The Company also expects that payments by participants to owners of beneficial
interests in the Global Note held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in Euroclear, Clearstream or DTC will be
effected in the ordinary way through Euroclear, Clearstream or DTC's same-day
funds system in accordance with Euroclear, Clearstream or DTC rules and will be
settled in same-day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Exchange Notes to
persons in states which require physical delivery of the Exchange Notes, or to
pledge such securities, such holder must transfer its interest in the Global
Note, in accordance with the normal procedures of Euroclear, Clearstream or DTC
and with the procedures set forth in the Indenture.
Euroclear, Clearstream and DTC have advised the Company that they will
take any action permitted to be taken by a holder of Exchange Notes (including
the presentation of Exchange Notes for exchange as described below) only at the
direction of one or more participants to whose account the Euroclear,
Clearstream or DTC interests in the Global Note are credited and only in respect
of such portion of the aggregate principal amount of Exchange Notes as to which
such participant or participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"). DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly ("INDIRECT PARTICIPANTS").
We understand that: Euroclear and Clearstream hold securities for
participating organizations and facilitate the clearance and settlement of
securities transactions between their respective participants through electronic
book-entry changes in accounts of such participants; Euroclear and Clearstream
provide to their participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing; Euroclear and Clearstream interface with
domestic securities markets; Euroclear and Clearstream participants are
financial institutions such as underwriters, securities brokers and dealers,
banks, trust companies and
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certain other organizations; and indirect access to Euroclear or Clearstream is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodian relationship with a Euroclear or
Clearstream participant, either directly or indirectly.
Subject to compliance with the transfer restrictions applicable to the
Global Notes, cross-market transfers between the participants in DTC, on the one
hand, and Euroclear or Clearstream participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its depository; however, such cross-market
transactions will require delivery of instructions to Euroclear or Clearstream,
as the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Notes in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the depositories for
Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear
or Clearstream participant purchasing an interest in a Global Note from a
participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
the Company that cash received in Euroclear or Clearstream as a result of sales
of interests in a Global Note by or through a Euroclear or Clearstream
participant to a participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Clearstream cash account only as of the business day for Euroclear or
Clearstream following DTC's settlement date.
Although Euroclear, Clearstream and DTC have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Global Note
among participants of Euroclear, Clearstream and DTC, they are under no
obligation to perform such procedures, and such procedures may be discontinued
at any time. Neither the Company nor the Trustee will have any responsibility
for the performance by Euroclear, Clearstream or DTC or their participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED SECURITIES
If Euroclear, Clearstream or DTC is at any time unwilling or unable to
continue as a depository for the Global Note and a successor depository is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Note.
Neither the Company nor the Trustee shall be liable for any delay by
Euroclear, Clearstream or DTC or any participant or indirect participant in
identifying the beneficial owners of the related Exchange Notes and each such
person may conclusively rely on, and shall be protected in relying on,
instructions from Euroclear, Clearstream or DTC for all purposes (including with
respect to registration and delivery, and the respective principal amounts, of
the Exchange Notes to be issued).
REGISTERED EXCHANGE OFFER; REGISTRATION RIGHTS
We have agreed pursuant to the Registration Rights Agreement that we
will, subject to certain exceptions,
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(1) within 75 days after the Issue Date, file a registration
statement (the "EXCHANGE OFFER REGISTRATION STATEMENT") with
the SEC with respect to a registered offer (the "REGISTERED
EXCHANGE OFFER") to exchange the Initial Notes for new notes
of the Company (the "EXCHANGE NOTES") having terms
substantially identical in all material respects to the
Initial Notes (except that the Exchange Notes will not contain
terms with respect to transfer restrictions);
(2) use our commercially reasonable best efforts to cause the
Exchange Offer Registration Statement to be declared effective
under the Securities Act within 140 days after the Issue Date;
(3) promptly after the effectiveness of the Exchange Offer
Registration Statement (the "EFFECTIVENESS DATE"), offer the
Exchange Notes in exchange for surrender of the Initial Notes;
and
(4) use our commercially reasonable best efforts to keep the
Registered Exchange Offer open for not less than 30 days (or
longer if required by applicable law) after the date notice of
the Registered Exchange Offer is mailed to the Holders of the
Initial Notes.
For each Initial Note tendered to us pursuant to the Registered
Exchange Offer, we will issue to the Holder of such Initial Note an Exchange
Note having a principal amount equal to that of the surrendered Initial Note.
Interest on each Exchange Note will accrue from the last interest payment date
on which interest was paid on the Initial Note surrendered in exchange therefor,
or, if no interest has been paid on such Initial Note, from the date of its
original issue.
Under existing SEC interpretations, the Exchange Notes will be freely
transferable by Holders other than our affiliates after the Registered Exchange
Offer without further registration under the Securities Act if the Holder of the
Exchange Notes represents to us in the Registered Exchange Offer that it is
acquiring the Exchange Notes in the ordinary course of its business, that it has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes and that it is not an affiliate of the
Company, as such terms are interpreted by the SEC; provided, however, that
broker- dealers ("PARTICIPATING BROKER-DEALERS") receiving Exchange Notes in the
Registered Exchange Offer will have a prospectus delivery requirement with
respect to resales of such Exchange Notes. The SEC has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to Exchange Notes (other than a resale of an unsold allotment from
the original sale of the Initial Notes) with the prospectus contained in the
Exchange Offer Registration Statement.
Under the Registration Rights Agreement, the Company is required to
allow Participating Broker-Dealers and other persons, if any, with similar
prospectus delivery requirements to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such Exchange
Notes for 180 days following the effective date of such Exchange Offer
Registration Statement (or such shorter period during which Participating
Broker-Dealers are required by law to deliver such prospectus).
A Holder of Initial Notes (other than certain specified holders) who
wishes to exchange such Initial Notes for Exchange Notes in the Registered
Exchange Offer will be required to represent that any Exchange Notes to be
received by it will be acquired in the ordinary course of its business and that
at the time of the commencement of the Registered Exchange Offer it has no
arrangement or understanding with any person to participate in the distribution
(within the meaning of the Securities Act) of the Exchange Notes and that it is
not an "affiliate" of the Company, as defined in Rule 405 of the Securities Act,
or if it is an affiliate, that it
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will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
In the event that:
(1) applicable interpretations of the staff of the SEC do not
permit us to effect such a Registered Exchange Offer; or
(2) for any other reason we do not consummate the Registered
Exchange Offer within 180 days of the Issue Date; or
(3) an initial purchaser shall notify us following consummation of
the Registered Exchange Offer that Initial Notes held by it
are not eligible to be exchanged for Exchange Notes in the
Registered Exchange Offer; or
(4) certain Holders are prohibited by law or SEC policy from
participating in the Registered Exchange Offer or may not
resell the Exchange Notes acquired by them in the Registered
Exchange Offer to the public without delivering a prospectus,
then, we will, subject to certain exceptions,
(x) promptly (but in any event not sooner than 75 days after the
Issue Date) file a shelf registration statement (the "Shelf
Registration Statement") covering resales of the Initial Notes
or the Exchange Notes, as the case may be;
(y) use our commercially reasonable best efforts to cause the
Shelf Registration Statement to be declared effective under
the Securities Act on or prior to the 60th day following the
date on which the Shelf Registration Statement is required to
be filed; and
(z) use our commercially reasonable best efforts to keep the Shelf
Registration Statement effective until the earliest of (A) the
time when the Initial Notes covered by the Shelf Registration
Statement can be sold pursuant to Rule 144 without any
limitations under clauses (c), (e), (f) and (h) of Rule 144,
(B) two years from the effective date of the Shelf
Registration Statement and (C) the date on which all Initial
Notes registered thereunder are disposed of in accordance
therewith.
We will, in the event that a Shelf Registration Statement is filed,
among other things, provide to each Holder for whom such Shelf Registration
Statement was filed copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such Holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales of the Initial Notes or the Exchange Notes, as the
case may be. A Holder selling such Initial Notes or Exchange Notes pursuant to
the Shelf Registration Statement generally would be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such
Holder (including certain indemnification obligations).
We will pay additional cash interest on the applicable Initial Notes
and Exchange Notes, subject to certain exceptions:
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(1) if we fail to file an Exchange Offer Registration Statement
with the SEC on or prior to the 75th day after the Issue Date;
(2) if the Exchange Offer Registration Statement is not declared
effective by the SEC on or prior to the 140th day after the
Issue Date;
(3) if the Exchange Offer is not consummated on or before the 40th
day after the Exchange Offer Registration Statement is
declared effective;
(4) if obligated to file the Shelf Registration Statement, we fail
to file the Shelf Registration Statement with the SEC on or
prior to the 45th day after the date (the "SHELF FILING DATE")
on which the obligation to file a Shelf Registration Statement
arises;
(5) if obligated to file a Shelf Registration Statement, the Shelf
Registration Statement is not declared effective on or prior
to the 60th day after the Shelf Filing Date; or
(6) after the Exchange Offer Registration Statement or the Shelf
Registration Statement, as the case may be, is declared
effective, such Registration Statement thereafter ceases to be
effective or usable, subject to certain exceptions (each such
event referred to in the preceding clauses (1) through (6) a
"Registration Default"),
from and including the date on which any such Registration Default shall occur
to but excluding the date on which all Registration Defaults have been cured.
The rate of the additional interest will be 0.50% per annum for the
first 90-day period immediately following the occurrence of a Registration
Default, and such rate will increase by an additional 0.50% per annum with
respect to each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum additional interest rate of 2.0% per annum. The rate
of additional interest during any 90-day period will not be increased due to
concurrent Registration Defaults during such period. We will pay such additional
interest on regular interest payment dates. Such additional interest will be in
addition to any other interest payable from time to time with respect to the
Initial Notes and the Exchange Notes.
All references in the Indenture, in any context, to any interest or
other amount payable on or with respect to the Notes shall be deemed to include
any additional interest pursuant to the Registration Rights Agreement.
If we effect the Registered Exchange Offer, we will be entitled to
close the Registered Exchange Offer 30 days after the commencement thereof
provided that we have accepted all Initial Notes theretofore validly tendered in
accordance with the terms of the Registered Exchange Offer.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "CHANGE OF
CONTROL"), each Holder shall have the right to require that the Company purchase
such Holder's Notes at a purchase price in cash equal to 101% of the principal
amount thereof on the date of purchase plus accrued and unpaid interest, if any,
to the date of purchase (subject to the right of Holders on the relevant record
date to receive interest due on the relevant interest payment date):
(1) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that for purposes of this clause (1) such person shall
be deemed to have
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"beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly
or indirectly, of more than 35% of the total voting
power of the Voting Stock of UCAR International (for the
purposes of this clause (1), such other person shall be deemed
to beneficially own any Voting Stock of a Person (the
"specified person") held by any other Person (the "parent
entity"), if such other person is the beneficial owner (as
defined above in this clause (1)), directly or indirectly, of
more than 35% of the voting power of the Voting Stock of such
parent entity);
(2) individuals who on the Issue Date constituted the Board of
Directors of UCAR International (together with any new
directors whose election by the Board of Directors of UCAR
International or whose nomination for election by the
stockholders of UCAR International was approved by a vote of
66 2/3% of the directors of UCAR International then still in
office who were either directors on the Issue Date or whose
election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the
Board of Directors of UCAR International then in office;
(3) the adoption of a plan relating to the liquidation or
dissolution of UCAR International;
(4) the merger or consolidation of UCAR International with or into
another Person or the merger of another Person with UCAR
International, or the sale of all or substantially all the
assets of UCAR International (in each case, determined on a
consolidated basis) to another Person, other than a
transaction following which (A) in the case of a merger or
consolidation transaction, holders of securities that
represented 100% of the Voting Stock of UCAR International
immediately prior to such transaction (or other securities
into which such securities are converted as part of such
merger or consolidation transaction) hold directly or
indirectly at least a majority of the voting power of the
Voting Stock of the surviving Person in such merger or
consolidation transaction immediately after such transaction
and in substantially the same proportion as before such merger
or consolidation transaction and (B) in the case of a sale of
assets transaction, (i) the transferee Person or Persons
become(s) a guarantor in respect of the Notes and (ii) either
(x) the transferee Person(s) constitute(s) a Subsidiary of the
transferor of such assets or (y) holders of securities that
represented 100% of the Voting Stock of UCAR International
immediately prior to such sale of assets transaction hold,
directly or indirectly, at least a majority of the voting
power of the Voting Stock of the transferee Person(s) in such
sale of assets transaction immediately after such sale of
assets transaction and in substantially the same proportion as
before such sale of assets transaction; or
(5) UCAR International ceases to own, directly or indirectly, all
the voting power of the Voting Stock of UCAR Global, UCAR
Carbon and the Company.
Within 30 days following any Change of Control, we will mail a notice
to each Holder with a copy to the Trustee (the "Change of Control Offer")
stating:
(1) that a Change of Control has occurred and that such Holder has
the right to require us to purchase such Holder's Notes at a
purchase price in cash equal to 101% of the principal amount
thereof on the date of purchase, plus accrued and unpaid
interest, if any, or premium, if any, to the date of purchase
(subject to the right of Holders on the relevant record date
to receive interest on the relevant interest payment date);
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(2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma
historical income, cash flow and capitalization, in each case
after giving effect to such Change of Control);
(3) the purchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by us, consistent with this
covenant, that a Holder must follow in order to have its
Notes purchased.
We will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by us and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
We will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes as a result of a Change of Control.
To the extent that the provisions of any securities laws or regulations conflict
with the provisions of this covenant, we will comply with the applicable
securities laws and regulations and shall not be deemed to have breached our
obligations under this covenant by virtue of our compliance with such securities
laws or regulations.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a sale or takeover of UCAR
International and, thus, the removal of incumbent management. The Change of
Control purchase feature is a result of negotiations between UCAR International,
the Company and the initial purchasers. We have no present intention to engage
in a transaction involving a Change of Control, although it is possible that we
could decide to do so in the future. Subject to the limitations discussed below,
we could, in the future, enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that would not constitute
a Change of Control under the Indenture, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect our capital structure
or credit ratings. Restrictions on our ability to Incur additional Indebtedness
are contained in the covenants described under "-Certain Covenants-Limitation on
Indebtedness," "-Limitation on Liens" and "-Limitation on Sale/Leaseback
Transactions." Such restrictions can only be waived with the consent of the
Holders of a majority in principal amount of the Notes then outstanding. Except
for the limitations contained in such covenants, however, the Indenture will not
contain any covenants or provisions that may afford Holders of the Notes
protection in the event of a highly leveraged transaction.
The Credit Agreement limits our ability to purchase Notes, and also
provides that the occurrence of certain change of control events with respect to
UCAR International or the Company would constitute a default thereunder. In the
event that a Change of Control occurs at a time when we are prohibited from
purchasing Notes, we may seek the consent of our lenders to the purchase of
Notes or may attempt to refinance the borrowings under the Credit Agreement. If
we do not obtain such a consent or repay such borrowings, we will remain
prohibited from purchasing Notes. In such case, our failure to offer to purchase
Notes would constitute a Default under the Indenture, which would, in turn,
constitute a default under the Credit Agreement.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such indebtedness upon a Change of Control. Moreover,
the exercise by the Holders of their right to require us to repurchase the Notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on us. Finally,
our ability to pay cash to the Holders of Notes following the
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occurrence of a Change of Control may be limited by our then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases.
The provisions under the Indenture relative to our obligation to make
an offer to repurchase the Notes as a result of a Change of Control may be
waived or modified with the written consent of the Holders of a majority in
principal amount of the then outstanding Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the
following:
LIMITATION ON INDEBTEDNESS
(a) UCAR International will not, and will not permit any Restricted
Subsidiary to, Incur, directly or indirectly, any Indebtedness; provided,
however, that the Company, the Guarantors and the Intercompany Note Obligors
will be entitled to Incur Indebtedness if, on the date of such Incurrence and
after giving effect thereto on a pro forma basis, no Default has occurred and is
continuing and the Consolidated Coverage Ratio would be greater than 2.0 to 1 if
such Indebtedness is Incurred prior to December 31, 2004 or 2.25 to 1 if such
Indebtedness is Incurred thereafter.
(b) Notwithstanding paragraph (a), UCAR International and the
Restricted Subsidiaries will be entitled to Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred by the Company, any Guarantor
or any Intercompany Note Obligor pursuant to any
Revolving Credit Facility; provided, however, that,
immediately after giving effect to any such
Incurrence on a pro forma basis, the aggregate
principal amount of all Indebtedness Incurred under
this clause (1) and then outstanding, when added
together with the aggregate principal amount of
Indebtedness theretofore Incurred pursuant to clause
(2) that could have been Incurred pursuant to this
clause (1), does not exceed the greater of (A) $250.0
million and (B) the sum of (x) 50% of the book value
of the inventory of UCAR International and the
Restricted Subsidiaries at the end of the most recent
fiscal quarter for which financial statements are
publicly available and (y) 80% of the book value of
the accounts receivable of UCAR and the Restricted
Subsidiaries at the end of the most recent fiscal
quarter for which financial statements are publicly
available (excluding any accounts receivable pledged
or otherwise supporting a Qualified Receivables
Transaction);
(2) Indebtedness Incurred by the Company, any Guarantor
or any Intercompany Note Obligor pursuant to any Term
Loan Facility; provided, however, that, after giving
effect to any such Incurrence on a pro forma basis,
the aggregate principal amount of all Indebtedness
Incurred under this clause (2) and then outstanding
does not exceed (A) $226 million plus the maximum
principal amount of Indebtedness that could be
Incurred at such time under clause (1) above less (B)
the aggregate sum of all principal payments actually
made from time to time after the Issue Date with
respect to such Indebtedness (other than principal
payments made from any permitted Refinancings thereof
Incurred pursuant to this clause (2));
(3) Indebtedness (x) owed to and held by UCAR
International or a Restricted Subsidiary and (y) in
the event the obligor on such Indebtedness is Carbone
Savoie, owed to and held by its minority stockholders
in an amount not to exceed
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$10.0 million outstanding in the aggregate at any
time and that is pro rata in amount, based on equity
interests, with the amount of Indebtedness of Carbone
Savoie owed to and held by UCAR International and its
Restricted Subsidiaries pursuant to this clause (3);
provided, however, that (A) any subsequent issuance
or transfer of any Capital Stock which results in any
such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of such
Indebtedness (other than to UCAR International or a
Restricted Subsidiary) shall be deemed, in each case,
to constitute the Incurrence of such Indebtedness by
the obligor thereon and (B) if the Company, any
Guarantor or any Intercompany Note Obligor is the
obligor on such Indebtedness and the holder of such
Indebtedness is a Person other than the Company, a
Guarantor or an Intercompany Note Obligor, such
Indebtedness is expressly subordinated to the prior
payment in full in cash of all obligations with
respect to the Notes or the applicable Guaranty;
(4) Indebtedness consisting of the Notes and the Exchange
Notes (other than any Additional Notes);
(5) Indebtedness outstanding on the Issue Date (other
than Indebtedness described in clause (1), (2), (3)
or (4) of this covenant);
(6) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such
Restricted Subsidiary was acquired by UCAR
International or, in the case of a Restricted
Subsidiary formed to acquire a business, the date on
which such business was acquired by such Restricted
Subsidiary (other than Indebtedness Incurred in
connection with, or to provide all or any portion of
the funds or credit support utilized to consummate,
the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a
Subsidiary or was acquired by UCAR International or
such business was acquired by such Restricted
Subsidiary, as the case may be); provided, however,
that on the date of such acquisition and after giving
pro forma effect thereto, UCAR International would
have been able to Incur at least $1.00 of additional
Indebtedness pursuant to paragraph (a) of this
covenant;
(7) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (a) or pursuant to
clause (4), (5) or (6) or this clause (7); provided,
however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances
Indebtedness of the Company, a Guarantor or an
Intercompany Note Obligor, such Refinancing
Indebtedness shall be Incurred only by the Company, a
Guarantor or an Intercompany Note Obligor;
(8) Hedging Obligations entered into in the ordinary
course of business and not for the purpose of
speculation;
(9) obligations, in each case Incurred, made or given in
the ordinary course of business, (A) in respect of
performance bonds, bid bonds, bankers' acceptances,
surety or appeal bonds and other similar obligations
of UCAR International or any of the Restricted
Subsidiaries, (B) for or in connection with pledges,
deposits or payments in connection with or to secure
statutory, regulatory or similar obligations,
including obligations under health, safety or
environmental obligations, (C) arising from
Guarantees to suppliers, lessors, licensees,
contractors, franchisees or customers of obligations
(other than Indebtedness)
136
Incurred in the ordinary course of business, (D) in
respect of worker's compensation obligations,
employee benefit obligations, property, casualty or
liability insurance and self-insurance and (E)
trade-related letters of credit;
(10) Indebtedness arising from the honoring by a bank or
other financial institution of a check, draft or
similar instrument drawn against insufficient funds
in the ordinary course of business; provided,
however, that such Indebtedness is extinguished
within five Business Days of its Incurrence;
(11) Indebtedness represented by Capital Lease
Obligations, Sale/Leaseback Transactions, mortgage
financings or purchase money obligations, in each
case Incurred by UCAR International or any Restricted
Subsidiary for the purpose of financing all or any
part of the construction, purchase or lease of, or
repairs, improvements or additions to, property,
plant or equipment used in a Related Business or
Indebtedness Incurred to Refinance any such
Indebtedness, purchase price or cost of construction
or improvement, in each case Incurred no later than
365 days after the later of the acquisition,
completion of construction, repair, improvement,
addition or commencement of full operation of the
property or in respect of any Capital Lease
Obligation or any Sale/Leaseback Transaction
permitted under the Indenture; provided, however,
that such Indebtedness does not, when added together
with all other Indebtedness Incurred pursuant to this
clause (11) and then outstanding, exceed $10.0
million;
(12) Indebtedness consisting of agreements to provide for
indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of
credit, surety bonds or performance bonds securing
any obligations of UCAR International or any of the
Restricted Subsidiaries pursuant to such agreements,
in any case incurred in connection with the
disposition or acquisition of any business assets or
Restricted Subsidiary (other than Guarantees of
Indebtedness or other obligations Incurred by any
Person acquiring all or any portion of such business
assets or Restricted Subsidiary for the purpose of
financing such acquisition) in an amount not to
exceed, in the case of a disposition, the gross
proceeds actually received by UCAR International or
any Restricted Subsidiary in connection with such
disposition;
(13) Indebtedness consisting of (A) the Guaranties of the
Guarantors, (B)(i) Guarantees by UCAR International,
the Company, a Guarantor or an Intercompany Note
Obligor of Indebtedness Incurred by a Restricted
Subsidiary without violation of the Indenture, (ii)
Guarantees by a Guarantor of Senior Indebtedness
Incurred by UCAR International or the Company (so
long as such Guarantor could have Incurred such
Indebtedness directly without violation of the
Indenture) without violation of the Indenture and (C)
any Guarantee by the Company or any Guarantor of
Indebtedness Incurred pursuant to clause (7) to the
extent the Refinancing Indebtedness Incurred
thereunder directly or indirectly Refinances
Indebtedness Incurred pursuant to clause (4);
(14) Indebtedness Incurred for working capital purposes by
a Restricted Subsidiary that is neither a Guarantor
nor an Intercompany Note Obligor; provided, however,
that the amount of such Indebtedness, when added
together with the aggregate amount of all
Indebtedness Incurred pursuant to this clause (14)
and then outstanding, does not exceed $10.0 million;
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(15) Indebtedness Incurred by Graftech or Carbone Savoie
in a principal amount which, when added together with
all other Indebtedness Incurred pursuant to this
clause (15) and then outstanding, does not exceed
$10.0 million; provided, however, that if, at the
time of such Incurrence and after giving effect
thereto on a pro forma basis, the Consolidated
Coverage Ratio would be greater than 3.0 to 1, then
the amount of such Indebtedness shall not exceed,
when added together with all other Indebtedness
Incurred pursuant to this clause (15) and then
outstanding, $25.0 million; and
(16) Indebtedness of UCAR International or any Restricted
Subsidiary in an aggregate principal amount which,
when taken together with all other Indebtedness of
UCAR International and the Restricted Subsidiaries
outstanding on the date of such Incurrence (other
than Indebtedness permitted by clauses (1) through
(15) above or paragraph (a)), does not exceed $10.0
million.
(c) Notwithstanding the foregoing, none of the Company, any Guarantor
or any Intercompany Note Obligor will incur any Indebtedness pursuant to the
foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations of the Company, any
Guarantor or any Intercompany Note Obligor, as the case may be, unless such
Indebtedness shall be subordinated to the Notes, the respective Guaranty or the
respective Intercompany Note Obligation, as the case may be, to at least the
same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this covenant, (1) in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, UCAR International, in its sole
discretion, will classify such item of Indebtedness at the time of Incurrence
and only be required to include the amount and type of such Indebtedness in one
of the above clauses and (2) UCAR International, in its sole discretion, will be
entitled to divide and classify an item of Indebtedness in more than one of the
types of Indebtedness described above.
(e) For the purpose of determining amounts of Indebtedness outstanding
under this covenant and for the purpose of avoiding duplication only,
Indebtedness of a Person resulting from the grant by such Person of security
interests with respect to, or from the issuance by such Person of Guarantees
(and security interests with respect thereof) of, or from the assumption of
obligations with respect to letters of credit supporting, Indebtedness Incurred
by such Person pursuant to the Indenture (or Indebtedness which such Person is
otherwise permitted to Incur under the Indenture) shall not be deemed to be a
separate Incurrence of Indebtedness by such Person.
(f) For purposes of determining compliance with any U.S. dollar
restriction on the Incurrence of Indebtedness where the Indebtedness Incurred is
denominated in a different currency, the amount of such Indebtedness will be the
U.S. Dollar Equivalent, determined on the date of the Incurrence of such
Indebtedness, provided, however, that if any such Indebtedness denominated in a
different currency is subject to a Currency Agreement with respect to U.S.
dollars, covering all principal, premium, if any, and interest payable on such
Indebtedness, the amount of such Indebtedness expressed in U.S. dollars will be
as provided in such Currency Agreement. The principal amount of any Refinancing
Indebtedness Incurred in the same currency as the Indebtedness being Refinanced
will be the U.S. Dollar Equivalent of the Indebtedness Refinanced, except to the
extent that (i) such U.S. Dollar Equivalent was determined based on a Currency
Agreement, in which case the Refinancing Indebtedness will be determined in
accordance with the preceding sentence, and (ii) the principal amount of the
Refinancing Indebtedness exceeds the principal amount of the Indebtedness being
Refinanced, in which case the U.S. Dollar Equivalent of such excess will be
determined on the date such Refinancing Indebtedness is Incurred.
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LIMITATION ON RESTRICTED PAYMENTS
(a) UCAR International will not, and will not permit any Restricted
Subsidiary, directly or indirectly, to make a Restricted Payment if at the time
UCAR International or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing
(or would result therefrom);
(2) UCAR International is not entitled to Incur an
additional $1.00 of Indebtedness pursuant to
paragraph (a) of the covenant described under
"-Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and
all other Restricted Payments since the Issue Date
would exceed the sum of (without duplication):
(A) 50% of the Consolidated Net Income accrued
during the period (treated as one accounting
period) from the beginning of the fiscal
quarter immediately following the fiscal
quarter during which the Issue Date occurs
to the end of the most recent fiscal quarter
for which financial statements are publicly
available(or, in case such Consolidated Net
Income shall be a deficit, minus 100% of
such deficit); plus
(B) 100% of the aggregate Net Cash Proceeds
received by UCAR International from the
issuance or sale of its Capital Stock (other
than Disqualified Stock) subsequent to the
Issue Date (other than an issuance or sale
to a Subsidiary of UCAR International and
other than an issuance or sale to an
employee stock ownership plan or to a trust
established by UCAR International or any of
its Subsidiaries for the benefit of its
employees, until such employee stock
ownership plan or such trust sells such
Capital Stock to a Person other than UCAR
International and its Affiliates) and 100%
of any cash capital contribution received by
UCAR International from its stockholders
subsequent to the Issue Date; plus
(C) the amount by which Indebtedness of UCAR
International or any Restricted Subsidiary
is reduced on UCAR International's
consolidated balance sheet upon the
conversion or exchange (other than a
conversion or exchange with a Subsidiary of
UCAR International, or with an employee
stock ownership plan or trust established by
UCAR International or any of its
Subsidiaries for the benefit of its
employees until such employee stock
ownership plan or trust sells such Capital
Stock to a Person other than UCAR
International and its Affiliates (other than
employees)) subsequent to the Issue Date of
any Indebtedness of UCAR International or
any Restricted Subsidiary convertible or
exchangeable for Capital Stock (other than
Disqualified Stock) of UCAR International
(less the amount of any cash, or the fair
value of any other property, paid to such
Person by UCAR International or any
Restricted Subsidiary upon such conversion
or exchange); plus
(D) an amount equal to the sum of (x) the net
reduction in the Investments (other than
Permitted Investments) made by UCAR
International or any Restricted Subsidiary
in any Person resulting from repurchases,
139
repayments or redemptions of such
Investments by such Person, proceeds
realized on the sale of such Investment and
proceeds representing the return of capital
(excluding ordinary dividends and
distributions), in each case received by
UCAR International or any Restricted
Subsidiary, and (y) the portion
(proportionate to UCAR International's
direct or indirect equity interest in such
Person) of the fair market value of the net
assets of any Person that was an
Unrestricted Subsidiary at the time such
Person is designated a Restricted
Subsidiary; provided , however, that the
foregoing sum shall not exceed, in the case
of any such Person, amount of Investments
(excluding Permitted Investments) previously
made (and treated as a Restricted Payment)
by UCAR International or any Restricted
Subsidiary in such Person.
(b) The provisions of the preceding paragraph (a) will not
prohibit:
(1) any Restricted Payment made out of the Net Cash
Proceeds of the substantially concurrent sale of, or
made by exchange for, Capital Stock of UCAR
International (other than Disqualified Stock and
other than Capital Stock issued or sold to a
Subsidiary of UCAR International or an employee stock
ownership plan or to a trust established by UCAR
International or any of its Subsidiaries for the
benefit of their employees until such employee stock
ownership plan or trust sells such Capital Stock to a
Person other than UCAR International and its
Affiliates) or a substantially concurrent cash
capital contribution received by UCAR International
from its stockholders; provided, however, that (A)
such Restricted Payment shall be excluded in the
calculation of the amount of Restricted Payments and
(B) the Net Cash Proceeds from such sale, exchange or
cash capital contribution (to the extent so used for
such Restricted Payment) shall be excluded from the
calculation of amounts under clause (3)(B) of
paragraph (a);
(2) any purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value of
Subordinated Obligations of the Company, any
Guarantor or any Intercompany Loan Obligor made by
exchange for, or out of the proceeds of the
substantially concurrent sale of, Indebtedness which
is permitted to be Incurred pursuant to the covenant
described under "-Limitation on Indebtedness";
provided, however, that such purchase, repurchase,
redemption, defeasance or other acquisition or
retirement for value shall be excluded in the
calculation of the amount of Restricted Payments;
(3) any purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent
permitted under the covenant described under
"Limitation on Sales of Assets and Subsidiary Stock";
provided, however, that such purchase or redemption
shall be excluded from the calculation of the amount
of Restricted Payments;
(4) any dividends paid within 60 days after the date of
declaration thereof if at such date of declaration
such dividend would have complied with this covenant;
provided, however, that at the time of payment of
such dividend, no other Default shall have occurred
and be continuing (or result therefrom); and provided
further, however, that such dividend shall be
included in the calculation of the amount of
Restricted Payments;
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(5) any purchase of any fractional share of Capital Stock
of UCAR International resulting from (A) any dividend
or other distribution on outstanding shares of
Capital Stock of UCAR International or any of its
Subsidiaries that is payable in shares of Capital
Stock of UCAR International (including any stock
split or subdivision of the outstanding Capital Stock
of UCAR International or any of its Subsidiaries),
(B) any combination of the outstanding shares of
Capital Stock of UCAR International or any of its
Subsidiaries, (C) any reorganization or consolidation
of UCAR International or any of its Subsidiaries or
any merger of UCAR International or any of its
Subsidiaries with or into any other Person, or (D)
the conversion or exchange of any securities of UCAR
International or any of its Subsidiaries into shares
of Capital Stock of UCAR International; provided,
however, that such purchase shall be included in the
calculation of the amount of Restricted Payments;
(6) the redemption of any preferred stock purchase rights
issued under the stockholder rights plan of UCAR
International in effect on the Issue Date (or under
any amendment thereto or any customary similar
successor plan, except to the extent that the method
of calculating redemption payments would result in
greater payments than would be the case under the
plan as in effect on the Issue Date) at a redemption
price of $0.01 per right; provided, however, that
such purchase shall be included in the calculation of
the amount of Restricted Payments;
(7) so long as no Default has occurred and is continuing,
the repurchase or other acquisition of shares of
Capital Stock of UCAR International from employees,
former employees, directors or former directors of
UCAR International or any of its Subsidiaries (or
permitted transferees of such employees, former
employees, directors or former directors), pursuant
to the terms of the agreements (including employment
agreements) or plans (or amendments thereto) approved
by the Board of Directors of UCAR International under
which such individuals purchase or sell, or are
granted the option to purchase or sell, shares of
such Capital Stock; provided, however, that the
aggregate amount of such repurchases and other
acquisitions (other than any acquisition of shares of
Capital Stock of UCAR International that are acquired
as payment for the exercise price of outstanding
options) shall not exceed $5.0 million in any
calendar year and $10.0 million in the aggregate; and
provided further, however, that such repurchases and
other acquisitions shall be excluded in the
calculation of the amount of Restricted Payments;
(8) any Investments made to or in the China Joint
Ventures; provided, however, that the aggregate
amount of all such Investments made pursuant to this
clause (8) and outstanding at any one time does not
exceed $10.0 million in the aggregate (exclusive of
contributions of intellectual property rights with a
book value of less than $5.0 million and Capital
Stock of UCAR International (other than Disqualified
Stock)) less any available amount for Investments
under this clause (8) that has theretofore been
utilized pursuant to clause (9); provided further,
however, that such Investments shall be included in
the calculation of the amount of Restricted Payments;
(9) any Investments made to or in joint ventures or
similar Persons in the Related Businesses; provided,
however, that the aggregate amount of all Investments
made pursuant to this clause (9) and outstanding at
any one time does not exceed
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(A) $15.0 million (exclusive of Capital Stock of UCAR
International (other than Disqualified Stock)) plus
(B) any amount available at such time for making
Investments permitted under clause (8); provided
further, however, that such Investments shall be
included in the calculation of the amount of
Restricted Payments; or
(10) other Restricted Payments in an aggregate amount
which, when taken together with all other Restricted
Payments made pursuant to this clause (10) and then
outstanding, does not exceed $25.0 million; provided,
however, that the amount of such Restricted Payments
shall be included in the calculation of the amount of
Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
UCAR International will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of
any Restricted Subsidiary to (a) pay dividends or make any other
distributions on its Capital Stock to UCAR International or a
Restricted Subsidiary or pay any Indebtedness owed to UCAR
International or the Company (including the Intercompany Note
Obligations), (b) make any loans or advances to UCAR International or
the Company or (c) transfer any of its property or assets to UCAR
International or the Company, except:
(1) with respect to clause (a), (b) and (c),
(i) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Issue
Date (including the Credit Agreement as in effect on
the Issue Date);
(ii) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement in
effect or entered into on or prior to the date on
which such Restricted Subsidiary was acquired by UCAR
International or a Restricted Subsidiary or, in the
case of a Restricted Subsidiary formed to acquire a
business, the date on which such business was
acquired by such Restricted Subsidiary (other than an
agreement entered into, in connection with, as
consideration in, or to provide all or any portion of
the funds or credit support utilized to consummate,
the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by UCAR
International or a Restricted Subsidiary or such
business was acquired by such Restricted Subsidiary)
and outstanding on such date;
(iii) any encumbrance or restriction contained in an
agreement effecting a refinancing, substitution,
novation, extension, renewal, refund, repayment,
prepayment, redemption, defeasement or retirement, or
issuance of exchange or replacement Indebtedness,
pursuant to an agreement referred to in clause (i) or
(ii) of this clause (1) or in this clause (iii) or
contained in any amendment to an agreement referred
to in clause (i) or (ii) of this clause (1) or in
this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such agreement
or amendment are no less favorable to the Noteholders
than encumbrances and restrictions with respect to
such Restricted Subsidiary contained in the
predecessor agreement;
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(iv) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered
into for the sale or disposition of all or
substantially all the Capital Stock or assets of such
Restricted Subsidiary, pending the closing of such
sale or disposition; and
(2) with respect to clause (c) only,
(i) any such encumbrance or restriction (A) that
restricts in a customary manner the subletting,
assignment or transfer of any property or asset that
is a lease, license, conveyance, contract or similar
property or asset or (B) that is included in a lease,
license, installment purchase or sale contract or
similar agreement to the extent such encumbrances or
restrictions limit the transfer of the property or
asset subject to such lease, license, contract or
similar agreement; and
(ii) restrictions contained in security agreements or
mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict
the transfer of the property subject to such security
agreements or mortgages.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) UCAR International will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, consummate any Asset Disposition unless:
(1) UCAR International or such Restricted Subsidiary
receives consideration at the time of such Asset
Disposition at least equal to the fair market value
(including as to the value of all non-cash
consideration), as determined in good faith by the
Board of Directors (or, if the fair market value is
less than $25.0 million, the chief financial officer)
of UCAR International, whose good faith determination
shall be conclusive of the shares and assets subject
to such Asset Disposition;
(2) at least 75% of the consideration thereof received by
UCAR International or such Restricted Subsidiary is
in the form of cash or cash equivalents; and
(3) an amount equal to 100% of the Net Available Cash
from such Asset Disposition is applied by UCAR
International (or such Restricted Subsidiary, as the
case may be)
(A) first, to the extent UCAR International
elects (or is required by the terms of any
Indebtedness), to prepay, repay, redeem or
purchase Senior Indebtedness of the Company,
any Guarantor or any Intercompany Note
Obligor or Indebtedness (other than any
Disqualified Stock) of any other Subsidiary
that is a Wholly Owned Subsidiary (in each
case other than Indebtedness owed to UCAR
International or an Affiliate of UCAR
International) within one year from the
later of the date of such Asset Disposition
or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of such
Net Available Cash after application in
accordance with clause (A), to the extent
UCAR International elects, to acquire or
commit to acquire Additional Assets within
one year from the later of the date of such
Asset Disposition or the receipt of such Net
Available Cash provided, however, that if
UCAR International elects to commit to
acquire Additional Assets, such
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acquisition shall be consummated no later
than six months after the end of such one
year period; and
(C) third, to the extent of the balance of such
Net Available Cash after application in
accordance with clauses (A) and (B), to make
an offer to the Holders of the Notes (and to
holders of other Senior Indebtedness of the
Company, any Guarantor or any Intercompany
Note Obligor designated by UCAR
International) to purchase Notes (and such
other Senior Indebtedness) pursuant to and
subject to the conditions contained in the
Indenture;
provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A) or (C), UCAR International or such
Restricted Subsidiary shall permanently retire such Indebtedness and shall cause
the related loan commitment (if any) to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid, redeemed or purchased.
Notwithstanding the foregoing, UCAR International and the Restricted
Subsidiaries will not be required to apply any Net Available Cash in accordance
with this covenant except to the extent that the aggregate Net Available Cash
from all Asset Dispositions which are not applied in accordance with this
covenant exceeds $10.0 million. Pending application of Net Available Cash
pursuant to this covenant, such Net Available Cash shall be invested in
Temporary Cash Investments or applied to temporarily reduce revolving credit
indebtedness.
For the purposes of this covenant, the following are deemed to be cash
or cash equivalents:
(1) the assumption of Indebtedness of UCAR International or any
Restricted Subsidiary and the release of UCAR International or
such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition; and
(2) any securities received by UCAR International or any
Restricted Subsidiary from the transferee that are promptly
converted by UCAR International or such Restricted Subsidiary
into cash.
(b) In the event of an Asset Disposition that requires the purchase of
Notes (and other Senior Indebtedness) pursuant to clause (a)(3)(C), UCAR
International will cause the Company to purchase Notes tendered pursuant to an
offer by the Company for the Notes (and such other Senior Indebtedness) at a
purchase price of 100% of their principal amount (or, in the event such other
Senior Indebtedness was issued with significant original issue discount, 100% of
the accreted value thereof) without premium, plus accrued but unpaid interest
(or, in respect of such other Senior Indebtedness, such lesser price, if any, as
may be provided for by the terms of such other Senior Indebtedness) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
the securities tendered exceeds the Net Available Cash allotted to their
purchase, UCAR International will cause the Company to select the securities to
be purchased on a pro rata basis but in round denominations, which in the case
of the Notes will be denominations of $1,000 principal amount or integral
multiples thereof. UCAR International will not be required to cause the Company
to make such an offer to purchase Notes (and other Senior Indebtedness) pursuant
to this covenant if the Net Available Cash available therefor is less than $10.0
million (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to the Net Available
Cash from any subsequent Asset Disposition).
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(c) UCAR International will cause the Company to comply, to the extent
applicable, with the requirements of Section 14(e) of the Exchange Act and any
other securities laws or regulations in connection with the repurchase of Notes
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, UCAR
International and the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached their obligations under
this clause by virtue of their compliance with such securities laws or
regulations.
(d) Notwithstanding the foregoing, to the extent that any or all of the
Net Available Cash of any Asset Disposition of assets or shares based outside
the United States is prohibited or delayed by applicable local law from being
repatriated to the United States and such Net Available Cash is not actually
applied in accordance with clauses (a) and (b), UCAR International shall not be
required to apply the portion of such Net Available Cash so affected but may
permit the applicable Restricted Subsidiaries to retain such portion of the Net
Available Cash so long, but only so long, as the applicable local law will not
permit repatriation to the United States. Once such repatriation of any such
affected Net Available Cash is permitted under the applicable local law, such
repatriation will be immediately effected and such repatriated Net Available
Cash will be applied in the manner set forth in this covenant as if the Asset
Disposition had occurred on such date; provided that to the extent that UCAR
International has determined in good faith that repatriation of any or all of
the Net Available Cash of such Asset Disposition would have a material adverse
tax cost consequence, the Net Available Cash so affected may be retained by the
applicable Restricted Subsidiary for so long as such material adverse tax cost
event would continue.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) UCAR International will not, and will not permit any Restricted
Subsidiary to, enter into or permit to exist any transaction (including the
purchase, sale, lease or exchange of any property, employee compensation
arrangements or the rendering of any service) with, or for the benefit of, any
Affiliate of UCAR International (an "AFFILIATE TRANSACTION") unless:
(1) the terms of the Affiliate Transaction are no less
favorable to UCAR International or such Restricted
Subsidiary than those that could be obtained at the
time of the Affiliate Transaction in arm's-length
dealings with a Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in
excess of $10.0 million, the terms of the Affiliate
Transaction are set forth in writing and a majority
of the non-employee directors of UCAR International
disinterested with respect to such Affiliate
Transactions have determined in good faith that the
criteria set forth in clause (1) are satisfied and
have approved the relevant Affiliate Transaction as
evidenced by a Board resolution; and
(3) if such Affiliate Transaction involves an amount in
excess of $25.0 million, the Board of Directors of
UCAR International shall also have received a written
opinion from an Independent Qualified Party to the
effect that such Affiliate Transaction is fair, from
a financial standpoint, to UCAR International and the
Restricted Subsidiaries or not less favorable to UCAR
International and the Restricted Subsidiaries than
could reasonably be expected to be obtained at the
time in an arm's-length transaction with a Person who
was not an Affiliate.
(b) The provisions of the preceding paragraph (a) will not
prohibit:
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(1) any Investment (other than a Permitted Investment) or
other Restricted Payment, in each case permitted to
be made pursuant to the covenant described under
"-Limitation on Restricted Payments";
(2) any issuance of securities, payments, awards or
grants in cash or securities, or other perquisites,
or any funding of, employee benefit trusts and
similar arrangements, in each case, to (i) executive
officers of UCAR International as approved by the
Board of Directors of UCAR International, (ii) all
other employees of UCAR International and employees
and directors of any of the Restricted Subsidiaries
as approved by an executive officer of UCAR
International and (iii) directors of UCAR
International who are not employees of UCAR
International;
(3) (i) loans and advances, including loans and advances
outstanding on the Issue Date, to employees of UCAR
International and the Restricted Subsidiaries not to
exceed $6.0 million in the aggregate at any time
outstanding and (ii) advances of payroll payments and
expenses to employees in the ordinary course of
business;
(4) the payment of reasonable fees to and indemnities of
directors, officers and employees of UCAR
International and the Restricted Subsidiaries in the
ordinary course of business or as required by
governing corporate organizational documents,
customary indemnification contracts or law;
(5) any transaction with a Restricted Subsidiary or joint
venture or similar entity which would constitute an
Affiliate Transaction solely because UCAR
International or a Restricted Subsidiary owns an
equity interest in or otherwise controls such
Restricted Subsidiary, joint venture or similar
entity;
(6) the issuance or sale of Capital Stock (other than
Disqualified Stock) of UCAR International or a
capital contribution to UCAR International; or
(7) any agreement in effect on the Issue Date and
described in or incorporated by reference into the
Offering Circular with respect to the Initial Notes
(including any lease, operating agreement, license,
supply agreement or service agreement) or any
amendment, renewal or extension of any such agreement
(so long as such amendment, renewal or extension is
not less favorable to UCAR International or the
Restricted Subsidiaries) and the transactions
evidenced thereby.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
UCAR International:
(1) will not, and will not permit any Restricted Subsidiary to,
sell, lease, transfer or otherwise dispose of any Capital
Stock of any Restricted Subsidiary to any Person (other than
to UCAR International or a Wholly Owned Subsidiary or in
connection with a Graftech Equity Offering or in connection
with a Carbone Savoie Equity Sale); and
(2) will not permit any Restricted Subsidiary to issue any of its
Capital Stock (other than, if necessary, shares of its Capital
Stock constituting directors' or other legally required
qualifying shares) to any Person (other than to UCAR
International or a Wholly Owned Subsidiary or in connection
with a Graftech Equity Offering or in connection with a
Carbone Savoie Equity Sale);
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unless:
(A) immediately after giving effect to such issuance,
sale or other disposition, neither UCAR International
nor any of its Subsidiaries owns any Capital Stock of
such Restricted Subsidiary; or
(B) immediately after giving effect to such issuance,
sale or other disposition, such Restricted Subsidiary
would no longer constitute a Restricted Subsidiary
and any Investment in such Person remaining after
giving effect thereto is treated as a new Investment
by UCAR International and such Investment would be
permitted to be made under the covenant described
under "-Limitation on Restricted Payments" if made on
the date of such issuance, sale or other disposition.
Notwithstanding the foregoing, the foregoing limitation will not be
deemed to prohibit the making by UCAR International or its Subsidiaries of
pledges under the Credit Agreement or the Indenture.
LIMITATION ON LIENS
UCAR International will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, Incur or permit to exist any Lien (the
"Initial Lien") of any nature whatsoever on (1) any Intercompany Note or
Intercompany Note Guaranty or (2) any of its other properties (including Capital
Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than, in the case of this clause (2), Permitted Liens, without
effectively providing that the Notes shall be secured equally and ratably with
(or prior to) the obligations so secured for so long as such obligations are so
secured.
Any Lien created for the benefit of the Holders of the Notes pursuant
to the preceding sentence shall provide by its terms that such Lien shall be
automatically and unconditionally released and discharged upon the release and
discharge of the Initial Lien.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS
UCAR International will not, and will not permit any Restricted
Subsidiary to, enter into any Sale/Leaseback Transaction with respect to any
property unless:
(1) UCAR International or such Restricted Subsidiary would be
entitled to (A) Incur Indebtedness in an amount equal to the
Attributable Debt with respect to such Sale/Leaseback
Transaction pursuant to the covenant described under
"-Limitation on Indebtedness" and (B) create a Lien on such
property securing such Attributable Debt without equally and
ratably securing the Notes pursuant to the covenant described
under "-Limitation on Liens";
(2) the gross proceeds received by UCAR International or any
Restricted Subsidiary in connection with such Sale/Leaseback
Transaction are at least equal to the fair value (as
determined by the Board of Directors of UCAR International or
its chief financial officer if the Sale/Leaseback Transaction
is less than $25.0 million in value, and whose determination
shall be conclusive) of such property; and
(3) UCAR International applies the proceeds of such transaction in
compliance with the covenant described under "-Limitation on
Sales of Assets and Subsidiary Stock."
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This limitation on Sale/Leaseback Transactions shall not limit or
prohibit transactions between or among Restricted Subsidiaries that fall within
the definition of "Sale/Leaseback Transactions."
LIMITATION ON CONDUCT OF BUSINESS OF THE COMPANY
The Company will not own any material assets or other property (other
than the Intercompany Notes, other notes payable to it and Temporary Cash
Investments) or engage in any trade or conduct any business activities other
than treasury, cash management, hedging and cash pooling activities and those
incidental thereto. The Company will not Incur any material liabilities or
obligations other than its obligations pursuant to the Notes, the Credit
Agreement, the Cash Flow Notes and other Indebtedness as permitted under the
Indenture and pursuant to business activities permitted by this covenant and
entered into in the ordinary course.
LIMITATION ON SALE OF THE CAPITAL STOCK OF THE COMPANY
For so long as any of the Notes are outstanding, including any
Additional Notes, the Company will continue to be, directly or indirectly, a
Wholly Owned Subsidiary of UCAR International.
FUTURE GUARANTORS AND INTERCOMPANY NOTE OBLIGORS
(a) UCAR International will cause each domestic Restricted Subsidiary
(other than (i) Graftech, for so long as Graftech is a Restricted Subsidiary and
the Capital Stock of Graftech is not 100% owned, either directly or indirectly,
by UCAR International, (ii) Union Carbide Grafito, Inc. and (iii) GENCO) that
Incurs any Indebtedness after the Issue Date to, at the same time, execute and
deliver to the Trustee a Guaranty Agreement pursuant to which such Restricted
Subsidiary will Guarantee payment of the Notes on the same terms and conditions
as those set forth in the Indenture.
(b) UCAR International will cause UCAR Electrodos, after the completion
of the Realignment insofar as the Realignment relates to it, and UCAR S.p.A.,
after the repayment of the third party secured term note issued by it, and each
Foreign Restricted Subsidiary that receives a portion of the gross proceeds from
the sale of Additional Notes from the Company to, at the time of such
completion, repayment or receipt, respectively, execute and deliver to the
Company an Intercompany Note in the principal amount equal to the principal
amount of its Secured Intercompany Note at such time or the portion of the gross
proceeds received by such Foreign Restricted Subsidiary, respectively. The
Company will, at the same time that such an Intercompany Note is issued to it,
pledge and deliver to the Trustee such Intercompany Note, subject to the
limitation that at no time will the combined value of the pledged portion of any
Foreign Restricted Subsidiary's Intercompany Note and Intercompany Note
Guarantee exceed 19.99% of the principal amount of the then outstanding Notes.
Such obligation in respect of UCAR Electrodos and UCAR S.p.A. has been
performed.
(c) UCAR International will, to the extent permitted by applicable law,
cause each Foreign Restricted Subsidiary that Guarantees a Secured Intercompany
Note of another Foreign Restricted Subsidiary after the Issue Date, to, at the
same time, execute and deliver to the Company a written instrument,
substantially in the form attached as an exhibit to the Indenture, pursuant to
which such Foreign Restricted Subsidiary will Guarantee payment of the
Intercompany Note of such other Foreign Restricted Subsidiary. The Company will,
at the same time, grant to the Trustee, in a form reasonably satisfactory to the
Trustee, a perfected security interest in such Intercompany Note Guaranty
pursuant to the Indenture, subject to the limitation that at no time will the
combined value of the pledged portion of any Foreign Restricted Subsidiary's
Intercompany Note and Intercompany Note Guarantee exceed 19.99% of the principal
amount of the then outstanding Notes.
148
(d) If at any time an Intercompany Note Maker executes and delivers to
the Company a new Intercompany Note or increases the principal amount of an
existing Intercompany Note, to the extent that an existing Intercompany Note
Guaranty does not extend to such new or increased Intercompany Note, then UCAR
International will cause each Intercompany Note Guarantor that has issued,
immediately prior to such execution and delivery, an Intercompany Note Guaranty
in respect of the obligation of such Intercompany Note Maker under an
Intercompany Note, to, at the same time, execute and deliver to the Company a
written instrument, substantially in the form attached as an exhibit to the
Indenture, pursuant to which such Intercompany Note Guarantor will Guarantee the
new Intercompany Note or the new obligations under the existing Intercompany
Note. The Company will, at the same time, grant to the Trustee, in a form
reasonably satisfactory to the Trustee, a perfected security interest in such
Intercompany Note Guaranty, subject to the limitation that at no time will the
combined value of the pledged portion of the Intercompany Note and Intercompany
Note Guarantee exceed 19.99% of the principal amount of the then outstanding
Notes.
MERGER AND CONSOLIDATION
UCAR International will not consolidate with or merge with or into, or
convey, transfer or lease, in one transaction or a series of related
transactions, directly or indirectly, all or substantially all its assets to,
any Person, unless:
(1) the resulting, surviving or transferee Person (the "SUCCESSOR
COMPANY") shall be a Person organized and existing under the
laws of the United States of America, any State thereof or the
District of Columbia and the Successor Company (if not UCAR
International) expressly assumes, by an indenture supplemental
thereto, executed and delivered to the Trustee, in form
reasonably satisfactory to the Trustee, all the obligations of
UCAR International under the Notes and the Indenture;
(2) immediately after giving pro forma effect to such transaction
(and treating any Indebtedness which becomes an obligation of
the Successor Company or any Subsidiary as a result of such
transaction as having been Incurred by such Successor Company
or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing;
(3) immediately after giving pro forma effect to such transaction,
the Successor Company would be able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the
covenant described under "-Limitation on Indebtedness";
(4) immediately after giving pro forma effect to such transaction,
the Successor Company shall have Consolidated Net Worth in an
amount that is not less than the Consolidated Net Worth of
UCAR International immediately prior to such transaction;
(5) UCAR International shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture; and
(6) UCAR International shall have delivered to the Trustee an
Opinion of Counsel to the effect that the Holders will not
recognize income, gain or loss for Federal income tax purposes
as a result of such transaction and will be subject to Federal
income tax on the same amounts, in the same manner and at the
same times as would have been the case if such transaction had
not occurred,
149
provided, however, that clauses (3) and (4) will not be applicable to (A) a
Restricted Subsidiary consolidating with, merging into or transferring all or
part of its properties and assets to UCAR International or (B) UCAR
International merging with an Affiliate of UCAR International solely for the
purpose and with the sole effect of reincorporating UCAR International in
another jurisdiction.
The foregoing limitation shall not prohibit any pledge of assets of
UCAR International under the Credit Agreement.
The Successor Company will be the successor to UCAR International and
shall succeed to, and be substituted for, and may exercise every right and power
of, UCAR International under the Indenture, and UCAR International, except in
the case of a lease, shall be released from its guaranty of the Company's
obligations under the Notes and the Indenture.
UCAR International will not permit UCAR Global, UCAR Carbon or the
Company to consolidate with or merge with or into, or convey, transfer or lease,
in one transaction or a series of transactions, all or substantially all of its
respective assets to any Person unless:
(1) the Successor Company (if not UCAR Global, UCAR Carbon or the
Company, as the case may be) shall be a Person organized and
existing under the laws of the United States of America, or
any State thereof or the District of Columbia, and such Person
expressly assumes, by an indenture supplemental thereto,
executed and delivered to the Trustee, in a form reasonably
satisfactory to the Trustee, all the obligations of UCAR
Global, UCAR Carbon or the Company, as the case may be, if
any, under the Notes and the Indenture;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any
Indebtedness which becomes an obligation of the resulting,
surviving or transferee Person as a result of such transaction
as having been issued by such Person at the time of such
transaction), no Default shall have occurred and be
continuing;
(3) UCAR Global, UCAR Carbon or the Company, as the case may be,
deliver to the Trustee an Officers' Certificate and an Opinion
of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture, if any, comply with
the Indenture; and
(4) UCAR Global, UCAR Carbon or the Company, as the case may be,
shall have delivered to the Trustee an Opinion of Counsel to
the effect that the Holders will not recognize income, gain or
loss for Federal income tax purposes as a result of such
transaction and will be subject to Federal income tax on the
same amounts, in the same manner and at the same times as
would have been the case if such transaction had not occurred.
The foregoing limitation shall not prohibit any pledge of assets of
UCAR Global, UCAR Carbon or the Company, as the case may be, under the Credit
Agreement or the Indenture.
The resulting, surviving or transferee Person will be the successor to
UCAR Global, UCAR Carbon or the Company, as the case may be, and shall succeed
to, and be substituted for, and may exercise every right and power of, UCAR
Global, UCAR Carbon or the Company, as the case may be, under the Notes and the
Indenture, and UCAR Global, UCAR Carbon or the Company, as the case may be,
except in the case of a lease, shall be released from, in the case of the
Company, the obligation to pay the principal of and interest on the Notes and,
in the case of UCAR Global and UCAR Carbon, their respective Guaranty of the
Company's obligations under the Notes and the Indenture.
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UCAR International will not permit any Subsidiary Guarantor or
Intercompany Note Obligor to consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, all or
substantially all of its assets to any Person unless:
(1) except in the case of a Subsidiary Guarantor or Intercompany
Note Obligor that has been disposed of its entirety to another
Person (other than to UCAR International or an Affiliate of
UCAR International), whether through a merger, consolidation
or sale of Capital Stock or assets, if in connection therewith
UCAR International provides an Officers' Certificate to the
Trustee to the effect that UCAR International will comply with
its obligations under the covenant described under
"-Limitation on Sales of Assets and Subsidiary Stock" in
respect of such disposition, the resulting, surviving or
transferee Person (if not such Subsidiary Guarantor or
Intercompany Note Obligor) expressly assumes, by a written
instrument, in a form reasonably satisfactory to the Trustee,
all the obligations of such Subsidiary Guarantor or
Intercompany Note Obligor, if any, under its Subsidiary
Guaranty, Intercompany Note Guaranty or Intercompany Note, as
the case may be;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any
Indebtedness which becomes an obligation of the resulting,
surviving or transferee Person as a result of such transaction
as having been issued by such Person at the time of such
transaction), no Default shall have occurred and be
continuing; and
(3) UCAR International delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such written instrument,
if any, complies with the Indenture.
The foregoing limitation shall not prohibit any pledge of assets of any
Subsidiary Guarantor or Intercompany Note Obligor, as the case may be, under the
Credit Agreement or the Indenture.
SEC REPORTS
Notwithstanding that UCAR International may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, UCAR
International will file with the SEC and provide the Trustee and Noteholders
with such annual reports and such information, documents and other reports as
are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
U.S. corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections. However, UCAR
International will not be required to file any reports, documents or other
information if the SEC will not accept such filing.
In addition, the Company shall furnish to the Holders of the Notes and
to prospective investors, upon the requests of such Holders, any information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act so
long as the Notes are not freely transferable under the Securities Act.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest on the Notes when due
that continues for 30 days;
(2) a default in the payment of principal of any Note when due at
its Stated Maturity, upon optional redemption, upon required
purchase, upon declaration of acceleration or otherwise;
151
(3) the failure by the Company, any Guarantor or any Intercompany
Note Obligor to comply with its obligations under "-Certain
Covenants-Merger and Consolidation" above;
(4) the failure by UCAR International or the Company to comply for
30 days after notice with any of its obligations in the
covenants described above under "-Change of Control" (other
than a failure to purchase Notes) "-Intercompany Notes and
Intercompany Note Guaranties" (other than a failure to
purchase Notes) or under "-Certain Covenants" under
"-Limitation on Indebtedness," "-Limitation on Restricted
Payments," "-Limitation on Restrictions on Distributions from
Restricted Subsidiaries," "-Limitation on Sales of Assets and
Subsidiary Stock" (other than a failure to purchase Notes),
"-Limitation on Affiliate Transactions," " -Limitation on the
Sale or Issuance of Capital Stock of Restricted Subsidiaries,"
"-Limitation on Liens," "-Limitation on Sale/Leaseback
Transactions," "-Limitation on Conduct of Business of the
Company," "Limitation on Sale of the Capital Stock of the
Company," "-Future Guarantors and Intercompany Note Obligors"
or "-SEC Reports";
(5) the failure by the Company or any Guarantor to comply for 60
days after notice with its other agreements contained in the
Indenture;
(6) Indebtedness of the Company, any Guarantor or any Significant
Subsidiary is not paid within any applicable grace period
after final maturity or is accelerated by the holders thereof
because of a default and the total amount of such Indebtedness
unpaid or accelerated exceeds $10.0 million, or its foreign
currency equivalent at the time (the "CROSS-ACCELERATION
PROVISION");
(7) certain events of bankruptcy, insolvency or reorganization of
the Company, any Guarantor or any Significant Subsidiary
(the "BANKRUPTCY PROVISIONS");
(8) any judgment or decree for the payment of money in excess of
$10.0 million, or its foreign currency equivalent at the time,
above the coverage under applicable insurance policies and
indemnities as to which the relevant insurer or indemnities
has not disclaimed responsibility is entered against the
Company, any Guarantor or any Significant Subsidiary, that
remains outstanding for a period of 60 days following the
entry of such judgment and is not discharged or waived or does
not have the execution thereof effectively stayed (including
by agreement) within 10 days after notice (the "JUDGMENT
DEFAULT PROVISION");
(9) any Guaranty, Intercompany Note Guaranty or Intercompany Note
ceases to be in full force and effect (other than in
accordance with the terms of such Guaranty, such Intercompany
Note Guaranty or such Intercompany Note) or any Guarantor or
Intercompany Note Obligor denies or disaffirms its obligations
under its Guaranty, its Intercompany Note Guaranty or its
Intercompany Note, as the case may be (the "GUARANTY
PROVISION"); or
(10) the Trustee, at any time, ceases to have a perfected security
interest in the Intercompany Notes, the Intercompany Note
Guaranties or the Pledged Graftech Stock; or any Intercompany
Note has been prepaid, except in accordance with such
Intercompany Note or the Indenture (the "PERFECTION
PROVISION").
However, a default under clauses (4), (5) and (8) will not constitute an Event
of Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Notes notify the Company and UCAR International of the default and
the Company or UCAR International does not cure such default within the time
specified after receipt of such notice.
152
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the outstanding Notes may declare
the principal of and accrued but unpaid interest on all of the Notes to be due
and payable. Upon such a declaration, such principal and interest shall be due
and payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of UCAR International or the Company
occurs and is continuing, the principal of and interest on all of the Notes will
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holders of the Notes. Under certain
circumstances, the Holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders of the Notes unless
such Holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no Holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless:
(1) such Holder has previously given the Trustee written notice
stating that an Event of Default is continuing;
(2) Holders of at least 25% in principal amount of the outstanding
Notes have made a written request to the Trustee to pursue the
remedy;
(3) such Holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or
indemnity; and
(5) Holders of a majority in principal amount of the outstanding
Notes have not given the Trustee a direction inconsistent with
such request within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
Holder of a Note or that would involve the Trustee in personal liability.
If a Default occurs, is continuing and is known to the Trustee, the
Trustee must mail to each Holder of the Notes notice of the Default within 90
days after it occurs. Except in the case of a Default in the payment of
principal of or interest on any Note, the Trustee may withhold notice if and so
long as a committee of its trust officers determines that withholding notice is
not opposed to the interest of the Holders of the Notes. In addition, the
Company is required to deliver to the Trustee, within 120 days after the end of
each fiscal year, a certificate indicating whether the signers thereof know of
any Default that occurred during the previous year. The Company is required to
deliver to the Trustee, within 30 days after the occurrence thereof, written
notice of any event which would constitute certain Defaults, their status and
what action it is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
153
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or non-compliance with any
provisions may also be waived with the consent of the Holders of a majority in
principal amount of the Notes then outstanding. However, without the consent of
each Holder of an outstanding Note affected thereby, an amendment or waiver may
not, among other things:
(1) reduce the amount of Notes whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest
on any Note;
(3) reduce the principal of or extend the Stated Maturity of any
Note;
(4) reduce the amount payable upon the redemption of any Note or
change the time at which any Note may be redeemed as described
under "-Optional Redemption";
(5) make any Note payable in money other than that stated in the
Note;
(6) impair the right of any Holder of the Notes to receive payment
of principal of and interest on such Holder's Notes on or
after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such Holder's
Notes;
(7) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions;
(8) make any change in the ranking or priority of any Note that
would adversely affect the Noteholders; or
(9) make any change that would adversely affect the Noteholders to
the Graftech Pledge Agreement, the Lien Subordination
Agreement, any Guaranty, any Intercompany Note Guaranty or any
Intercompany Note, in each case except as expressly permitted
by its terms.
Notwithstanding the preceding, without the consent of any Holder of the
Notes, the Company, the Guarantors and Trustee may amend the Indenture, the
Graftech Pledge Agreement, the Lien Subordination Agreement, any Intercompany
Note or any Intercompany Note Guaranty:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of
the obligations of any Guarantor or the Company under the
Indenture;
(3) to provide for uncertificated Notes in addition to or in place
of Certificated Notes (provided that the uncertificated Notes
are issued in registered form for purposes of Section 163(f)
of the Code, or in a manner such that the uncertificated Notes
are described in Section 163(f)(2)(B) of the Code);
(4) to add Guarantees or Intercompany Notes with respect to the
Notes, including any Subsidiary Guaranties and Intercompany
Note Guaranties or to secure the Notes;
154
(5) to add to the covenants of the Company, any Guarantor or any
Intercompany Note Obligor for the benefit of the Holders of
the Notes or to surrender any right or power conferred upon
the Company, any Guarantor or any Intercompany Note Obligor;
(6) to make any change that does not adversely affect the rights
of any Holder of the Notes;
(7) to comply with any requirements of the SEC in connection with
the qualification or maintenance of the Indenture under the
Trust Indenture Act; or
(8) as permitted under "-Intercompany Notes and Intercompany Note
Guaranties".
The consent of the Holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, we are
required to mail to Holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all Holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable
only upon the surrender of the Notes being transferred for registration of
transfer. We may require payment of a sum sufficient to cover any transfer tax,
assessment or similar governmental charge payable in connection with certain
transfers and exchanges.
DEFEASANCE
At any time, we may terminate all of the obligations of the Company,
the Guarantors and the Intercompany Note Obligors under the Notes, the
Indenture, the Graftech Pledge Agreement, the Lien Subordination Agreement and
the Intercompany Note Obligations ("LEGAL DEFEASANCE"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes.
In addition, at any time, we may terminate the obligations of the
Company, the Guarantors and the Intercompany Note Obligors described under
"-Change of Control," "-Intercompany Notes and Intercompany Note Guaranties" and
under the covenants described under "-Certain Covenants" (other than the
covenant described under "-Merger and Consolidation"), the operation of the
cross-acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries, the judgment default provision, the guaranty provision
and the perfection provision described under "-Defaults" and the limitations
described in clauses (3) and (4) of the first paragraph under "-Certain
Covenants-Merger and Consolidation" ("COVENANT DEFEASANCE").
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the Notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the Notes may not be accelerated because of an Event of Default
specified in clause (4), (6), (7) (with respect only to Significant
Subsidiaries), (8), (9) or (10) described under "-Defaults" or because of the
failure of UCAR International to comply with the covenants described in clause
(3) or (4) of the first paragraph under "-Certain Covenants-Merger and
Consolidation." If we exercise our legal defeasance
155
option or our covenant defeasance option, the Guarantors will be released from
all of their obligations with respect to their Guaranties and the pledge of the
Intercompany Note Guaranties, the Intercompany Notes and the Pledged Graftech
Stock will be released.
In order to exercise either of our defeasance options, we must
irrevocably deposit in trust (the "DEFEASANCE TRUST") with the Trustee money or
U.S. Government Obligations for the payment of principal and interest on the
Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that Holders of the Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amounts and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
State Street Bank and Trust Company is the Trustee under the Indenture.
We have also appointed State Street Bank and Trust Company as Registrar and
Paying Agent with regard to the Notes.
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; provided, however, that if it acquires any conflicting
interest it must either eliminate such conflict within 90 days, apply to the SEC
for permission to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee , subject to
certain exceptions. If an Event of Default occurs (and is not cured), the
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent person in the conduct of his or her own affairs. Subject to
such provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
reasonably satisfactory to it against any loss, liability or expense and then
only to the extent required by the terms of the Indenture.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, any Guarantor or any Intercompany Note Obligor, by virtue of such
office, status or capacity, will have any liability for any obligations of the
Company or any Guarantor under the Notes, the Guaranties or the Indenture or for
any claim based on, in respect of, or by reason of such obligations or their
creation. Each Holder of the Notes by accepting a Note waives and releases all
such liability. The waiver and release are part of the consideration for
issuance of the Notes. Such waiver and release may not be effective to waive
liabilities under the U.S. federal securities laws, and it is the view of the
SEC that such a waiver is against public policy.
GOVERNING LAW
The Indenture, the Notes, the Graftech Pledge Agreement, the Lien
Subordination Agreement, the Guaranties and the Intercompany Note Obligations
provide that they will be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to applicable principles of
conflicts of law to the extent that the application of the law of another
jurisdiction would be required thereby.
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CERTAIN DEFINITIONS
"ADDITIONAL ASSETS" means:
(1) any property, plant or equipment used in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital
Stock by UCAR International or another Restricted Subsidiary;
or
(3) Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (2)
or (3) is primarily engaged in a Related Business.
"AFFILIATE" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have correlative meanings. For purposes of the
covenants described under "- Certain Covenants - Limitation on Restricted
Payments," "- Certain Covenants - Limitation on Affiliate Transactions" and "-
Certain Covenants - Limitation on Sales of Assets and Subsidiary Stock" only,
"Affiliate" shall also mean any beneficial owner of Capital Stock representing
10% or more of the total voting power of the Voting Stock (on a fully diluted
basis) of UCAR International or the Company or of rights or warrants to purchase
such Capital Stock (whether or not currently exercisable) and any Person known
to the chief executive officer or chief financial officer of UCAR International
who would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof.
"ANTITRUST FINES" means monies payable by UCAR International in respect
of antitrust matters to (i) the U.S. Department of Justice, relating to fines
assessed in 1998, and (ii) the antitrust authority of the European Union,
relating to fines assessed in July 2001.
"ASSET DISPOSITION" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
UCAR International or any Restricted Subsidiary, including any disposition by
means of a merger, consolidation or similar transaction (each referred to for
the purposes of this definition as a "disposition"), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other
than directors' qualifying shares or shares required by
applicable law to be held by a Person other than UCAR
International or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or line of
business of UCAR International or any Restricted Subsidiary;
or
(3) any other assets of UCAR International or any Restricted
Subsidiary outside of the ordinary course of business of UCAR
International or such Restricted Subsidiary,
other than, in the case of clauses (1), (2) and (3),
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(A) a disposition by a Restricted Subsidiary to UCAR
International or by UCAR International or a
Restricted Subsidiary to a Wholly Owned Subsidiary;
(B) for purposes of the covenant described under "-
Certain Covenants - Limitation on Sales of Assets and
Subsidiary Stock" only, (x) a disposition that
constitutes a Restricted Payment permitted by the
covenant described under "- Certain Covenants -
Limitation on Restricted Payments" or a Permitted
Investment and (y) a disposition of all or
substantially all the assets of UCAR International in
accordance with the covenant described under "-
Certain Covenants - Merger and Consolidation";
(C) a disposition of assets with a fair market value of
less than $100,000;
(D) a disposition of obsolete inventory;
(E) a disposition of accounts receivable and related
assets in connection with a Qualified Receivables
Transaction;
(F) dispositions of property, plant or equipment for
gross proceeds less than $1.0 million in the
aggregate in any calendar year;
(G) transactions permitted under "-Certain
Covenants-Merger and Consolidation" above; and
(H) an exchange of assets by UCAR International or any
Restricted Subsidiary for property, plant or
equipment held by any Person, provided that any
property, plant or equipment received by UCAR
International or such Restricted Subsidiary, as the
case may be, in any such exchange, in the good faith
reasonable judgment of the Board of Directors (or the
chief financial officer if the value of the assets
exchanged is less than $25.0 million) (i) will
immediately constitute, be part of, or be used in, a
Related Business and (ii) will have a fair market
value substantially equal to or greater than the
assets exchanged therefor.
"ATTRIBUTABLE DEBT" in respect of a Sale/Leaseback Transaction means,
subject to the last sentence under "-Limitation on Sale/Leaseback Transactions,"
and as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the -lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended); provided, however, that if such Sale/Leaseback
Transaction results in a Capital Lease Obligation, the amount of Indebtedness
represented thereby will be determined in accordance with the definition of
"Capital Lease Obligation."
"AVERAGE LIFE" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date
of determination to the dates of each successive scheduled
principal payment of or redemption or similar payment with
respect to such Indebtedness multiplied by the amount of such
payment by
(2) the sum of all such payments.
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"BOARD OF DIRECTORS" with respect to a Person means the Board of
Directors of such Person or any committee thereof duly authorized to act on
behalf of such Board.
"BUSINESS DAY" means each day which is not a Legal Holiday.
"CAPITAL LEASE OBLIGATION" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP; the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty. For purposes of the covenant described under "-Certain
Covenants-Limitations on Liens," a Capital Lease Obligation will be deemed to be
secured by a Lien on the property being leased.
"CAPITAL STOCK" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into or exchangeable or
exercisable for such equity.
"CARBONE SAVOIE" means Carbone Savoie S.A.S., a company organized under
the laws of France, and its successors.
"CARBONE SAVOIE EQUITY SALE" means a private sale or issuance of the
Capital Stock of Carbone Savoie, provided, however, that after any such sale or
issuance, UCAR International directly or indirectly holds at least 51% of the
Voting Stock of Carbone Savoie.
"CASH FLOW NOTES" means the intercompany notes made by or in favor of
various subsidiaries of UCAR International payable to or by the Company, which
facilitate the transfer of cash from or to such subsidiaries.
"CHINA JOINT VENTURES" means (i) the manufacturing and marketing joint
venture (which may be in the form of a limited liability company, partnership,
corporation or other entity) contemplated by the Joint Venture Agreement dated
April 4, 2001 between UCAR Carbon and Jilin Carbon Joint Stock Company, Ltd., as
the same may be amended, in the Related Business in China and (ii) the marketing
joint venture in the form of a limited liability company contemplated by a
Letter of Intent dated September 4, 2001 between UCAR Carbon and Jilin Carbon
Group Company, Ltd., which will conduct operations through GENCO.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONSOLIDATED COVERAGE RATIO" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which financial statements are publicly
available to (y) Consolidated Interest Expense for such four fiscal quarters;
provided, however, that:
(1) if UCAR International or any Restricted Subsidiary has
Incurred any Indebtedness since the beginning of such period
that remains outstanding or if the transaction giving rise to
the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such
period;
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(2) if UCAR International or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness
since the beginning of such period or if any Indebtedness is
to be repaid, repurchased, defeased or otherwise discharged
(in each case other than Indebtedness Incurred under any
revolving credit facility unless such Indebtedness has been
permanently repaid and has not been replaced) on the date of
the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio, EBITDA and Consolidated Interest
Expense for such period shall be calculated on a pro forma
basis as if such discharge had occurred on the first day of
such period and as if UCAR International or such Restricted
Subsidiary has not earned the interest income actually earned
during such period in respect of cash or Temporary Cash
Investments actually used to repay, repurchase, defease or
otherwise discharge such Indebtedness;
(3) if since the beginning of such period UCAR International or
any Restricted Subsidiary shall have made any Asset
Disposition, EBITDA for such period shall be reduced by an
amount equal to EBITDA (if positive) directly attributable to
the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to EBITDA (if
negative), directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced
by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of UCAR
International or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to
UCAR International and its continuing Restricted Subsidiaries
in connection with such Asset Disposition for such period (or,
if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary
to the extent UCAR International and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after
such sale);
(4) if since the beginning of such period UCAR International or
any Restricted Subsidiary (by merger or otherwise) shall have
made an Investment in any Restricted Subsidiary (or any Person
which becomes a Restricted Subsidiary) or an acquisition of
assets, including any acquisition of assets occurring in
connection with a transaction requiring a calculation to be
made hereunder, which constitutes all or substantially all of
a division or line of business, EBITDA and Consolidated
Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of
any Indebtedness) as if such Investment or acquisition
occurred on the first day of such period; and
(5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with
or into UCAR International or any Restricted Subsidiary since
the beginning of such period) shall have made any Asset
Disposition, any Investment or any acquisition of assets that
would have required an adjustment pursuant to clause (3) or
(4) if made by UCAR International or a Restricted Subsidiary
during such period, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of UCAR
International, whose determination shall be conclusive. If any Indebtedness
bears a floating rate of interest and is being given pro forma effect, the
interest on such Indebtedness shall be calculated as if the rate in effect on
the date of determination had been the applicable rate for the entire period
(taking into account any Interest Rate
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Agreement applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term in excess of 12 months) provided, however, that if such
Indebtedness was Incurred pursuant to the Revolving Credit Facility, the
component of Consolidated Interest Expense related to the Revolving Credit
Facility shall be calculated based on the average amount of Indebtedness
outstanding under the Revolving Credit Facility during such period and the
average interest rate payable pursuant to the Revolving Credit Facility during
such period.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the total
interest expense of UCAR International and its consolidated Restricted
Subsidiaries, plus, to the extent not included in such total interest expense,
and to the extent incurred by UCAR International or the Restricted Subsidiaries,
without duplication:
(1) interest expense attributable to capital leases and the
interest expense attributable to leases constituting part of a
Sale/Leaseback Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance
financing, other than any letter of credit relating to the
Antitrust Fines, except and until drawn;
(6) net payments pursuant to Hedging Obligations;
(7) Preferred Stock dividends in respect of all Preferred Stock
held by Persons other than UCAR International or a Wholly
Owned Subsidiary (other than dividends payable solely in
Capital Stock (other than Disqualified Stock) of the issuer of
such Preferred Stock);
(8) interest incurred in connection with Investments in
discontinued operations;
(9) interest accruing on any Indebtedness of any other Person to
the extent such Indebtedness is Guaranteed by (or secured by
the assets of) UCAR International or any Restricted
Subsidiary; and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person
(other than UCAR International or a Wholly Owned Subsidiary)
in connection with Indebtedness Incurred by such plan or
trust;
and less, to the extent included in such interest expense, the imputed interest
expense related to the Antitrust Fines. Notwithstanding the foregoing, the
Consolidated Interest Expense with respect to any Restricted Subsidiary, not all
the net income of which was included in calculating Consolidated Net Income by
reason of the fact that such Restricted Subsidiary was not a Wholly Owned
Subsidiary, shall be included only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income.
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"CONSOLIDATED NET INCOME" means, for any period, the net income of UCAR
International and its consolidated Subsidiaries; provided, however, that there
shall not be included in determining such Consolidated Net Income:
(1) any net income of any Person (other than UCAR International)
if such Person is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4)
below, UCAR International's equity in the net income
of any such Person for such period shall be included
in such Consolidated Net Income up to the aggregate
amount of cash actually distributed by such Person
during such period to UCAR International or a
Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or
other distribution paid to a Restricted Subsidiary,
to the limitations contained in clause (3) below);
and
(B) UCAR International's equity in a net loss of any such
Person for such period shall be included in
determining such Consolidated Net Income up to the
aggregate amount of cash actually contributed or
advanced to such Person by UCAR International or its
consolidated Subsidiaries during such period;
(2) any net income (or loss) of any Person acquired by UCAR
International or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such
acquisition;
(3) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions (other than corporate
approvals within the control of UCAR International and
ministerial filings and notices), directly or indirectly, on
the payment of dividends or the making of distributions by
such Restricted Subsidiary, directly or indirectly, to UCAR
International or another Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4),
UCAR International's equity in the net income of any
such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such
Restricted Subsidiary during such period to UCAR
International or another Restricted Subsidiary as a
dividend or other distribution (subject, in the case
of a dividend or other distribution paid to another
Restricted Subsidiary, to the limitation contained in
this clause); and
(B) UCAR International's equity in a net loss of any such
Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income;
(4) any gain (but not loss) realized upon the sale or other
disposition of any assets of UCAR International, its
consolidated Subsidiaries or any other Person (including
pursuant to any sale-and-leaseback arrangement) which is not
sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or
other disposition of any Capital Stock of any Person;
(5) extraordinary gains or losses;
(6) Litigation Awards, except to the extent such Litigation Awards
are received in cash during such period; and
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(7) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"-Certain Covenants-Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any repurchases, repayments or redemptions
of Investments, proceeds realized on the sale of Investments or return of
capital to UCAR International or a Restricted Subsidiary to the extent such
repurchases, repayments, redemptions, proceeds or returns increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D)
thereof.
"CONSOLIDATED NET WORTH" means the total of the amounts shown on the
balance sheet of UCAR International and its consolidated Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of the
most recent fiscal quarter of UCAR International for which financial statements
are publicly available, as the sum of:
(1) the par or stated value of all outstanding Capital Stock of
UCAR International, plus
(2) paid-in capital or capital surplus (however described)
relating to such Capital Stock, plus
(3) any accumulated other comprehensive income, retained earnings
and earned surplus,
less (A) any accumulated deficit and accumulated other comprehensive loss, (B)
any amounts attributable to Disqualified Stock and (C) any cost of treasury
stock.
"CREDIT AGREEMENT" means the Credit Agreement dated as of February 22,
2000 among UCAR International, UCAR Global, the Company, certain of the other
Subsidiaries of UCAR International, the lenders referred to therein, JPMorgan
Chase Bank, as Administrative Agent, J.P. Morgan Securities Inc. and Credit
Suisse First Boston, as Joint-Lead Arrangers, and Chase Securities Inc. and
Credit Suisse First Boston, as Syndication Agents, together with the related
documents thereto (including the term loans and revolving loans thereunder, any
guarantees and any security documents), as amended, extended, renewed, restated,
supplemented or otherwise modified (in whole or in part, and without limitation
as to amount, terms, conditions, covenants and other provisions) from time to
time, and any agreement or agreements (and related documents) governing
Indebtedness incurred to Refinance, in whole or in part, the borrowings and
commitments then outstanding or permitted to be outstanding under such Credit
Agreement or a successor Credit Agreement, whether by the same or any other
lender or group of lenders.
"CURRENCY AGREEMENT" means, in respect of any Person, any foreign
exchange contract, currency swap agreement or other similar agreement designed
to protect such Person against fluctuations in currency values.
"DEFAULT" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital
Stock which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the holder) or upon
the happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking
fund obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
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(3) is mandatorily redeemable or must be purchased upon the
occurrence of certain events or otherwise, in whole or in
part;
in each case on or prior to the first anniversary of the Stated Maturity of the
Notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to purchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if:
(1) the "asset sale" or "change of control" provisions applicable
to such Capital Stock are not more favorable to the holders of
such Capital Stock in a material respect than the terms
applicable to the Notes and described under "-Certain
Covenants-Limitation on Sales of Assets and Subsidiary Stock"
and "-Certain Covenants-Change of Control"; and
(2) any such requirement only becomes operative after compliance
with such terms applicable to the Notes, including the
purchase of any Notes tendered pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed redemption,
repayment or repurchase price will be calculated in accordance with the terms of
such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided, however, that if such
Disqualified Stock could not be required to be redeemed, repaid or repurchased
at the time of such determination, the redemption, repayment or repurchase price
will be the book value of such Disqualified Stock as reflected in the most
recent financial statements of such Person.
"EBITDA" for any period means the sum of Consolidated Net Income and
Consolidated Interest Expense, plus, without duplication, the following to the
extent deducted in calculating such Consolidated Net Income:
(1) all income tax expense of UCAR International and its
consolidated Restricted Subsidiaries;
(2) depreciation and amortization expense of UCAR International
and its consolidated Restricted Subsidiaries (excluding
amortization expense attributable to a prepaid operating
activity item that was paid in cash in a prior period);
(3) all other non-cash charges of UCAR International and its
consolidated Restricted Subsidiaries (excluding any such
non-cash charge to the extent that it represents an accrual of
or reserve for cash expenditures in any future period ending
before the Stated Maturity of the Notes);
(4) non-cash exchange, translation or performance gains (or
losses) relating to any Hedging Obligations or currency or
interest rate fluctuations; and
(5) all cash and non-cash restructuring or non-recurring charges
attributable to Project Phoenix, to the extent the cumulative
amount of such charges realized from October 1, 2001 through
the end of such period do not exceed $50.0 million in the
aggregate,
in each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated
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Net Income, and only to the extent that payment of a corresponding amount of
dividends or distributions at the date of determination to UCAR International or
another Restricted Subsidiary by such Restricted Subsidiary is not subject to
restrictions (other than corporate approvals within the control of UCAR
International and ministerial filings and notices).
"EMSA" means Elektrode Maatskappy (Proprietary) Limited, a corporation
organized under the laws of South Africa, and its successors.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE NOTES" means the debt securities of the Company issued
pursuant to the Indenture in exchange for, and in an aggregate principal amount
equal to, the Notes, in compliance with the terms of the Registration Rights
Agreement.
"FACILITIES" means the Term Loan Facilities and the Revolving Credit
Facilities.
"FOREIGN RESTRICTED SUBSIDIARY" means a Restricted Subsidiary that is
incorporated in a jurisdiction other than the United States or a State thereof
or the District of Columbia and with respect to which more than 80% of any of
its sales, earnings or assets (determined on a consolidated basis in accordance
with GAAP) are located in, generated from or derived from operations located in
territories and jurisdictions outside the United States.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
in:
(1) the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public
Accountants;
(2) statements and pronouncements of the Financial Accounting
Standards Board;
(3) such other statements by such other entity as approved by a
significant segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the inclusion
of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant
to Section 13 of the Exchange Act, including opinions and
pronouncements in staff accounting bulletins and similar
written statements from the accounting staff of the SEC.
"GENCO" means Graphite Electrode Network LLC, a limited liability
company under the laws of the State of Delaware, and its successors.
"GRAFTECH" means Graftech Inc., a corporation organized under the laws
of the State of Delaware, and its successors.
"GRAFTECH EQUITY OFFERING" means any public or private offering or sale
of the Capital Stock of Graftech.
"GRAFTECH PLEDGE AGREEMENT" means the Pledge Agreement dated as of the
Issue Date among UCAR Carbon, JPMorgan Chase Bank, as Collateral Agent for the
Trustee, and State Street Bank and Trust Company, as Trustee for the
Noteholders.
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"GUARANTEE" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other Person
and any obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the
purchase or payment of) Indebtedness of such other Person
(whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities
or services, to take-or-pay, to maintain financial statement
conditions or otherwise), or
(2) entered into for the purpose of assuring in any other manner
the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole
or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a correlative meaning.
"GUARANTIES" means, collectively, the UCAR International Guaranty, the
UCAR Global Guaranty, the UCAR Carbon Guaranty and the Subsidiary Guaranties.
"GUARANTORS" means, collectively, UCAR International, UCAR Global, UCAR
Carbon and the Subsidiary Guarantors.
"GUARANTY AGREEMENT" means a supplemental indenture, substantially in
the form attached as an exhibit to the Indenture, pursuant to which a Subsidiary
Guarantor guarantees the Company's obligations with respect to the Notes on the
terms provided for in the Indenture.
"HEDGING OBLIGATIONS" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement or Currency Agreement.
"HOLDER" or "NOTEHOLDER" means the Person in whose name a Note is
registered on the Registrar's books.
"INCUR" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Restricted Subsidiary (whether
by merger, consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Person at the time it becomes a Restricted Subsidiary. The term
"Incurrence" when used as a noun shall have a correlative meaning. Solely for
purposes of determining compliance with "-Certain Covenants-Limitation on
Indebtedness," (1) amortization of debt discount or the accretion of principal
with respect to a non-interest bearing or other discount security, (2) the
payment of regularly scheduled interest in the form of additional Indebtedness
of the same instrument or the payment of regularly scheduled dividends on
Capital Stock in the form of additional Capital Stock of the same class and with
the same terms and (3) any premium in respect of the Indebtedness that becomes
due and payable as a result of the giving of a notice of redemption or the
making of a mandatory offer to purchase will not be deemed to be the Incurrence
of Indebtedness.
"INDEBTEDNESS" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person
for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the
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payment of which such Person is responsible or liable,
including, in each case, any premium on such indebtedness to
the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions
entered into by such Person;
(3) all obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person
under any title retention agreement regarding such property
(but excluding trade accounts payable arising in the ordinary
course of business);
(4) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with
respect to letters of credit securing (x) payment of the
Antitrust Fines or (y) obligations (other than obligations
described in clauses (1) through (3) above) entered into in
the ordinary course of business of such Person, in each case,
to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following payment on the
letter of credit);
(5) the amount of all obligations of such Person with respect to
the redemption, repayment or other repurchase of any
Disqualified Stock of such Person or, with respect to any
Preferred Stock of any Subsidiary of such Person, the
principal amount of such Preferred Stock to be determined in
accordance with the Indenture (but excluding, in each case,
any accrued dividends);
(6) all obligations of the type referred to in clauses (1) through
(5) of other Persons and all dividends of other Persons for
the payment of which, in either case, such Person is
responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee;
(7) all obligations of the type referred to in clauses (1) through
(6) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is
assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such property or asset
and the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition,
Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date as determined
in accordance with GAAP; provided, however, that in the case of Indebtedness
sold at a discount, the amount of such Indebtedness at any time will be the
accreted value thereof at such time as determined in accordance with GAAP.
For the avoidance of doubt, Indebtedness that is redeemed, defeased,
retired or otherwise repaid shall no longer be considered Indebtedness.
"INDEPENDENT QUALIFIED PARTY" means an investment banking firm,
accounting firm or appraisal firm of national standing; provided, however, that
such firm is not an Affiliate of UCAR International.
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"INTERCOMPANY LOAN" means an unsecured senior term loan of a portion of
the gross proceeds from the sale of the Notes (or, in the case of UCAR
Electrodos and UCAR S.p.A., specified borrowings under the Revolving Credit
Facility) from the Company to a Foreign Restricted Subsidiary.
"INTERCOMPANY NOTE" means (1) on the Issue Date, an unsecured senior
promissory term note evidencing Intercompany Loans to each of UCAR S.A., UCAR
Holdings S.A., UCAR Carbon Mexicana and EMSA, (2) on completion of the
Realignment insofar as the Realignment relates to UCAR Electrodos, an unsecured
senior promissory term note evidencing an Intercompany Loan to UCAR Electrodos,
and upon repayment of the third party secured term note issued by UCAR S.p.A.,
an unsecured senior promissory term note evidencing an Intercompany Loan to UCAR
Finance, in each case, in aggregate principal amount equal to the Secured
Intercompany Note repaid by such Intercompany Loan and (3) any other unsecured
senior promissory term note issued by a Foreign Restricted Subsidiary evidencing
an Intercompany Loan substantially in the form attached as an exhibit to the
Indenture.
"INTERCOMPANY NOTE GUARANTOR" means UCAR Limited, UCAR SNC, UCAR
Holdings S.A., UCAR Inc., UCAR Carbon S.A., UCAR Produtos de Carbono, UCAR
Carbon Mexicana and UCAR S.A. and each other Foreign Restricted Subsidiary of
UCAR International that thereafter Guarantees the Intercompany Notes.
"INTERCOMPANY NOTE GUARANTY" means a Guaranty by an Intercompany Note
Guarantor of all the obligations under the Intercompany Notes provided, however
that, on the Issue Date, the Intercompany Note Guaranty of UCAR SNC shall only
Guarantee the obligations of UCAR Holdings S.A. with respect to UCAR Holding
S.A.'s Intercompany Note.
"INTERCOMPANY NOTE MAKER" means UCAR S.A., UCAR Holdings S.A., UCAR
Carbon Mexicana and EMSA and each other Foreign Restricted Subsidiary of UCAR
International that thereafter issues an Intercompany Note.
"INTERCOMPANY NOTE OBLIGATIONS" means, collectively, the obligations of
an Intercompany Note Guarantor under its Intercompany Note Guaranty and the
obligations of an Intercompany Note Maker under its Intercompany Note.
"INTERCOMPANY NOTE OBLIGORS" means, collectively, the Intercompany Note
Makers and the Intercompany Note Guarantors.
"INTEREST RATE AGREEMENT" means in respect of a Person any interest
rate swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"INVESTMENT" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. Except as otherwise provided for
herein, the amount of an Investment shall be its fair value at the time the
Investment is made and without giving effect to subsequent changes in value.
For purposes of the definition of "Unrestricted Subsidiary," the
definition of "Restricted Payment" and the covenant described under "-Certain
Covenants-Limitation on Restricted Payments":
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(1) "INVESTMENT" shall include the portion (proportionate to UCAR
International's direct or indirect equity interest in such
Subsidiary) of the fair market value of the net assets of any
Subsidiary of UCAR International at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, UCAR International shall be deemed to
continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (A) UCAR
International's "Investment" in such Subsidiary at the time of
such redesignation less (B) the portion (proportionate to UCAR
International's direct or indirect equity interest in such
Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the
Board of Directors of UCAR International, whose good faith
determination shall be conclusive.
For purposes of valuing an Investment in a joint venture or
Unrestricted Subsidiary, the book value of non-cash contributions shall be used
unless the Investment constitutes a line of business, in which case the fair
market value of the contribution shall be used. Contributions of the Capital
Stock of UCAR International shall be treated as having zero book value.
"ISSUE DATE" means the date on which the Notes are originally issued.
"LEGAL HOLIDAY" means a Saturday, Sunday or a day on which commercial
banking institutions are authorized or required by law to close in New York City
or the Commonwealth of Massachusetts.
"LIEN" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"LIEN SUBORDINATION AGREEMENT" means the Lien Subordination Agreement
dated as of the Issue Date among UCAR Carbon, JPMorgan Chase Bank, as Senior
Lien Collateral Agent for the lenders under the Credit Agreement, JPMorgan Chase
Bank, as Junior Lien Collateral Agent for the Trustee, and State Street Bank and
Trust Company, as Trustee for the Noteholders.
"LITIGATION AWARDS" means the gross proceeds from the UCC/MC Lawsuit or
any settlement thereof, judgment therein or disposition thereof.
"LITIGATION LIABILITIES" shall mean liabilities and expenses of UCAR
International and its Subsidiaries associated with (a) antitrust investigations
and related lawsuits, settlements and claims of the type described in UCAR
International's Annual Report on Form 10-K for the year ended December 31, 2000,
and UCAR International's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2001, June 30, 2001 and September 30, 2001 (together, the "SEC
Reports"), (b) stockholder derivative lawsuits and claims of the type described
in the SEC Reports and (c) securities lawsuits and claims of the type described
in the SEC Reports and any investigations that may arise relating to the subject
matter of such securities lawsuits and claims.
"NET AVAILABLE CASH" from an Asset Disposition means 100% of the cash
payments received therefrom or, in the case of an Asset Disposition constituting
part of Project Phoenix, 75% of the cash payments received therefrom (including
any cash payments received by way of deferred payment of principal pursuant to a
note or installment receivable or otherwise and proceeds from the sale or other
disposition of any securities received as consideration, but only as and when
received, but excluding any
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other consideration received in the form of assumption by the acquiring Person
of Indebtedness or other obligations relating to such properties or assets or
received in any other noncash form), in each case net of:
(1) all legal, investment banking, accounting, professional,
filing, title, recording and transfer tax expenses,
commissions and other fees and expenses (including payments to
third parties to obtain any necessary consents) incurred, and
all Federal, state, provincial, foreign and local taxes
required to be paid or accrued as a liability under GAAP, as a
consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with
the terms of any Lien upon or other security agreement of any
kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law, be repaid out of the
proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries as a
result of such Asset Disposition; and
(4) the deduction of appropriate amounts provided by the seller as
a reserve, in accordance with GAAP, against any liabilities
associated with the property or other assets disposed in such
Asset Disposition and retained by UCAR International or any
Restricted Subsidiary after such Asset Disposition.
"NET CASH PROCEEDS," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees and expenses actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"OFFICERS' CERTIFICATE" means a certificate signed by the Chairman of
the Board, the President or a Vice President, and by the Treasurer, an Assistant
Treasurer, the Controller, an Assistant Controller, the Secretary or an
Assistant Secretary of UCAR International or its Subsidiaries, as applicable.
"OPINION OF COUNSEL" means a written opinion of legal counsel, in form
and substance reasonably acceptable to the Trustee. Such legal counsel may be an
employee of or counsel to UCAR International or its Restricted Subsidiaries.
"PERMITTED INVESTMENT" means an Investment by UCAR International or any
Restricted Subsidiary in:
(1) UCAR International, a Restricted Subsidiary or a Person that
will, upon the making of such Investment, become a Restricted
Subsidiary; provided, however, that the primary business of
such Restricted Subsidiary is a Related Business;
(2) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or
conveys all or substantially all its assets to, UCAR
International or a Restricted Subsidiary; provided, however,
that such Person's primary business is a Related Business;
(3) cash and Temporary Cash Investments;
(4) Hedging Obligations;
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(5) receivables owing to UCAR International or any Restricted
Subsidiary, if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with
customary trade terms; provided, however, that such trade
terms may include such concessionary trade terms as UCAR
International or any such Restricted Subsidiary deems
reasonable under the circumstances;
(6) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the
ordinary course of business;
(7) loans or advances to employees made in the ordinary course of
business consistent with past practices of UCAR International
or such Restricted Subsidiary;
(8) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to
UCAR International or any Restricted Subsidiary or in
satisfaction of judgments, settlements or awards;
(9) any Person to the extent such Investment represents the
non-cash portion of the consideration received for an Asset
Disposition as permitted pursuant to the covenant described
under "-Certain Covenants-Limitation on Sales of Assets and
Subsidiary Stock";
(10) advances or prepayments to vendors in the ordinary course of
business consistent with past practices of UCAR International
or such Restricted Subsidiary; and
(11) any Person where such Investment was acquired by UCAR
International or any Restricted Subsidiary (a) in exchange for
any other Investment or accounts receivable held by UCAR
International or any such Restricted Subsidiary in connection
with or as a result of a bankruptcy, workout, reorganization
or recapitalization of the issuer of such other Investment or
accounts receivable or (b) as a result of a foreclosure by
UCAR International or any Restricted Subsidiary with respect
to any secured Investment or other transfer of title with
respect to any secured Investment in default.
"PERMITTED LIENS" means, with respect to any Person:
(1) pledges or deposits by such Person under worker's compensation
laws, unemployment insurance laws, other social security laws
or regulations or similar legislation, or deposits securing
liability to insurance carriers under insurance or
self-insurance arrangements in respect of such obligations, or
good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or
leases or subleases to which such Person is a party, or
deposits to secure public, statutory, regulatory or similar
obligations of such Person or deposits of cash or United
States government bonds to secure surety or appeal bonds,
performance bonds and other obligations of a like nature
(including those incurred to secure health, safety and
environmental obligations) to which such Person is a party, or
deposits as security for contested taxes or import duties or
for the payment of rent, in each case Incurred in the ordinary
course of business;
(2) Liens imposed by law, such as carriers', warehousemen's,
mechanics', materialmen's, repairmen's and other like Liens,
in each case for sums not yet due and payable or being
contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person
with respect to which such Person shall then be proceeding
with an appeal or other proceedings for review and Liens
arising solely by virtue of any
171
statutory or common law provision relating to banker's Liens,
rights of set-off or similar rights and remedies as to deposit
accounts or other funds maintained with a creditor depository
institution; provided, however, that (A) such deposit account
is not a dedicated cash collateral account and is not subject
to restrictions against access by UCAR International in excess
of those set forth by regulations promulgated by the Federal
Reserve Board and (B) such deposit account is not intended by
UCAR International or any Restricted Subsidiary to provide
collateral to the depository institution;
(3) Liens for taxes, assessments or other governmental charges or
levies, including property taxes, not yet subject to penalties
for non-payment or which are being contested in good faith by
appropriate proceedings;
(4) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such
Person in the ordinary course of its business; provided,
however, that such letters of credit do not constitute
Indebtedness;
(5) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, licenses,
rights-of-way, sewers, electric lines, telegraph and telephone
lines and other similar purposes, or zoning or other
restrictions as to the use of real property or Liens
incidental to the conduct of the business of such Person or to
the ownership of its properties which were not Incurred in
connection with Indebtedness and which do not in the aggregate
materially adversely affect the value of such properties or
materially impair their use in the operation of the business
of such Person;
(6) Liens securing Indebtedness Incurred to finance the
construction, purchase or lease of, or repairs, improvements
or additions to, property, plant or equipment of such Person;
provided, however, that the Lien may not extend to any other
property owned by such Person or any of the Restricted
Subsidiaries at the time the Lien is Incurred (other than
assets and property affixed or appurtenant thereto), and the
Indebtedness (other than any interest thereon) secured by the
Lien may not be Incurred more than 270 days after the later of
the acquisition, completion of construction, repair,
improvement, addition or commencement of full operation of the
property, plant or equipment subject to the Lien;
(7) Liens to secure Indebtedness permitted under the provisions
described in clauses (b)(1) and (b)(2) under "-Certain
Covenants-Limitation on Indebtedness";
(8) Liens existing on the Issue Date;
(9) Liens on shares of Capital Stock of another Person at the time
such other Person becomes a Subsidiary of such Person;
provided, however, that the Liens may not extend to any other
property owned by such Person or any of its Restricted
Subsidiaries (other than assets and property affixed or
appurtenant thereto);
(10) Liens on property or assets at the time such Person or any of
its Subsidiaries acquires such property or assets, including
any acquisition by means of a merger or consolidation with or
into such Person or a Subsidiary of such Person; provided,
however, that the Liens may not extend to any other property
or assets owned by such Person or any of its Restricted
Subsidiaries (other than assets and property affixed or
appurtenant thereto);
(11) Liens securing Indebtedness or other obligations of a
Subsidiary of such Person owing to such Person or a Restricted
Subsidiary of such Person;
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(12) Liens securing Hedging Obligations so long as such Hedging
Obligations relate to Indebtedness that is, and is permitted
to be under the Indenture, secured by a Lien on the same
property securing such Hedging Obligations;
(13) Liens (i) relating to the establishment of depository
relations with banks not given in connection with the issuance
of Indebtedness or (ii) pertaining to pooled deposit and/or
sweep accounts of UCAR International or any Restricted
Subsidiary to permit satisfaction of overdraft or similar
obligations incurred in the ordinary course of business of
UCAR International or any Restricted Subsidiary;
(14) Liens arising by operation of law pursuant to Section 107(1)
of CERCLA or pursuant to analogous state or foreign law, for
costs or damages which are not yet due (by virtue of a written
demand for payment by a governmental authority) or which are
being contested in good faith by appropriate proceedings and
UCAR International, the Company or the affected Subsidiary has
set aside on its books adequate reserves with respect thereto,
or on property that UCAR International, the Company or a
Subsidiary has determined to abandon if the sole recourse for
such costs or damages is to such property;
(15) Liens, not securing Indebtedness, arising as a result of sales
or other dispositions of accounts receivable or inventory of
Restricted Subsidiaries in connection with asset
securitizations or factoring or similar transactions involving
accounts receivable;
(16) Liens related to the Antitrust Fines and any letters of credit
issued in support of the Antitrust Fines;
(17) minority stockholder rights, and rights of first refusal
relating to shares of Carbone Savoie, GENCO and other joint
ventures permitted under the Indenture;
(18) Liens on the assets of Unrestricted Subsidiaries;
(19) Liens relating to funding obligations, not constituting
Indebtedness, for employee benefit plans;
(20) Liens with respect to the Capital Stock of a Restricted
Subsidiary imposed pursuant to an agreement entered into for
the sale or disposition of all or substantially all of the
Capital Stock of such Restricted Subsidiary, pending the
closing of such sale or disposition; and
(21) Liens of a type described in clauses (1) through (20) to
extend, continue, renew or replace any similar Lien referred
to in clauses (1) through (20) (except with respect to a Lien
to secure the Antitrust Fines), and Liens to secure any
Refinancing (or successive Refinancings) as a whole, or in
part, of any Indebtedness secured by any Lien referred to in
the foregoing clause (6), (8), (9) or (10); provided, however,
that:
(A) such new Lien shall be limited to all or part of the
same property and assets that secured or, under the
written agreements pursuant to which the original
Lien arose, could secure the original Lien (plus
improvements and accessions to, such property or
proceeds or distributions thereof); and
(B) the Indebtedness, if any, secured by such Lien at
such time is not increased to any amount greater than
the sum of (x) the outstanding principal amount or,
if greater, committed amount of the Indebtedness
described under any such clause at the time
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the original Lien became a Permitted Lien and (y) an
amount necessary to pay any fees and expenses,
including premiums and accrued interest, related to
such refinancing, refunding, extension, renewal or
replacement.
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clauses (6), (9) or (10) above to the extent such Lien applies to
any Additional Assets acquired directly or indirectly from Net Available Cash
pursuant to the covenant described under "-Certain Covenants-Limitation on Sale
of Assets and Subsidiary Stock." For purposes of this definition, the term
"Indebtedness" shall be deemed to include interest on such Indebtedness.
"PERSON" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"PREFERRED STOCK," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"PRINCIPAL" of a Note means the principal of the Note plus the premium,
if any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"PROJECT PHOENIX" means the cost savings plan announced publicly in
January 2002 by UCAR International, including the mothballing of our graphite
electrode manufacturing operations in Caserta, Italy, headcount reductions,
other announced asset sales and the Realignment.
"PUBLIC EQUITY OFFERING" means an underwritten primary public offering
of common stock of UCAR International pursuant to an effective registration
statement under the Securities Act.
"QUALIFIED RECEIVABLES TRANSACTION" means any transaction or series of
transactions that may be entered into by UCAR International or any Restricted
Subsidiary pursuant to which UCAR International or any Restricted Subsidiary may
sell, convey, discount, factor or otherwise transfer to any other Person other
than UCAR International or a Subsidiary thereof, or may grant a security
interest in, any accounts receivable (whether now existing or arising in the
future) of UCAR International or any Restricted Subsidiary and any asset related
thereto, including all collateral securing the accounts receivable, all
contracts and all guarantees or other obligations in respect of the accounts
receivable, all proceeds of the accounts receivable and all other assets which
are customarily transferred, or in respect of which security interests are
customarily granted, in connection with asset securitization, factoring or
similar transactions involving accounts receivable.
"REALIGNMENT" means a series of transactions by which (1) various
non-U.S. operating subsidiaries of UCAR International are contributed or sold to
UCAR S.A., (2) Secured Intercompany Notes are issued by UCAR S.A. and other
Foreign Restricted Subsidiaries to the Company, in part in consideration for
loans that the Company has extended to such Foreign Restricted Subsidiaries in
order to facilitate the contribution or sale described in clause (1), (3)
certain new U.S. subsidiaries of UCAR Carbon are formed and (4) certain
operating businesses of UCAR Carbon are transferred to the newly formed U.S.
Subsidiaries of UCAR Carbon.
"REFINANCE" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
174
"REFINANCING INDEBTEDNESS" means Indebtedness that Refinances any
Indebtedness of UCAR International or any Restricted Subsidiary existing on the
Issue Date or Incurred in compliance with the Indenture, including Indebtedness
that Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being
Refinanced; and
(3) such Refinancing Indebtedness has an aggregate principal
amount (or if Incurred with original issue discount, an
aggregate issue price) that is equal to or less than the
aggregate principal amount (or if Incurred with original issue
discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Subsidiary that Refinances Indebtedness of UCAR International
or (B) Indebtedness of UCAR International or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated February 15, 2002, among the Company, the Guarantors, Credit Suisse First
Boston Corporation, J.P. Morgan Securities Inc., ABN AMRO Incorporated, Fleet
Securities, Inc. and Scotia Capital (USA) Inc.
"RELATED BUSINESS" means any business in which UCAR International or
the Restricted Subsidiaries were engaged on the Issue Date and any business
related, ancillary or complementary to any business of UCAR International or the
Restricted Subsidiaries in which UCAR International or the Restricted
Subsidiaries were engaged on the Issue Date.
"RESTRICTED PAYMENT" with respect to any Person means:
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock
(including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the
direct or indirect holders of its Capital Stock (in each case,
other than dividends or distributions payable solely in its
Capital Stock (other than Disqualified Stock) and dividends or
distributions payable solely to UCAR International or a
Restricted Subsidiary, and other than pro rata dividends or
other distributions made by a Subsidiary that is not a Wholly
Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an
entity other than a corporation));
(2) the purchase, redemption or other acquisition or retirement
for value of any Capital Stock of UCAR International held by
any Person or of any Capital Stock of a Restricted Subsidiary
held by any Affiliate of UCAR International (other than a
Restricted Subsidiary), including the exercise of any option
to exchange any Capital Stock (other than into Capital Stock
of UCAR International that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, other than from UCAR
International or any of the Restricted Subsidiaries, prior to
scheduled maturity, scheduled repayment or scheduled sinking
fund payment of any
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Subordinated Obligations of such Person (other than the
purchase, repurchase or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in
each case due within one year of the date of such purchase,
repurchase or other acquisition); or
(4) the making of any Investment (other than a Permitted
Investment) in any Person.
"RESTRICTED SUBSIDIARY" means any Subsidiary of UCAR International that
is not an Unrestricted Subsidiary.
"REVOLVING CREDIT FACILITY" means (a) the revolving credit facility
contained in the Credit Agreement and (b) any revolving credit facility for
local operating lines of credit, under which either a Guarantor or an
Intercompany Note Obligor is the borrower and, in either case, any other
facility or financing arrangement that Refinances, in whole or in part, any such
revolving credit facility.
"SALE/LEASEBACK TRANSACTION" means an arrangement relating to property
owned by UCAR International or a Restricted Subsidiary on the Issue Date or
thereafter acquired by UCAR International or a Restricted Subsidiary whereby
UCAR International or a Restricted Subsidiary transfers such property to a
Person and UCAR International or a Restricted Subsidiary leases it from such
Person provided, however, that the provisions of the covenant described under
"-Limitation on Sale/Leaseback Transactions" shall not apply to any
Sale/Leaseback Transaction relating to property owned by UCAR International or a
Restricted Subsidiary having a fair market value less than $500,000 (as
determined in good faith by the chief financial officer of UCAR International,
whose good faith determination shall be conclusive).
"SEC" means the U.S. Securities and Exchange Commission.
"SECURED INTERCOMPANY NOTES" means the secured intercompany term notes
made by various non-U.S. subsidiaries of UCAR International in favor of the
Company that are pledged by the Company to the lenders under the Credit
Agreement to secure obligations under the Credit Agreement and that are
described in and restricted by the Credit Agreement and shall include, for
purposes of this definition, the third party secured term note issued by UCAR
S.p.A. that is backed by a deposit of the Company.
"SENIOR INDEBTEDNESS" means, with respect to any Person on any date of
determination:
(1) Indebtedness of such Person, whether outstanding on the Issue
Date or thereafter Incurred; and
(2) accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for
reorganization relating to such Person whether or not
post-filing interest is allowed in such proceeding) in respect
of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is
responsible or liable;
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are junior to or subordinate in right of payment to the
Notes or the Guaranty of such Person, as the case may be; provided, however,
that Senior Indebtedness shall not include:
(1) any obligation of such Person to any Subsidiary of such
Person;
(2) any liability for Federal, state, local or other taxes owed or
owing by such Person;
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(3) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such
liabilities);
(4) any Indebtedness of such Person (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in
any respect to any other Indebtedness or other obligation of
such Person; or
(5) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of the Indenture.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of UCAR International within the meaning of Rule 1-02
under Regulation S-X promulgated by the SEC.
"STATED MATURITY" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"SUBORDINATED OBLIGATION" means, with respect to any Person, any
Indebtedness of such Person (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of payment to the Notes or a
Guaranty of such Person, as the case may be, pursuant to a written agreement to
that effect.
"SUBSIDIARY" means, with respect to any Person, any corporation,
association, partnership, limited liability company or other business entity of
which more than 50% of the total voting power of shares of Voting Stock is at
the time owned or controlled, directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"SUBSIDIARY GUARANTOR" means UCAR Composites, UCAR Carbon Technology
LLC, UCAR International Trading, UCAR International Holdings and UCAR Holdings
III and each other Subsidiary of UCAR International that executes the Indenture
as a guarantor (except UCAR Global and UCAR Carbon) and each other Subsidiary of
UCAR International that thereafter guarantees the Notes pursuant to the terms of
the Indenture.
"SUBSIDIARY GUARANTY" means a Guaranty by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
"TEMPORARY CASH INVESTMENTS" means any of the following:
(1) any investment in direct obligations of the United States of
America or any agency thereof or obligations guaranteed by the
United States of America or any agency thereof;
(2) investments in time deposit accounts, certificates of deposit
and money market deposits maturing within 180 days of the date
of acquisition thereof issued by a bank or trust company which
is organized under the laws of the United States of America,
any state
177
thereof or any foreign country recognized by the United States
of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50.0
million (or the foreign currency equivalent thereof) and has
outstanding long-term debt or whose parent holding company has
outstanding long-term debt, which is rated "A" (or such
similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as
defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or
mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (1)
entered into with a bank meeting the qualifications described
in clause (2);
(4) investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation
(other than an Affiliate of UCAR International) organized and
in existence under the laws of the United States of America or
any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and
Poor's Ratings Group;
(5) investments in securities with maturities of six months or
less from the date of acquisition issued or fully guaranteed
by any state, commonwealth or territory of the United States
of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by Standard & Poor's
Ratings Group or "A-2" by Moody's Investors Service, Inc; and
(6) in the case of any Foreign Restricted Subsidiary, investments:
(a) in direct obligations of the sovereign nation (or any
agency thereof) in which such Foreign Restricted Subsidiary is
organized and is conducting business or in obligations fully
and unconditionally guaranteed by such sovereign nation (or
any agency thereof); provided that such obligations have a
rating of "A" (or such similar equivalent rating) or higher by
at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities
Act), or the equivalent thereof from comparable foreign rating
agencies, (b) of the type and maturity described in clauses
(1) through (5) of foreign obligors, which investments or
obligors (or the parents of such obligors) have ratings
described in such clauses or equivalent ratings from
comparable foreign rating agencies or (c) of the type and
maturity described in clauses (1) through (5) of foreign
obligors (or the parents of such obligors), which investments
or obligors (or the parents of such obligors) are not rated as
provided in such clauses or in clause (2) but which are, in
the reasonable judgment of UCAR International, comparable in
investment quality to such investments and obligors (or the
parents of such obligors); provided that the aggregate face
amount outstanding at any time of such investments of all
Foreign Restricted Subsidiaries made pursuant to this
subclause (c) does not exceed $50.0 million;
(7) investments in mutual funds whose investment guidelines
restrict such funds' investments to those satisfying the
provisions of clauses (1) through (5); and
(8) investments in time deposit accounts, certificates of deposit
and money market deposits in an aggregate face amount not in
excess of one-half of 1% of the total consolidated assets of
UCAR International as of the end of UCAR International's most
recently completed fiscal year.
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"TERM LOAN FACILITY" means the term loan facilities contained in the
Credit Agreement and any other facilities or financing arrangements that
Refinances in whole or in part any such term loan facilities.
"UCAR CARBON" means UCAR Carbon Company Inc., a corporation organized
under the laws of the State of Delaware, and its successors.
"UCAR CARBON GUARANTY" means the Guarantee by UCAR Carbon of the
Company's obligations with respect to the Notes.
"UCAR CARBON MEXICANA" means UCAR Carbon Mexicana S.A. de C.V., a
corporation organized under the laws of Mexico, and its successors.
"UCAR CARBON S.A." means UCAR Carbon S.A. a corporation organized under
the laws of Brazil, and its successors.
"UCAR CARBON TECHNOLOGY LLC" means UCAR Carbon Technology LLC, a
limited liability company under the laws of the State of Delaware, and its
successors.
"UCAR COMPOSITES" means UCAR Composites Inc., a corporation organized
under the laws of the State of California, and its successors.
"UCAR ELECTRODOS" means the Spanish subsidiary of UCAR International,
which currently means UCAR Electrodos, S.L., a limited liability company
organized under the laws of Spain, and its successors, and, upon completion of
the realignment of UCAR's Spanish subsidiary, will mean UCAR Electrodos Iberica,
S.L., a limited liability company organized under the laws of Spain, and its
successors.
"UCAR GLOBAL" means UCAR Global Enterprises Inc., a corporation
organized under the laws of the State of Delaware, and its successors.
"UCAR GLOBAL GUARANTY" means the Guarantee by UCAR Global of the
Company's obligations with respect to the Notes.
"UCAR HOLDINGS S.A." means UCAR Holdings S.A., a limited liability
company organized under the laws of France, and its successors.
"UCAR HOLDINGS III" means UCAR Holdings III Inc., a corporation
organized under the laws of the State of Delaware, and its successors.
"UCAR INC." means UCAR Inc., a corporation organized under the laws of
Canada, and its successors.
"UCAR INTERNATIONAL" means UCAR International Inc., a corporation
organized under the laws of the State of Delaware, and its successors.
"UCAR INTERNATIONAL GUARANTY" means the Guarantee by UCAR International
of the Company's obligations with respect to the Notes.
"UCAR INTERNATIONAL HOLDINGS" means UCAR International Holdings, Inc.,
a corporation organized under the laws of the State of Delaware, and its
successors.
"UCAR INTERNATIONAL TRADING" means UCAR International Trading Inc., a
corporation organized under the laws of the State of Delaware, and its
successors.
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"UCAR LIMITED" means UCAR Limited, a private limited company organized
under the laws of the United Kingdom, and its successors.
"UCAR PRODUTOS DE CARBONO" means UCAR Produtos de Carbono S.A., a
corporation organized under the laws of Brazil, and its successors.
"UCAR S.A." means UCAR S.A., a limited company organized under the laws
of Switzerland, and its successors.
"UCAR SNC" means UCAR SNC, a partnership organized under the laws of
France, and its successors.
"UCAR S.p.A." means UCAR S.p.A., a joint stock corporation organized
under the laws of Italy, and its successors.
"UCC/MC LAWSUIT" means the lawsuit pending in the United States
District Court for the Southern District of New York, entitled UCAR
International Inc., UCAR Global Enterprises Inc. and UCAR Carbon Company Inc. v.
Union Carbide Corporation, Mitsubishi Corporation, Mitsubishi International
Corporation, Hiroshi Kawamura and Robert D. Kennedy, Case No. 00 Civ. 1338
(GBD), and all claims asserted by or against any of the parties or their
affiliates, related parties or successors in such lawsuit or in subsequent
suits, actions or proceedings arising from or related to such lawsuit or the
facts giving rise to such lawsuit.
"UNRESTRICTED SUBSIDIARY" means:
(1) any Subsidiary of UCAR International that at the time of
determination shall be designated an Unrestricted Subsidiary
by the Board of Directors of UCAR International (or its chief
financial officer if the Subsidiary is not a Significant
Subsidiary) in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary;
provided, however, that UCAR International shall not be entitled to designate
the Company as an Unrestricted Subsidiary.
The Board of Directors of UCAR International (or its chief financial
officer if the Subsidiary is not a Significant Subsidiary) may designate any
Subsidiary of UCAR International (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on
any property of, UCAR International or any other Subsidiary of UCAR
International that is not a Subsidiary of the Subsidiary to be so designated;
provided, however, that either (A) the Subsidiary to be so designated has total
assets of $1,000 or less or (B) if such Subsidiary has assets greater than
$1,000, then in each such case such designation would be permitted under the
covenant described under "-Certain Covenants-Limitation on Restricted Payments."
The Board of Directors of UCAR International may at any time designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however,
that immediately after giving effect to such designation (A) UCAR International
could Incur $1.00 of additional Indebtedness under paragraph (a) of the covenant
described under "-Certain Covenants-Limitation on Indebtedness" and (B) no
Default shall have occurred and be continuing. Any designation of an
Unrestricted Subsidiary by the Board of Directors of UCAR International or its
chief financial officer, as the case may be, shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the resolution of the Board of
Directors of UCAR International
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giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing provisions.
"U.S. DOLLAR EQUIVALENT" means, with respect to any monetary amount in
a currency other than U.S. dollars, at any time for determination thereof, the
amount of U.S. dollars obtained by converting such foreign currency involved in
such computation into U.S. dollars at the spot rate for the purchase of U.S.
dollars with the applicable foreign currency as published in The Wall Street
Journal in the "Exchange Rates" column under the heading "Currency Trading" on
the date two Business Days prior to such determination.
Except as described under "-Certain Covenants-Limitation on
Indebtedness," whenever it is necessary to determine whether UCAR International
or any of its subsidiaries has complied with any covenant in the Indenture or a
Default has occurred and an amount is expressed in a currency other than U.S.
dollars, such amount will be treated as the U.S. Dollar Equivalent determined as
of the date such amount was initially determined in such currency.
"U.S. GOVERNMENT OBLIGATIONS" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"VOTING STOCK" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary, which at least
97% of the Capital Stock of which (other than directors' qualifying or other
legally required shares) is owned by UCAR International or one or more Wholly
Owned Subsidiaries.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material U.S. federal income tax
consequences and, in the case of a holder that is a non-U.S. holder, the U.S.
federal estate tax consequences, of purchasing, owning and disposing of the
Notes. This summary applies to you only if you are the initial holder of the
Notes and you acquire the Notes for a price equal to the issue price of the
Notes. The issue price of the Notes is the first price at which a substantial
amount of the Notes is sold other than to bond houses, brokers, or similar
persons or organizations acting in the capacity of underwriters, placement
agents or wholesalers.
This summary deals only with notes held as capital assets (generally,
investment property) and does not deal with special tax rules applicable to
certain other holders such as:
o dealers in securities or currencies;
o traders in securities;
o U.S. holders (as defined below) whose functional currency is not
the United States dollar;
o persons holding notes as part of a hedge, straddle, conversion or
other integrated transaction;
o certain U.S. expatriates;
o financial institutions;
o insurance companies;
o real estate investment trusts;
o regulated investment companies;
o grantor trusts;
o entities that are tax-exempt for U.S. federal income tax
purposes; and
o persons that acquire the Notes for a price other than their issue
price.
This summary does not discuss all of the aspects of U.S. federal income
and estate taxation that may be relevant to you in light of your particular
investment or other circumstances. In addition, this summary does not discuss
any U.S. state or local income or foreign income or other tax consequences. This
summary is based on U.S. federal income tax law, including the provisions of the
Internal Revenue Code of 1986, as amended, Treasury regulations, administrative
rulings and judicial authority, all as in effect as of the date of this
prospectus. Subsequent developments in U.S. federal income tax law, including
changes in law or differing interpretations, which may be applied retroactively,
could have a material effect on the U.S. federal income tax consequences of
purchasing, owning and disposing of Notes as set forth in this summary. Before
purchasing, holding or disposing of the Notes, you should consult your own tax
advisor regarding the particular U.S. federal, state and local and foreign
income and other tax consequences of purchasing, owning and disposing of the
Notes that may be applicable to you.
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CONSEQUENCES TO HOLDERS OF THE EXCHANGE
The exchange of Initial Notes for Exchange Notes pursuant to this
exchange offer will not be a taxable event for U.S. federal income tax purposes.
As a result, there will not be any material U.S. federal income tax consequences
to a holder exchanging Initial Notes pursuant to this exchange offer. Because
each Exchange Note is a continuation of the corresponding Initial Note, the
remainder of this discussion of certain U.S. federal income tax consequences
generally refers only to "Notes."
CHARACTERIZATION OF THE NOTES
It is the opinion of Kelley Drye & Warren LLP that under applicable
authorities the Notes should be treated as indebtedness for U.S. federal income
tax purposes. However, it is possible that the Internal Revenue Service will
contend that the Notes are properly characterized in an alternative manner,
including as an equity interest in us. In the event that the Notes are treated
as equity, the amount of any payments on any such Note would first be taxable to
you as ordinary dividend income to the extent of our current and accumulated
earnings and profits, and next would be treated as a non-taxable return of
capital to the extent of your tax basis in the Note with any remaining amount
treated as capital gain from the sale of a Note. Further, if you are a non-U.S.
holder (as defined below), any payments on the Notes treated as equity would not
be eligible for the portfolio interest exception from U.S. withholding tax, any
dividends thereon would be subject to U.S. withholding tax at a flat rate of 30%
(or lower applicable treaty rate), and any gain from the sale or other taxable
disposition of the Notes might also be subject to U.S. tax in certain
circumstances. The remainder of this discussion assumes that the Notes will
constitute our indebtedness for U.S. federal income tax purposes.
U.S. HOLDERS
The following summary applies to you only if you are a U.S. holder.
Definition of a U.S. Holder. A "U.S. holder" is a beneficial owner of a
Note or Notes who or which is for U.S. federal income tax purposes:
o an individual citizen or resident of the U.S.;
o a corporation or partnership (or other entity classified as a
corporation or partnership for these purposes) created or
organized in or under the laws of the U.S. or of any political
subdivision of the U.S., including any State;
o an estate, the income of which is subject to U.S. federal
income taxation regardless of the source of that income; or
o a trust, if, in general, a U.S. court is able to exercise
primary supervision over the trust's administration and one or
more U.S. persons (within the meaning of the Internal Revenue
Code) has the authority to control all of the trust's
substantial decisions.
If a partnership holds Notes, the tax treatment of a partner generally
will depend upon the status of the partner and upon the activities of the
partnership. If you are a partner of a partnership holding Notes, you should
consult your tax advisor.
PAYMENTS OF INTEREST. Interest on your Notes will be taxed as ordinary
interest income. In addition:
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o if you use the cash method of accounting for U.S. federal
income tax purposes, you will have to include the interest on
your Notes in your gross income at the time you receive the
interest; and
o if you use the accrual method of accounting for U.S. federal
income tax purposes, you will have to include the interest on
your Notes in your gross income at the time the interest
accrues.
SALE OR OTHER DISPOSITION OF NOTES. Your tax basis in your Notes
generally will be their cost, subject to certain adjustments. You generally will
recognize taxable gain or loss when you sell or otherwise dispose of your Notes
equal to the difference, if any, between:
o the amount realized on the sale or other disposition (less any
amount attributable to accrued interest, which will be taxable
in the manner described under "-U.S. Holders-Payments of
Interest"); and
o your tax basis in your Notes.
Your gain or loss generally will be a capital gain or loss. This
capital gain or loss will be long term capital gain or loss if at the time of
the sale or other disposition you have held your Notes for more than one year.
Subject to limited exceptions, your capital losses cannot be used to offset your
ordinary income. If you are a non-corporate U.S. holder, your long term capital
gain generally will be subject to a maximum tax rate of 20%.
BACKUP WITHHOLDING. In general, "backup withholding," currently at a
rate of 30% and being reduced in stages to a rate of 28% in 2006, may apply:
o to any payments made to you of principal of and interest on
your Notes; and
o to payment of the proceeds of a sale or other disposition of
your Notes before maturity;
if you are a non-corporate U.S. holder and fail to provide a correct taxpayer
identification number or otherwise comply with applicable requirements of the
backup withholding rules.
The backup withholding tax is not an additional tax and may be credited
against your U.S. federal income tax liability, provided that the required
information is provided to the Internal Revenue Service.
NON-U. S. HOLDERS
The following summary applies to you if you are a beneficial owner of a
Note or Notes who or which is not a U.S. holder (a "non-U.S. holder"). An
individual may, subject to exceptions, be deemed to be a resident alien, as
opposed to a non-resident alien, by among other ways being present in the U.S.:
o on at least 31 days in the calendar year; and
o for an aggregate of at least 183 days during a three-year period
ending in the current calendar year, counting for such purposes
all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the
days present in the second preceding year.
Resident aliens are subject to U.S. federal income tax as if they were
U.S. citizens.
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U.S. FEDERAL WITHHOLDING TAX. Under current U.S. federal income tax
laws, and subject to the discussion below, U.S. federal withholding tax will not
apply to payments by us or our paying agent (in its capacity as such) of
principal of and interest on your Notes under the "portfolio interest" exception
of the Internal Revenue Code, provided that in the case of interest:
o you do not, directly or indirectly, actually or constructively,
own ten percent or more of the total combined voting power of all
classes of our stock entitled to vote within the meaning of
section 871(h)(3) of the Internal Revenue Code and the Treasury
regulations thereunder;
o you are not (i) a controlled foreign corporation for U.S. federal
income tax purposes that is related, directly or indirectly, to us
through sufficient stock ownership (as provided in the Internal
Revenue Code), or (ii) a bank receiving interest described in
section 881(c)(3)(A) of the Internal Revenue Code;
o such interest is not effectively connected with your conduct of a
U.S. trade or business; and
o you provide a signed written statement, under penalties of
perjury, which can reliably be related to you, certifying that you
are not a U.S. person within the meaning of the Internal Revenue
Code and providing your name and address to:
(A) us or our paying agent; or
(B) a securities clearing organization, bank or other
financial institution that holds customers' securities in
the ordinary course of its trade or business and holds
your Notes on your behalf and that certifies to us or our
paying agent under penalties of perjury that it, or the
bank or financial institution between it and you, has
received from you your signed, written statement and
provides us or our paying agent with a copy of this
statement.
Treasury regulations provide alternative methods for satisfying the
certification requirement described in this section. In addition, under these
Treasury regulations:
o if you are a foreign partnership, the certification requirement
will generally apply to partners in you, and you will be required
to provide certain information;
o if you are a foreign trust, the certification requirement will
generally be applied to you or your beneficial owners depending on
whether you are a "foreign complex trust," "foreign simple trust,"
or "foreign grantor trust" as defined in the Treasury regulations;
and
o look-through rules will apply for tiered partnerships, foreign
simple and foreign grantor trusts.
If you are a foreign partnership or a foreign trust, you should consult
your own tax advisor regarding your status under these Treasury regulations and
the certification requirements applicable to you.
U.S. FEDERAL INCOME TAX. Except for the possible application of U.S.
withholding tax (see "-Non-U.S. Holders-U.S. Federal Withholding Tax" above) and
backup withholding tax (see "-Backup Withholding and Information Reporting"
below), you generally will not have to pay U.S. federal income tax on payments
of principal and interest on your Notes, or on any gain or income realized from
the sale, redemption, retirement at maturity or other disposition of your Notes
(provided that, in the case of
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proceeds representing accrued interest, the conditions described in "-Non-U.S.
Holders-U.S. Federal Withholding Tax" are met), unless:
o in the case of gain, you are an individual who is present in
the U.S. for 183 days or more during the taxable year of the
sale or other disposition of your Notes, and specific other
conditions are met; or
o the gain is effectively connected with your conduct of a U.S.
trade or business, and, if an income tax treaty applies, is
generally attributable to a U.S. "permanent establishment"
maintained by you.
If you are engaged in a trade or business in the U.S. and interest,
gain or any other income in respect of your Notes is effectively connected with
the conduct of your U.S. trade or business, and, if an income tax treaty
applies, you maintain a U.S. "permanent establishment" to which the interest,
gain or other income is generally attributable, you may be subject to U.S.
income tax on a net basis on the interest, gain or income (although interest is
exempt from the withholding tax discussed in the preceding paragraphs provided
that you provide a properly executed applicable Internal Revenue Service form on
or before any payment date to claim the exemption).
In addition, if you are a foreign corporation, you may be subject to a
branch profits tax equal to 30% of your earnings and profits for the taxable
year that are effectively connected to your U.S. trade or business, as adjusted
for certain items, unless a lower rate applies to you under a U.S. income tax
treaty with your country of residence. For this purpose, you must include
interest, gain or income on your Notes in the earnings and profits subject to
the branch tax if these amounts are effectively connected with the conduct of
your U.S. trade or business.
U.S. FEDERAL ESTATE TAX. If you are an individual and are not a U.S.
citizen or a resident of the U.S. (as specially defined for U.S. federal estate
tax purposes) at the time of your death, your Notes will generally not be
subject to the U.S. federal estate tax, unless, at the time of your death:
o you directly or indirectly, actually or constructively, own ten
percent or more of the total combined voting power of all classes
of our stock entitled to vote within the meaning of section
871(h)(3) of the Internal Revenue Code and the Treasury
regulations thereunder; or
o your interest on the Notes is effectively connected with your
conduct of a U.S. trade or business.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Under current Treasury
regulations, backup withholding and information reporting will not apply to
payments made by us or our paying agent (in its capacity as such) to you if you
have provided the required certification that you are a non-U.S. holder as
described in "-Non-U.S. Holders-U.S. Federal Withholding Tax" above, and
provided that neither we nor our paying agent has actual knowledge that you are
a U.S. holder (as described in "-U.S. Holders" above). We or our paying agent
may, however, be subject to information reporting requirements with respect to
certain payments on the Notes.
The gross proceeds from the disposition of your Notes may be subject to
information reporting and backup withholding tax currently at a rate of 30% and
being reduced in stages to 28% in 2006. If you sell your Notes outside the U.S.
through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid
to you outside the U.S., then the U.S. backup withholding and information
reporting requirements generally will not apply to that payment. However, U.S.
information reporting, but not backup withholding, will apply
186
to a payment of sales proceeds, even if that payment is made outside the U.S.,
if you sell your Notes through a non-U.S. office of a broker that:
o is a U.S. person (as defined in the Internal Revenue Code);
o derives 50% or more of its gross income in specific periods
from the conduct of a trade or business in the U.S.;
o is a "controlled foreign corporation" for U.S. federal income
tax purposes;
o is a foreign partnership, if at any time during its tax year:
o one or more of its partners are U.S. persons who in the
aggregate hold more than 50% of the income or capital
interests in the partnership; or
o the foreign partnership is engaged in a U.S. trade or
business;
unless the broker has documentary evidence in its files that you are a non-U.S.
person and certain other conditions are met or you otherwise establish an
exemption. If you receive payments of the proceeds of a sale of your Notes to or
through a U.S. office of a broker, the payment is subject to both U.S. backup
withholding and information reporting unless you provide a Form W-8BEN
certifying that you are a non-U.S. person or you otherwise establish an
exemption.
You should consult your own tax advisor regarding application of backup
withholding in your particular circumstance and the availability of and
procedure for obtaining an exemption from backup withholding under current
Treasury regulations. Any amounts withheld under the backup withholding rules
from a payment to you will be allowed as a refund or credit against your U.S.
federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
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PLAN OF DISTRIBUTION
Reference is made to "The Exchange Offer" for a description of the
exchange offer, including the purpose of the exchange offer, the basis upon
which the Exchange Notes are offered and expenses incurred in connection with
the exchange offer.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the exchange offer in exchange for Initial Notes acquired by such
broker-dealer as a result of market making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and,
therefore, must deliver a prospectus meeting the requirements of the Securities
Act in connection with the exchange offer. Accordingly, each such broker-dealer
must acknowledge that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Initial Notes where such Initial Notes were acquired as a result of
market-making activities or other trading activities. We have agreed that,
starting on the consummation of the exchange offer and ending on the close of
business six months after the consummation of the exchange offer, we will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale.
Neither we nor any of our affiliates has entered into any arrangement
or understanding with any broker-dealer to distribute the Exchange Notes and we
will not receive any proceeds from any sale of Exchange Notes by any
broker-dealer or any other person. Exchange notes received by broker-dealers for
their own account pursuant to the exchange offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of the resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
broker-dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchaser of any such Exchange
Notes. Any broker-dealer that resells Exchange Notes that were received by it
for its own account pursuant to the exchange offer and any broker-dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such broker-dealer may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of six months after the consummation of the exchange
offer, we will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. We have agreed to pay all expenses
incidental to the exchange offer other than commissions or concessions of any
broker-dealer and expenses of counsel for the underwriters or holders of the
Exchange Notes.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Exchange Notes in Canada is being made only on
a private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Exchange Notes are made. Accordingly, any resale of the Exchange Notes
188
in Canada must be made under applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be made
under available statutory exemptions or under a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the Exchange Notes.
REPRESENTATIONS OF PURCHASERS
By purchasing Exchange Notes in Canada and accepting a purchase
confirmation a purchaser is representing to us and the dealer from whom such
purchase confirmation is received that
(i) the purchaser is entitled under applicable provincial
securities laws to purchase the Exchange Notes without the
benefit of a prospectus qualified under those securities laws;
(ii) where required by law, the purchaser is purchasing as
principal and not as agent; and
(iii) the purchaser has reviewed the text above under Resale
Restrictions.
RIGHTS OF ACTION-ONTARIO PURCHASERS ONLY
Under Ontario securities legislation, a purchaser who purchases a
security offered by this prospectus during the period of distribution will have
a statutory right of action for damages, or while still the owner of the
Exchange Notes, for rescission against us in the event that this prospectus
contains a misrepresentation. A purchaser will be deemed to have relied on the
misrepresentation. The right of action for damages is exercisable not later than
the earlier of 180 days from the date the purchaser first had knowledge of the
facts giving rise to the cause of action and three years from the date on which
payment is made for the Exchange Notes. The right of action for rescission is
exercisable not later than 180 days from the date on which payment is made for
the Exchange Notes. If a purchaser elects to exercise the right of action for
rescission, the purchaser will have no right of action for damages against us.
In no case will the amount recoverable in any action exceed the price at which
the Exchange Notes were offered to the purchaser and if the purchaser is shown
to have purchased the securities with knowledge of the misrepresentation, we
will have no liability. In the case of an action for damages, we will not be
liable for all or any portion of the damages that are proven to not represent
the depreciation in value of the Exchange Notes as a result of the
misrepresentation relied upon. These rights are in addition to, and without
derogation from, any other rights or remedies available at law to an Ontario
purchaser. The foregoing is a summary of the rights available to an Ontario
purchaser. Ontario purchasers should refer to the complete text of the relevant
statutory provisions.
ENFORCEMENT OF LEGAL RIGHTS
All of our directors and officers as well as the experts named herein
may be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon us or such
persons. All or a substantial portion of our assets and the assets of those
persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against us or such persons in Canada or to
enforce a judgment obtained in Canadian courts against us or those persons
outside of Canada.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Exchange Notes should consult their own legal
and tax advisors with respect to the tax consequences of an investment in the
Exchange Notes in their particular circumstances
189
and about the eligibility of the Exchange Notes for investment by the purchaser
under relevant Canadian legislation.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file periodic reports, proxy statements and other
information relating to our business, financial statements and other matters
with the SEC. Our SEC filings are available to the public over the Internet at
the SEC's web site at http://www.sec.gov. You may also read and copy any
document we file at the SEC's public reference room located at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room and its charges. Our reports and proxy
statements and other information relating to us can also be inspected at the
NYSE located at 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by us with the SEC under Section 12,
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 are
incorporated by reference into this prospectus:
o annual report on Form 10-K for the year ended December 31, 2001,
except for Items 6, 7 and 8 therein;
o proxy statement on Schedule 14A, dated March 29, 2002; and
o current report on Form 8-K, filed on April 23, 2002.
In addition, we incorporate by reference all reports and other
documents we file in the future pursuant to Section 12, 13(a), 13(c), 14 or
15(d) of the Exchange Act until this offering is completed. Any statement
contained in a previously filed document incorporated by reference in this
prospectus is modified or superseded to the extent that a statement contained in
this prospectus modifies or supersedes such statement. Any statement contained
in this prospectus or in a document incorporated by reference in this prospectus
is modified or superseded to the extent that a statement contained in any
subsequently filed document which is or is deemed to be incorporated by
reference in this prospectus modifies or supersedes such statement. Only the
modified or superseded statement shall constitute a part of this prospectus.
You may request a copy of these filings, other than their exhibits, at
no cost, by oral or written request to: UCAR International Inc., Brandywine
West, 1521 Concord Pike, Suite 301, Wilmington, Delaware 19803, Attention: Elise
A. Garofalo, Director of Investor Relations, (302) 778-8227.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes offered
hereby will be passed upon for us by Kelley Drye & Warren LLP, New York, New
York, and Stamford, Connecticut.
EXPERTS
The consolidated financial statements as of and for the year ended
December 31, 2001 included in this registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
190
The consolidated financial statements of UCAR International Inc. and
subsidiaries as of December 31, 2000, and for each of the years in the two-year
period ended December 31, 2000, have been included and incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent accountants, appearing elsewhere and incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
191
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.............................................. F-2
Independent Auditors' Report.............................................. F-3
Consolidated Balance Sheets as of December 31, 2000 and 2001.............. F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 2000 and 2001................................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 2000 and 2001................................. F-6
Consolidated Statements of Stockholders' Equity (Deficit) for
the Years Ended December 31, 1999, 2000 and 2001................. F-7
Notes to Consolidated Financial Statements................................ F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
UCAR International Inc.
Wilmington, Delaware
We have audited the accompanying Consolidated Balance Sheet of UCAR
International Inc. and Subsidiaries (the "Company") as of December 31, 2001, and
the related Consolidated Statements of Operations, Cash Flows and Stockholders'
Equity (Deficit), for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such Consolidated Financial Statements present fairly, in all
material respects, the financial position of the Company at December 31, 2001,
and the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Nashville, Tennessee
February 20, 2002
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
UCAR International Inc.:
We have audited the accompanying Consolidated Balance Sheet of UCAR
International Inc. and Subsidiaries as of December 31, 2000, and the related
Consolidated Statements of Operations, Cash Flows and Stockholders' Equity
(Deficit) for each of the years in the two-year period ended December 31, 2000.
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 auditing standards generally accepted
in the United States of America. 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, 2000, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
Nashville, Tennessee
February 15, 2001
F-3
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
AT DECEMBER 31,
---------------
2000 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 47 $ 38
Notes and accounts receivable ..................................................... 121 95
Inventories:
Raw materials and supplies ...................................................... 41 33
Work in process ................................................................. 103 111
Finished goods .................................................................. 31 33
----- -----
175 177
Prepaid expenses and deferred income taxes ........................................ 18 12
----- -----
Total current assets ............................................................ 361 322
----- -----
Property, plant and equipment ......................................................... 987 931
Less: accumulated depreciation ....................................................... 609 650
----- -----
Net fixed assets ........................................................... 378 281
----- -----
Other assets .......................................................................... 169 194
----- -----
Total assets ..................................................... $ 908 $ 797
===== =====
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable .................................................................. $ 99 $ 101
Short-term debt ................................................................... 3 7
Payments due within one year on long term debt .................................... 27 --
Accrued income and other taxes .................................................... 41 45
Other accrued liabilities ......................................................... 90 57
----- -----
Total current liabilities ....................................................... 260 210
----- -----
Long term debt ........................................................................ 705 631
Other long term obligations ........................................................... 209 231
Deferred income taxes ................................................................. 36 32
Minority stockholders' equity in consolidated entities ................................ 14 25
Stockholders' deficit
Preferred stock, par value $.01, 10,000,000 shares authorized, none issued ........ -- --
Common stock, par value $.01, 100,000,000 shares authorized, 47,491,009
shares issued at December 31, 2000, 58,532,209 shares issued at December
31, 2001 ....................................................................... -- 1
Additional paid-in capital ........................................................ 525 629
Accumulated other comprehensive income (loss) ..................................... (241) (269)
Retained deficit .................................................................. (515) (602)
Less: cost of common stock held in treasury, 2,319,482 shares at
December 31, 2000, 2,322,412 shares at December 31, 2001 ....................... (85) (85)
Common stock held in employee benefit trust, 426,400 shares at
December 31, 2001 .............................................................. -- (6)
----- -----
Total stockholders' deficit ................................................ (316) (332)
----- -----
Total liabilities and stockholders' deficit ...................... $ 908 $ 797
===== =====
See accompanying Notes to Consolidated Financial Statements
F-4
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 2000 2001
---------- ------------ -----------
Net sales............................................................... $ 831 $ 776 $ 654
Cost of sales........................................................... 565 560 469
Cost of sales - write-down of advanced graphite materials inventory..... 8 - -
---------- ----------- ----------
Gross profit......................................................... 258 216 185
Research and development................................................ 9 11 12
Selling, administrative and other expenses.............................. 86 86 78
Restructuring (credit) charges.......................................... (6) 6 12
Impairment loss on long-lived and other assets ......................... 35 3 80
Antitrust investigations and related lawsuits and claims................ - - 10
Securities class action and stockholder derivative lawsuits............. 13 (1) -
Corporate realignment and related expenses.............................. - - 2
Other (income) expense, net............................................. (9) - 1
---------- ----------- ----------
Operating profit (loss).............................................. 130 111 (10)
Interest expense........................................................ 84 75 60
---------- ----------- ----------
Income (loss) before provision for income taxes, minority interest
and extraordinary item............................................... 46 36 (70)
Provision for income taxes.............................................. 1 10 15
---------- ----------- ----------
Income (loss) before minority interest and extraordinary item........ 45 26 (85)
Less: minority stockholders' share of income........................... 3 3 2
---------- ----------- ----------
Income (loss) before extraordinary item.............................. 42 23 (87)
Extraordinary item, net of tax.......................................... - 13 -
---------- ----------- ----------
Net income (loss).................................................. $ 42 $ 10 $ (87)
========== =========== ==========
Earnings (loss) per common share:
BASIC:
-----
Income (loss) before extraordinary item............................ $ 0.94 $ 0.51 $ (1.75)
Extraordinary item, net of tax..................................... - (0.29) -
---------- ----------- ----------
Net income (loss) per share ....................................... $ 0.94 $ 0.22 $ (1.75)
========== =========== ==========
DILUTED:
-------
Income (loss) before extraordinary item............................ $ 0.91 $ 0.50 $ (1.75)
Extraordinary item, net of tax..................................... - (0.28) -
---------- ----------- ----------
Net income (loss) per share........................................ $ 0.91 $ 0.22 $ (1.75)
========== =========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-5
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
---- ---- ----
Cash flow from operating activities:
Net income (loss) ................................................................ $ 42 $ 10 $(87)
Extraordinary item, net of tax ................................................... -- 13 --
Non-cash (credits) charges to net income (loss):
Depreciation and amortization ................................................ 45 43 36
Deferred income taxes ........................................................ (26) (25) (9)
Securities class action and stockholder derivative lawsuits .................. 13 (1) --
Antitrust investigations and related lawsuits and claims ..................... -- -- 10
Restructuring charges (credit) ............................................... (6) 6 12
Impairment loss on long-lived and other assets ............................... 35 3 80
Write-down of advanced graphite materials inventory .......................... 8 -- --
Other non-cash charges ...................................................... 26 6 13
Working capital* ................................................................... (48) 43 (32)
Long term assets and liabilities ................................................... (9) (4) (6)
---- ----- ----
Net cash provided by operating activities .................................... 80 94 17
---- ----- ----
Cash flow from investing activities:
Capital expenditures ............................................................. (56) (52) (40)
Purchase of investment ........................................................... -- (1) (2)
Purchases of short-term investments .............................................. (20) -- --
Maturities of short-term investments ............................................. 28 2 --
Sale of assets ................................................................... 9 1 3
---- ----- ----
Net cash used in investing activities ........................................ (39) (50) (39)
---- ----- ----
Cash flow from financing activities:
Short-term debt borrowings, net .................................................. (18) 3 3
Revolving credit facility borrowings, net ........................................ (3) 56 7
Long term debt borrowings ........................................................ -- 661 2
Long term debt reductions ........................................................ (59) (707) (96)
Minority interest investment ..................................................... -- -- 9
Financing costs .................................................................. -- (28) (4)
Sale of common stock ............................................................. 1 2 94
Dividends paid to minority stockholder ........................................... (1) -- --
---- ----- ----
Net cash provided by (used in) financing activities .......................... (80) (13) 15
---- ----- ----
Net increase (decrease) in cash and cash equivalents ............................. (39) 31 (7)
Effect of exchange rate changes on cash and cash equivalents ..................... (2) (1) (2)
Cash and cash equivalents at beginning of period ................................. 58 17 47
---- ----- ----
Cash and cash equivalents at end of period ....................................... $ 17 $ 47 $ 38
==== ===== ====
Supplemental disclosures of cash flow information:
Net cash paid during the year for:
Interest expense ............................................................. $ 76 $ 81 $ 56
==== ===== ====
Income taxes ................................................................. $ 33 $ 13 $ 25
==== ===== ====
* Net change in working capital due to the following components:
(Increase) decrease in current assets:
Notes and accounts receivable ................................................ $ 15 $ 30 $ 20
Inventories .................................................................. 33 18 (20)
Prepaid expenses ............................................................. 3 3 --
Payments for antitrust investigations and related lawsuits and claims ............ (64) (23) (16)
Payments for securities class action and stockholder derivative lawsuits ......... (12) -- --
Restructuring payments ........................................................... (23) (7) (18)
Increase (decrease) in payables and accruals ..................................... -- 22 2
---- ----- ----
Working capital .............................................................. $(48) $ 43 $(32)
==== ===== ====
See accompanying Notes to Consolidated Financial Statements
F-6
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in millions)
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK HELD TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY IN EMPLOYEE STOCKHOLDERS'
STOCK CAPITAL INCOME (LOSS) DEFICIT STOCK BENEFIT TRUST DEFICIT
-------- --------- ------------- ---------- -------- ------------- -------------
Balance at December 31, 1998.................. $ - $ 521 $ (157) $ (566) $ (85) $ - $ (287)
Comprehensive income (loss):
Net income............................... - - - 42 - - 42
Foreign currency translation adjustments. - - (48) - - - (48)
----- ------ ------- ------ ------ ------- -------
Total comprehensive income (loss).... - - (48) 42 - - (6)
Sale of common stock - treasury stock......... - - - (1) 1 - -
Acquisition of common stock held in
treasury................................. - 2 - - (2) - -
----- ------ ------- ------ ------ ------- -------
Balance at December 31, 1999.................. $ - $ 523 $ (205) $ (525) $ (86) $ - $ (293)
===== ====== ======= ====== ====== ======= =======
Comprehensive income (loss):
Net income............................... - - - 10 - - 10
Other comprehensive income:
Unrealized loss on available-for-sale
securities......................... - - (1) - - - (1)
Foreign currency translation
adjustments........................ - - (35) - - - (35)
----- ------ ------- ------ ------ ------- -------
Total comprehensive income (loss).. - - (36) 10 - - (26)
Sale of common stock - stock options.......... - 2 - - - - 2
Sale of common stock - treasury stock......... - - - - 1 - 1
----- ------ ------- ------ ------ ------- -------
Balance at December 31, 2000.................. $ - $ 525 $ (241) $ (515) $ (85) $ - $ (316)
===== ====== ======= ====== ====== ======= =======
Comprehensive income (loss):
Net loss................................. - - - (87) - - (87)
Other comprehensive income:
Recognized loss on available-for-
sale securities................... - - 1 - - - 1
Foreign currency translation
adjustments...................... - - (29) - - - (29)
----- ------ ------- ------ ------ ------- -------
Total comprehensive income (loss)......... - - (28) (87) - - (115)
Sale of 2.5% equity interest in Graftech...... - 4 - - - - 4
Common stock issued to Employee
Benefit Trust............................ - 6 - - - (6) -
Sale of common stock, net..................... 1 94 - - - - 95
----- ------ ------- ------ ------ ------- -------
Balance at December 31, 2001.................. $ 1 $ 629 $ (269) $ (602) $ (85) $ (6) $ (332)
===== ====== ======= ====== ====== ======= =======
See accompanying Notes to Consolidated Financial Statements.
F-7
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DISCUSSION OF BUSINESS AND STRUCTURE
IMPORTANT TERMS
We use the following terms to identify various companies or groups of
companies in the Consolidated Financial Statements.
"UCAR" refers to UCAR International Inc. only. UCAR is our public
parent company and the issuer of the publicly traded common stock covered by the
Consolidated Financial Statements. We will request our stockholders to approve,
at our Annual Meeting of Stockholders for 2002, a change in the name of UCAR to
GrafTech International Ltd.
"UCAR Global" refers to UCAR Global Enterprises Inc. only. UCAR Global
is a direct, wholly-owned subsidiary of UCAR and the direct or indirect holding
company for all of our operating subsidiaries. UCAR Global was the issuer of the
previously outstanding 12% senior subordinated notes due 2005 (the "Subordinated
Notes") and was the primary borrower under our prior senior secured bank credit
facilities (the "Prior Senior Facilities").
"UCAR Carbon" refers to UCAR Carbon Company Inc. only. UCAR Carbon is
our wholly owned subsidiary through which we conduct most of our U.S.
operations. In connection with the corporate realignment of our subsidiaries as
described below, UCAR Carbon will change its name to UCAR Technology Company
Inc. and transfer its businesses to one or more newly formed wholly owned U.S.
subsidiaries.
"UCAR Finance" refers to UCAR Finance Inc. only. UCAR Finance is a
direct, wholly owned special purpose finance subsidiary of UCAR and the borrower
under our senior secured bank credit facilities (as amended, the "Senior
Facilities"). UCAR Finance is the issuer of our outstanding 10.25% senior notes
due 2012 (the "Senior Notes").
"Graftech" refers to Graftech Inc. only. Graftech is our 97.5% owned
(wholly owned, prior to June 2001) subsidiary engaged in the development,
manufacture and sale of natural graphite-based products. In connection with the
corporate realignment of our subsidiaries as described below, Graftech will
change its name to Graftech Technology Company Inc. and transfer its business to
its newly formed 100% owned U.S. subsidiary (to be named Graftech Inc.). These
companies will retain their names after UCAR International Inc. changes its name
to GrafTech International Ltd.
"Carbone Savoie" refers to Carbone Savoie S.A.S. only. Carbone Savoie
is our 70% owned subsidiary engaged in the development, manufacture and sale of
graphite and carbon cathodes.
"Subsidiaries" refers to those companies which, at the relevant time,
are or were majority owned or wholly owned directly or indirectly by UCAR or by
its predecessors to the extent that those predecessors' activities related to
the carbon and graphite business. All of UCAR's subsidiaries have been wholly
owned (with de minimis exceptions in the case of certain foreign subsidiaries)
from at least January 1, 1998 through December 31, 2001, except for:
o our German subsidiary, which was acquired in early 1997 and 70%
owned until early 1999, when it became wholly owned to facilitate
its liquidation;
F-8
o Carbone Savoie, which has been and is 70% owned; and
o Graftech, which was 100% owned until it became 97.5% owned in
June 2001.
Our 100% owned Brazilian cathode manufacturing operations were contributed to
Carbone Savoie, and as a result became 70% owned, on March 31, 2001.
"We," "us" or "our" refer to UCAR and its subsidiaries collectively or,
if the context so requires, UCAR, UCAR Global or UCAR Finance, individually.
We are realigning the corporate organizational structure of our
subsidiaries. Upon completion of this corporate realignment, most of the
businesses of each division will be segregated into separate companies along
divisional lines. In addition, because most of the operations, net sales and
growth opportunities of our Graphite Power Systems Division are located outside
the U.S., most of its operations will be held by our Swiss subsidiary or its
subsidiaries. Most of our technology will continue to be held by our U.S.
subsidiaries.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements present our consolidated
financial position, results of operations and cash flows at the dates and for
the periods indicated. 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.
INVESTMENTS
Investments in marketable equity securities are generally classified
and accounted for as hold-to-maturity or available-for-sale. We determine the
appropriate classification of debt and equity securities at the time of purchase
and reassess the classification at each reporting date. Investments in debt
securities classified as hold-to-maturity are reported at amortized cost plus
accrued interest. Securities classified as available-for-sale are reported at
fair value with unrealized gains and losses, net of related tax, recorded as a
separate component of comprehensive income in the Consolidated Statement of
Stockholders' Equity (Deficit) until realized. Interest and amortization of
premiums and discounts for debt securities are included in interest expense.
Gains and losses on securities sold are determined based on the specific
identification method and are included in other (income) expense, net. For all
investment securities, unrealized losses that are other than temporary are
recognized in net income (loss). We do not hold these securities for speculative
or trading purposes.
REVENUE RECOGNITION
Sales of our products are recognized when persuasive evidence of an
arrangement exists, delivery has occurred, title has passed, the revenue amount
is determinable and collection is reasonably assured. Sales and licenses of
technology are recognized over the term of the agreements.
F-9
INVENTORIES
Inventories are stated at cost or market, whichever is lower. Cost is
determined on the "first-in first-out" ("FIFO") or the "average cost" method.
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. We generally use accelerated depreciation methods
for tax purposes, where appropriate.
The average estimated useful lives are as follows:
YEARS
-----
Buildings......................................... 25
Land improvements................................. 20
Machinery and equipment........................... 20
Furniture and fixtures............................ 10
Transportation equipment.......................... 6
The carrying value of fixed assets is assessed when events and
circumstances indicating impairment are present. We determine such impairment by
measuring undiscounted estimated future cash flows. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the asset is
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed are reported at the lower of the carrying amount or
fair value less costs to sell.
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, we
assess 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 assets. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows of the acquired assets, at our internal rate of
return. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." Under the statement, goodwill and certain other
intangibles will no longer be amortized; however, they must be tested for
impairment at least annually. Amortization will continue to be recorded for
other intangible assets with determinable lives. We will adopt the statement
effective January 1, 2002. Goodwill amortization expense in 2001 was
approximately $2 million. We anticipate that the goodwill impairment provisions
of the statement will not have a significant impact on our consolidated
financial position or results of operations except that we will no longer
amortize goodwill.
F-10
DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138. The adoption did not have a significant impact on our consolidated
financial position or results of operations. We do not use derivative financial
instruments for trading purposes. They are used to manage well-defined currency
exchange rate risks and interest rate risks.
We enter into foreign currency instruments to manage exposure to
currency exchange rate fluctuations. These foreign currency instruments, which
include forward exchange contracts, purchased currency options and currency
option collars, attempt to hedge primarily U.S. dollar-denominated debt held by
several of our foreign subsidiaries and identifiable foreign currency
receivables, payables and commitments held by our 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.
Forward exchange contracts, purchased currency options and currency option
collars are carried at market value. Gains and losses due to the recording of
such contracts at fair value are recognized currently as other (income) expense,
net.
We enter into agreements with financial institutions that are intended
to limit, or cap, our exposure to the incurrence of additional interest expense
due to increases in variable interest rates. Since we deal with counterparties
that are major banks, we do not anticipate credit-related losses from
non-performance by such counterparties.
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. A valuation allowance is recorded when it is determined that it
is more likely than not that any portion of a recorded deferred tax asset will
not be realized.
STOCK-BASED COMPENSATION PLANS
We account 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 or if ultimate vesting is subject to performance conditions.
The total amount of recorded compensation expense, if any, is based on the
number of awards that eventually vest. No compensation expense is recognized for
forfeited awards, failure to satisfy a service requirement or
F-11
failure to satisfy a performance condition. Our accruals of compensation expense
for awards subject to performance conditions are based on our assessment of the
probability of satisfying the performance conditions. As of December 31, 2001,
all performance options were fully vested.
RETIREMENT PLANS
The cost of pension benefits under our retirement plans is recorded in
accordance with SFAS No. 87, "Employee Accounting for Pensions" as determined by
independent actuarial firms using the "projected unit credit" actuarial cost
method. Contributions to the U.S. retirement plan are made in accordance with
the requirements of the Employee Retirement Income Security Act of 1974. Plan
settlements and curtailments are recorded in accordance with SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and Termination Benefits."
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. Effective November 1, 2001, the U.S. plan was modified to limit our
cost of future annual retiree medical benefits at the 2001 cost and is accounted
for prospectively.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Our operations are governed by laws addressing protection of the
environment and worker safety and health. Under various circumstances, these
laws provide for civil and criminal penalties and fines, as well as injunctive
and remedial relief, for noncompliance and require remediation at sites where
company-related substances have been released into the environment.
We have been in the past, and may become in the future, the subject of
formal or informal enforcement actions or proceedings regarding noncompliance
with these laws or the remediation of company-related substances released into
the environment. Such matters typically are resolved by negotiation with
regulatory authorities resulting in commitments to compliance, abatement or
remediation programs and in some cases payment of penalties. Historically,
neither the commitments undertaken nor the penalties imposed on us have been
material.
Environmental considerations are part of all significant capital
expenditure decisions. Environmental remediation, compliance and management
expenses were approximately $12 million and $14 million in 2001 and 2000,
respectively. The accrued liability relating to environmental matters increased
to $5 million at December 31, 2001 from $1 million at December 31, 2000. The
change was primarily due to a reclassification of $4 million from the accrual
for restructuring costs. A charge to income is recorded when it is probable that
a liability has been incurred and the cost can be reasonably estimated. Our
environmental liabilities do not take into consideration any possible recoveries
of future insurance proceeds. Because of the uncertainties associated with
environmental remediation activities at sites where we may be potentially
liable, future expenses to remediate identified sites could be considerably
higher than the accrued liability. However, while neither the timing nor the
amount of ultimate costs associated with known environmental remediation matters
can be determined at this time, we do not expect that these matters will have a
material adverse effect on our financial position, results of operations or cash
flows.
F-12
POST-EMPLOYMENT BENEFITS
We accrue post-employment benefits expected to be paid before
retirement, principally severance, over employees' active service periods.
USE OF ESTIMATES
We have 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 the Consolidated Financial Statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
RECLASSIFICATION
Certain amounts previously reported have been reclassified to conform
to the current year presentation.
FOREIGN CURRENCY TRANSLATION
Generally, except for operations in Russia where high inflation has
existed, unrealized gains and losses resulting from translation of the financial
statements of our foreign subsidiaries from their functional currencies into
dollars are accumulated in other comprehensive income on the Consolidated
Balance Sheets until such time as the operations are sold or substantially or
completely liquidated. Translation gains and losses relating to operations,
where high inflation has existed, are included in other (income) expense, net in
the Consolidated Statements of Operations. Our Mexican subsidiary began using
the dollar as its functional currency during 1999, as its sales and purchases
are predominantly dollar-denominated. Prior to August 1, 2000, our Swiss
subsidiary used the dollar as its functional currency. Beginning August 1, 2000,
our Swiss subsidiary began using the euro as its functional currency because its
operations became predominantly euro-dominated. We have designated (euro)125
million of our Tranche A Term Loans as a net equity hedge for our net
investments in Europe. The currency effects of the debt obligations are
reflected in accumulated other comprehensive income (loss) in the Consolidated
Statement of Stockholders' Equity (Deficit) where they offset gains and losses
recorded on the net investment in Europe.
NEW ACCOUNTING STANDARDS
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, excluding
goodwill and other intangible assets not being amortized pursuant to SFAS No.
142, and certain other assets. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. We will
adopt the statement effective January 1, 2002. We anticipate that the statement
will not have a significant impact on our consolidated financial position or
results of operations.
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. SFAS
No. 143 will be effective for all financial statements for fiscal years
beginning after June 15, 2002. We anticipate that the statement will not, upon
adoption, have a significant impact on our consolidated financial position or
results of operations.
F-13
In July 2001, the FASB issued SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets," both of which are
effective for all fiscal years beginning after December 15, 2001. These
statements establish accounting and reporting standards for business
combinations, goodwill and intangible assets. We will adopt these statements
effective January 1, 2002. We anticipate that the statements will not have a
significant impact on our consolidated financial position or results of
operations except that we will no longer amortize goodwill.
In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," a
replacement of SFAS No. 125, which has the same title. SFAS No. 140 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings, and requires certain
additional disclosures. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001, and is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 did
not have a significant impact on our consolidated financial position or results
of operations.
(3) FINANCIAL INSTRUMENTS
We do not use derivative financial instruments for trading purposes.
They are used to manage well-defined currency exchange rate and interest rate
risks.
FOREIGN CURRENCY CONTRACTS
The amount of foreign exchange contracts used by us to minimize foreign
currency exposure was $69 million at December 31, 2000 and $37 million at
December 31, 2001. Contracts hedging U.S. dollar-denominated debt totaled $61
million at December 31, 2000 and nil at December 31, 2001. Of the total foreign
exchange contracts outstanding approximately $9 million (13%) were offsetting at
December 31, 2000 and approximately $4 million (11%) were offsetting at December
31, 2001.
SALE OF RECEIVABLES
Certain of our U.S. and foreign subsidiaries sold receivables of $79
million in 1999, $152 million in 2000 and $223 million in 2001. Receivables sold
and remaining on the Consolidated Balance Sheets were nil at December 31, 1999,
nil at December 31, 2000, and $1 million at December 31, 2001.
INTEREST RATE RISK MANAGEMENT
We periodically enter into agreements with financial institutions which
are intended to limit, or cap, our exposure to the incurrence of additional
interest expense due to increases in variable interest rates. At December 31,
2001, we had outstanding interest rate caps of $100 million and (euro)200
million limiting our floating interest rate factor on related debt to a
weighted-average rate of 5.0% (where the interest on the debt is based on LIBOR)
and 5.0% (where the interest on the debt is based on euro LIBOR) through various
dates ending June 2002. Fees related to these agreements are charged to interest
expense over the term of the agreements.
FAIR MARKET VALUE DISCLOSURES
SFAS No. 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
F-14
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 NOTES AND ACCOUNTS RECEIVABLES,
ACCOUNTS PAYABLE AND OTHER CURRENT PAYABLES-The carrying amount
approximates fair value because of the short maturity of these instruments.
DEBT-Fair values of debt and related interest rate risk agreements
approximate carrying value at December 31, 2000 and 2001 because of the
nature of the instruments.
FOREIGN CURRENCY CONTRACTS-Foreign currency contracts are carried at market
value. The market value of the contracts was approximately $1 million at
December 31, 2000 and nil at December 31, 2001.
(4) SEGMENT REPORTING
Beginning in the 2001 first quarter, we realigned our businesses into
two new reportable segments: our Graphite Power Systems Division ("GPS") and our
Advanced Energy Technology Division ("AET"). GPS includes our graphite and
carbon electrode and cathode businesses serving primarily the steel, aluminum
and ferroalloy industries. AET includes Graftech, our Advanced Graphite
Materials and Advanced Carbon Materials business units (which includes our
former graphite and carbon specialties businesses), and a new business unit
called High Tech High Temp ("HT2") that markets technical solutions. These two
segments are managed separately because of the different markets they serve and
the different products and services they sell. Prior year segment information
has been reclassified to conform to current year segment information.
The accounting policies of the reportable segments are the same as
those described in Note 2. We evaluate the performance of our operating segments
based on gross profit. Intersegment sales and transfers are not material.
The following tables summarize financial information concerning our
reportable segments.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 2000 2001
------------- ------------- ------------
(Dollars in millions)
Net sales to external customers:
Graphite Power Systems Division................. $ 700 $ 651 $ 525
Advanced Energy Technology Division............. 131 125 129
------ ------ ------
Consolidated net sales....................... $ 831 $ 776 $ 654
====== ====== ======
Gross profit:
Graphite Power Systems Division................. $ 236 $ 184 $ 147
Advanced Energy Technology Division............. 22 32 38
------ ------ ------
Consolidated gross profit.................... $ 258 $ 216 $ 185
====== ====== ======
Depreciation and amortization:
Graphite Power Systems Division................. $ 39 $ 40 $ 31
Advanced Energy Technology Division............. 6 3 5
------ ------ -------
Consolidated depreciation and
amortization............................... $ 45 $ 43 $ 36
====== ====== =======
We do not report assets by business segment. Assets are managed based
on geographic location because both business segments share certain facilities.
The following tables summarize information as to our operations in different
geographic areas:
F-15
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 2000 2001
-------------- ------------- ------------
(Dollars in millions)
Net sales (a):
U.S.................................................. $ 267 $ 240 $ 196
Canada............................................... 50 34 21
Mexico............................................... 49 43 33
Brazil............................................... 48 46 44
France............................................... 148 142 137
Italy................................................ 42 39 30
Switzerland ......................................... 106 104 79
South Africa......................................... 61 59 53
Spain................................................ 29 31 29
Other countries...................................... 31 38 32
-------- ------- --------
Total.............................................. $ 831 $ 776 $ 654
======== ======= ========
--------------------
(a) Net sales are based on location of seller.
AT DECEMBER 31,
-------------------------------------
1999 2000 2001
---- ---- ----
(Dollars in millions)
Long-lived assets (a):
U.S............................................. $ 126 $ 115 $ 76
Mexico.......................................... 34 38 37
Brazil.......................................... 42 37 34
France.......................................... 95 93 94
Italy........................................... 35 31 6
South Africa.................................... 56 43 27
Switzerland..................................... 5 23 7
Other countries................................. 17 20 17
------ ------ ------
Total......................................... $ 410 $ 400 $ 298
====== ====== ======
--------------------
(a) Long-lived assets represent net fixed assets and goodwill, net of accumulated amortization.
(5) LONG TERM DEBT
The following table presents our long term debt:
AT DECEMBER 31,
-----------------------------
2000 2001
---- ----
(Dollars in millions)
Senior Facilities:
Tranche A Euro Facility...................................... $ 239 $ 194
Tranche A USD Facility....................................... 54 23
Tranche B USD Facility....................................... 346 313
Revolving Facility........................................... 88 95
------ -----
Total Senior Facilities................................... 727 625
Switzerland mortgage and other European debt.................... 5 6
------ -----
Subtotal.................................................. 732 631
Less: payments due within one year.......................... 27 -
------ -----
Total..................................................... $ 705 $ 631
====== =====
F-16
See Note 18 for a description of the issuance of $400 million of Senior
Notes in the 2002 first quarter.
The Senior Facilities, as amended, consist of:
o A Tranche A Facility providing for initial term loans of $137
million and of (euro)161 million (equivalent to $158 million
based on currency exchange rates in effect at February 22, 2000)
to UCAR Finance. The Tranche A Facility amortizes in quarterly
installments over six years, commencing June 30, 2000, with
quarterly installments ranging from about $2 million in 2000 to
about $17 million in 2005, with the final installment payable on
December 31, 2005. In October 2000, we converted $78 million from
dollar-denominated to euro-denominated debt.
o A Tranche B Facility providing for initial term loans of $350
million to UCAR Finance. The Tranche B Facility amortizes over
eight years, commencing June 30, 2000, with nominal quarterly
installments during the first six years, and quarterly
installments of about $41 million in 2006 and 2007, with the
final installment payable on December 31, 2007.
o A Revolving Facility providing for revolving and swingline loans
to, and the issuance of dollar-denominated letters of credit for
the account of, UCAR Finance and certain of our other
subsidiaries in an aggregate principal and stated amount at any
time not to exceed(euro)250 million. The Revolving Facility
terminates on February 22, 2006. As a condition to each borrowing
under the Revolving Facility, we are required to represent, among
other things, that the aggregate amount of payments made
(excluding certain imputed interest) and additional reserves
created in connection with antitrust, securities and stockholder
derivative investigations, lawsuits and claims do not exceed $340
million by more than $130 million (which $130 million is reduced
by the amount of certain debt (excluding the Senior Notes)
incurred by us that is not incurred under the Senior Facilities).
After completion of our public offering of common stock in July 2001,
our private offering of Senior Notes in February 2002 and the initial
application of the net proceeds therefrom, the aggregate principal payments due
on the Tranche A and Tranche B Term Loans are: no payments in 2002, 2003 or
2004, $26 million in 2005, $26 million in 2006 and $164 million in 2007.
We are required to make mandatory prepayments in the amount of:
o Either 75% or 50% (depending on our leverage ratio, which is the
ratio of our adjusted net debt to our adjusted total EBITDA) of
adjusted excess cash flow. The obligation to make these
prepayments, if any, arises after the end of each year with
respect to adjusted excess cash flow during the prior year.
o 100% of the net proceeds of certain asset sales or incurrence of
certain indebtedness.
o 50% of the net proceeds of the issuance of any UCAR equity
securities (60%, in the case of the net proceeds from our public
offering of common stock in July 2001).
We may make voluntary prepayments under the Senior Facilities. There is
no penalty or premium due in connection with prepayments (whether voluntary or
mandatory).
UCAR Finance makes secured and guaranteed intercompany loans of the net
proceeds of borrowings under the Senior Facilities to UCAR Global's
subsidiaries. The obligations of UCAR
F-17
Finance under the Senior Facilities are secured, with certain exceptions, by
first priority security interests in all of these intercompany loans (including
the related security interests and guarantees). Following completion of the sale
of the Senior Notes, these intercompany loans consist of intercompany revolving
loans to UCAR Carbon and our Swiss subsidiary.
UCAR has unconditionally and irrevocably guaranteed the obligations of
UCAR Finance under the Senior Facilities. This guarantee is secured, with
certain exceptions, by first priority security interests in all of the
outstanding capital stock of UCAR Global and UCAR Finance, all of the
intercompany debt owed to UCAR and UCAR's interest in the lawsuit initiated by
us against our former parents.
UCAR, UCAR Global and each of UCAR Global's subsidiaries has
guaranteed, with certain exceptions, the obligations of UCAR Global's
subsidiaries under the intercompany loans, except that our foreign subsidiaries
have not guaranteed the intercompany loan obligations of our U.S. subsidiaries.
The obligations of UCAR Global's subsidiaries under the intercompany
loans as well as these guarantees are secured, with certain exceptions, by first
priority security interests in substantially all of our assets, except that no
more than 65% of the capital stock or other equity interests in our foreign
subsidiaries held directly by our U.S. subsidiaries and no other foreign assets
secure obligations or guarantees of our U.S. subsidiaries.
The interest rates, as amended, applicable to the Tranche A and
Revolving Facilities are, at our option, either euro LIBOR plus a margin ranging
from 1.375% to 3.375% (depending on our leverage ratio) or the alternate base
rate plus a margin ranging from 0.375% to 2.375% (depending on our leverage
ratio). The interest rate applicable to the Tranche B Facility is, at our
option, either euro LIBOR plus a margin ranging from 2.875% to 3.625% (depending
on our leverage ratio) or the alternate base rate plus a margin ranging from
1.875% to 2.625% (depending on our leverage ratio). The alternate base rate is
the higher of the prime rate announced by JP Morgan Chase Bank or the federal
funds effective rate, plus 0.50%. UCAR Finance pays a per annum fee ranging from
0.375% to 0.500% (depending on our leverage ratio) on the undrawn portion of the
commitments under the Revolving Facility. At December 31, 2001, the interest
rates on outstanding debt under the Senior Facilities were: Tranche A euro
Facility, 6.4%; Tranche A dollar Facility, 4.9%; Tranche B Facility, 5.6%; and
Revolving Facility, 5.2%. The weighted average interest rate on the Senior
Facilities was 8.1% during 2001.
We enter into agreements with financial institutions, which are
intended to limit, or cap, our exposure to incurrence of additional interest
expense due to increases in variable interest rates. Use of these agreements is
allowed with the Senior Facilities.
The Senior Facilities contain a number of significant covenants that,
among other things, restrict our ability to sell assets, incur additional
indebtedness, repay or refinance other debt or amend other debt instruments,
create liens on assets, enter into leases, investments or acquisitions, engage
in mergers or consolidations, make capital expenditures, make dividend payments
to UCAR, pay intercompany debt owed to UCAR, engage in transactions with
affiliates, or pay dividends or make other restricted payments and that
otherwise restrict corporate activities. In addition, we are required to comply
with specified minimum interest coverage and maximum leverage ratios, which
become more restrictive over time, beginning December 31, 2002.
In addition to the failure to pay principal, interest and fees when
due, events of default under the Senior Facilities include: failure to comply
with applicable covenants; failure to pay when due, or other defaults permitting
acceleration of, other indebtedness exceeding $7.5 million; judgment defaults in
excess of $7.5 million to the extent not covered by insurance; certain events of
bankruptcy; and certain changes in control.
F-18
Under the Senior Facilities, UCAR is permitted to pay dividends on, and
repurchase, common stock in an aggregate annual amount of $25 million, plus up
to an additional $25 million if certain leverage ratio and excess cash flow
requirements are satisfied. We are also permitted to repurchase common stock
from present or former directors, officers or employees in an aggregate amount
of up to the lesser of $5 million per year (with unused amounts permitted to be
carried forward) or $25 million on a cumulative basis since February 22, 2000.
We are highly leveraged and, as discussed in Note 14, have substantial
obligations in connection with antitrust investigations, lawsuits and claims. We
had total debt of $638 million and a stockholders' deficit of $332 million at
December 31, 2001. Our leverage and obligations, as well as changes in
conditions affecting our industry, changes in global and regional economic
conditions and other factors, have adversely impacted our recent operating
results.
We use, and are dependent on, funds available under our revolving
credit facility, including continued compliance with the financial covenants
under the Senior Facilities, as well as monthly or quarterly cash flow from
operations as our primary sources of liquidity.
Our high leverage and substantial obligations in connection with
antitrust investigations, lawsuits and claims could have a material impact on
our liquidity. Cash flow from operations services payment of our debt and these
obligations, thereby reducing funds available to us for other purposes. Our
leverage and these obligations make us more vulnerable to economic downturns or
in the event that these obligations are greater or timing of payment is sooner
than expected.
Our ability to service our debt, as it comes due, including maintaining
compliance with the covenants under the Senior Facilities, and to meet these and
other obligations as they come due is dependent on our future financial and
operating performance. This performance, in turn is subject to various factors,
including certain factors beyond our control, such as changes in conditions
affecting our industry, changes in global and regional economic conditions,
changes in interest and currency exchange rates, developments in antitrust
investigations, lawsuits and claims involving us and inflation in raw material,
energy and other costs.
Even if we are able to meet our debt service and other obligations when
due, we may not be able to comply with the financial covenants under the Senior
Facilities. A failure to so comply, unless waived by the lenders thereunder,
would be a default thereunder. This would permit the lenders to accelerate the
maturity of substantially all of our debt. It would also permit them to
terminate their commitments to extend credit under our revolving credit
facility. This would have an immediate material adverse effect on our liquidity.
If we were unable to repay our debt to the lenders, the lenders could proceed
against the collateral securing the Senior Facilities and exercise all other
rights available to them.
The Senior Facilities require us to, among other things, comply with
specified minimum interest coverage and maximum leverage ratios. In October
2000, the Senior Facilities were amended to, among other things, increase the
maximum leverage ratio permitted thereunder through June 30, 2001. In connection
therewith, we paid an amendment fee of $2 million and the margin which is added
to either euro LIBOR or the alternate base rate in order to determine the
interest rate payable thereunder increased by 25 basis points.
In April 2001, the Senior Facilities were amended to, among other
things, exclude certain expenses incurred in connection with the lawsuit
initiated by us against our former parents (up to a maximum of $20 million, but
not more than $3 million in any quarter) and certain charges and payments in
connection with antitrust fines, settlements and expenses from the calculation
of financial covenants. Charges (over and above $340 million charge recorded in
1997) recorded on or before June 30, 2002 for
F-19
antitrust fines, settlements and expenses are excluded from the calculation of
financial covenants (until paid) up to a maximum of $130 million (reduced by the
amount of certain debt, other than the Senior Notes, incurred by us that is not
incurred under the Senior Facilities, $6 million of which debt was outstanding
at December 31, 2001). The fine assessed by the antitrust authority of the
European Union, as well as the additional $10 million charge recorded in July
2001 and any payments related to such fine (including payments within the $340
million charge recorded in 1997), are excluded from the calculation of financial
covenants through June 30, 2002.
In July 2001, the Senior Facilities were amended to, among other
things, change our financial covenants so that they were less restrictive
through 2006 than would otherwise have been the case. In connection therewith,
we have agreed that our investments in Graftech and any of our other
unrestricted subsidiaries after this amendment will be made in the form of
secured loans, which will be pledged to secure the Senior Facilities, and the
maximum amount of capital expenditures permitted under the Senior Facilities
would be reduced in 2001 and 2002. We do not expect that our capital
expenditures would exceed such maximums. In connection therewith, we paid an
amendment fee of $2 million and the margin which is added to either euro LIBOR
or the alternate base rate in order to determine the interest rate payable
thereunder increased by 25 basis points.
In December 2001, the Senior Facilities were amended to, among other
things, permit the corporate realignment of our subsidiaries. In connection
therewith, we paid an amendment fee of $1 million.
In February 2002, the Senior Facilities were amended to, among other
things, permit us to issue senior notes (in an amount not to exceed $400
million), to pledge certain unsecured intercompany term notes and unsecured
guarantees of those notes to secure such senior notes, to have certain U.S.
subsidiaries holding a majority of our U.S. assets guarantee such senior notes
and to have those U.S. subsidiaries pledge shares of Graftech to secure such
guarantees. Furthermore, the amendment permitted the net proceeds from the sale
of such senior notes to be applied as described elsewhere in these Notes.
In connection with this amendment, our maximum permitted leverage ratio
was substantially increased and our minimum required interest coverage ratio was
substantially decreased while maintaining full availability of our revolving
credit facility. The amendment also changed the manner in which net debt and
EBITDA are calculated to exclude certain fees, costs and expenses (including
fees of counsel and experts) in connection with the lawsuit initiated by us
against our former parents as well as any letter of credit issued to secure
payment of the antitrust fine assessed against us by the antitrust authority of
the European Union. In addition, the amendment expanded our ability to make
certain investments, including investments in Graftech, and eliminate provisions
relating to a spin-off of Graftech. In connection therewith, we paid an
amendment fee of $1 million and the margin which is added to either euro LIBOR
or the alternate base rate in order to determine the interest rate payable
thereunder increased by 37.5 basis points.
EQUITY OFFERING
On July 31, 2001, we sold an aggregate of 10,350,000 shares of our
common stock in a registered public offering at a public offering price of $9.50
per share. The gross proceeds from the offering were $98 million and the net
proceeds to us were $91 million. Sixty percent of the net proceeds were used to
prepay term loans under the Senior Facilities. Prepayments of $23 million under
the Tranche A Facility and $32 million under the Tranche B Facility were applied
against scheduled maturities of each Tranche in the order in which they were
due. The balance of the net proceeds were applied to reduce the outstanding
balance under the Revolving Facility.
F-20
SUBORDINATED NOTES
UCAR Global redeemed $200 million aggregate principal amount of
Subordinated Notes in whole as part of our debt recapitalization on February 22,
2000 at a redemption price of 104.5% of the principal amount plus accrued and
unpaid interest. Interest on the Subordinated Notes was payable semiannually at
the rate of 12% per annum. The Subordinated Notes were to mature on January 15,
2005. EXTRAORDINARY ITEMS
In February 2000, we recorded an extraordinary charge of $21 million
($13 million after tax) related to our debt recapitalization. The extraordinary
charge includes $5 million of bank and third party fees and expenses, $9 million
of redemption premium on the Subordinated Notes, and write off of $7 million of
deferred debt issuance costs.
OTHER
Our weighted-average interest rate on short-term borrowings outstanding
was 9.4% at December 31, 2000 and 6.3% at December 31, 2001.
In the 2000 third quarter, pursuant to our debt recapitalization in
February 2000, our Italian subsidiary entered into a $15 million long term debt
arrangement with a third party lender. We also placed on deposit with the third
party lender funds in the same amounts, which secure repayment of the debt.
Since we have the legal right to set off the deposited funds against the debt,
and the intent to do so, such amounts have been netted and are not reflected
separately in the Consolidated Balance Sheets. In February 2002, in connection
with our corporate realignment of our subsidiaries, we exercised our right to
setoff.
(6) INCOME TAXES
The following table summarizes the U.S. and non-U.S. components of
income (loss) before provision for income taxes, minority interest and
extraordinary items:
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1999 2000 2001
-------- -------- ---------
(Dollars in millions)
U.S..........................................................$ (84) $ (69) $ (136)
Non-U.S...................................................... 130 105 66
------- ------- -------
$ 46 $ 36 $ (70)
======= ======= =======
Total income taxes were allocated as follows:
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1999 2000 2001
-------- -------- ---------
(Dollars in millions)
Income from operations.......................................$ 1 $ 10 $ 15
Extraordinary items.......................................... - (8) -
------- ------- -------
$ 1 $ 2 $ 15
======= ======= =======
Income tax expense attributable to income from operations consists of:
F-21
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1999 2000 2001
-------- -------- ---------
(Dollars in millions)
U.S. federal income taxes:
Current...............................................$ (8) $ 8 $ 1
Deferred.............................................. (23) (23) (10)
-------- ------- -------
$ (31) $ (15) $ (9)
======== ======= =======
Non-U.S. income taxes
Current...............................................$ 35 $ 27 $ 23
Deferred.............................................. (3) (2) 1
------- ------- -------
$ 32 $ 25 $ 24
======= ======= =======
We have an income tax exemption from the Brazilian government on income
generated from graphite electrode and cathode production through 2006 and 2005,
respectively. The exemption reduced the net expense associated with income taxes
by $5 million in 1999, $2 million in 2000 and $1 million in 2001.
In 1998, we obtained an income tax exemption from the Swiss government.
The exemption reduced the net expense associated with income taxes by $9 million
in 1999, $8 million in 2000 and $8 million in 2001.
Income tax expense attributable to income from operations differed from
the amounts computed by applying the U.S. federal income tax rate of 35% to
pretax income from operations as a result of the following:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1999 2000 2001
---- ---- ----
(Dollars in millions)
Tax at statutory U.S. federal rate...................................... $ 16 $ 13 $ (24)
Nondeductible expenses associated with antitrust investigations and
related lawsuits and claims........................................ 2 1 5
State tax benefit (net of federal tax benefit).......................... - - (5)
Restructuring charges with no tax benefit............................... - - 9
Adjustments related to investment in subsidiaries....................... - - 26
U.S. operating loss..................................................... 32 - -
Impact of dividend of foreign earnings ................................. - 22 9
Foreign operating losses with no benefit provided....................... (9) - -
Non U.S. tax exemptions and holidays.................................... (14) (10) (9)
Adjustments to deferred tax asset valuation allowance................... (17) (20) (3)
Other................................................................... (9) 4 7
---- ---- ----
$ 1 $ 10 $ 15
==== ==== ====
The significant components of deferred income tax expense attributable
to income from operations are as follows:
F-22
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1999 2000 2001
---- ---- ----
(Dollars in millions)
Deferred tax expense (exclusive of the effects of changes in
the valuation allowance described below)........................ $ (9) $ (5) $ (6)
Increase (decrease) in beginning of the year balance of the
valuation allowance for deferred tax assets..................... (17) (20) (3)
------- ------- -------
$ (26) $ (25) $ (9)
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of t9he deferred tax assets and deferred tax liabilities at December
31, 2000 and 2001 are as follows:
AT DECEMBER 31,
---------------------
2000 2001
---- ----
(Dollars in millions)
Deferred tax assets:
Fixed assets.......................................................... $ 9 $ 46
Estimated liabilities and expenses associated with antitrust
investigations and related lawsuits and claims...................... 3 1
Postretirement and other employee benefits............................ 55 55
Foreign tax credit and other carryforwards............................ 53 52
AT DECEMBER 31,
---------------------
2000 2001
---- ----
(Dollars in millions)
Provision for scheduled plant closings and other
restructurings...................................................... 11 4
Other................................................................ 27 35
------ ------
Total gross deferred tax assets..................................... 158 193
Less: valuation allowance.......................................... (21) (27)
------ ------
Total deferred tax assets......................................... $ 137 $ 166
====== ======
Deferred tax liabilities:
Fixed assets.......................................................... $ 55 $ 44
Inventory............................................................. 8 6
Other................................................................. 4 4
------ ------
Total deferred tax liabilities...................................... 67 54
------ ------
Net deferred tax asset............................................ $ 70 $ 112
====== ======
Deferred income tax assets and liabilities are classified on a net
current and non-current basis within each tax jurisdiction. Net deferred income
tax assets are included in prepaid expenses in the amount of $14 million at
December 31, 2000 and $9 million at December 31, 2001 and in other assets in the
amount of $97 million at December 31, 2000 and $140 million at December 31,
2001. Net deferred tax liabilities are included in accrued income and other
taxes in the amount of $5 million at December 31, 2000 and $5 million at
December 31, 2001 and separately stated as deferred income taxes in the amount
of $36 million at December 31, 2000 and $32 million at December 31, 2001.
During the 2000 fourth quarter, we entered into an intercompany sale
leaseback transaction between two subsidiaries relating to a U.S. graphite
electrode facility, which allowed for utilization of foreign tax credits. This
transaction resulted in a tax effect of a book gain of $22 million being
classified as a deferred charge, which was included in other assets and was to
be amortized into income. In June 2001, as a result of the decision to shutdown
this facility, the facility was sold back to the original subsidiary owner and
impaired. Accordingly, we then recognized a deferred tax asset for the resulting
tax basis in excess of the amount for financial reporting.
F-23
The net change in the total valuation allowance for 2001 was an
increase of $6 million. The change results from an increase in our Canadian net
operating loss related to additional costs associated with the 1999 closure of
our Canadian graphite electrode operations and the provision of an allowance
related to the impairment and restructuring of our Italian graphite electrode
operations.
We have total excess foreign tax credit carryforwards of $45 million at
December 31, 2001. Of these tax credit carryforwards, $5 million expire in 2002,
$21 million expire in 2003, $14 million expire in 2004 and $5 million expire in
2006. On a recomputed basis, we used foreign tax credits to reduce U.S. current
tax liabilities in the amount of $10 million in 1999, $40 million in 2000 and
$16 million in 2001. Based upon the level of historical taxable income and
projections for future taxable income over the periods during which these
credits are utilizable, we believe it is more likely than not we will realize
the benefits of these deferred tax assets net of the existing valuation
allowances at December 31, 2001. Specifically, it is our intention to
pursue tax planning strategies and one time events in order to utilize our
foreign tax credit carryforward prior to expiration.
U.S. income taxes have not been provided on undistributed earnings of
foreign subsidiaries. Our intention is to reinvest these undistributed earnings
indefinitely. To the extent that our circumstances change or future earnings are
repatriated, we will provide for income tax on the earnings of the effected
foreign subsidiaries. We believe that any U.S. income tax on repatriated
earnings would be substantially offset by U.S. foreign tax credits.
(7) OTHER (INCOME) EXPENSE, NET
The following table presents an analysis of other (income) expense,
net:
FOR THE YEAR ENDED
-------------------------------------
DECEMBER 31,
1999 2000 2001
------ ------ -----
(Dollars in millions)
Interest income........................................................ $ (8) $ (6) $ (2)
Currency (gains) losses................................................ (2) (4) (2)
Bank fees.............................................................. 2 2 2
Loss on sale of accounts receivable.................................... 1 1 3
Amortization of goodwill............................................... 1 2 2
(Gain) loss on sale of assets.......................................... (3) 2 (1)
Insurance related gains................................................ - (5) -
Power of One initiative consulting fees................................ - 4 -
Graftech initial public offering expenses.............................. - 2 -
Global integration project consulting fees............................. (1) - -
Former parent company lawsuit legal expenses........................... - 3 1
Other.................................................................. 1 (1) (2)
------- ------- -------
Total other (income) expense, net...................................... $ (9) $ - $ 1
======= ======= =======
(8) INTEREST EXPENSE
The following table presents an analysis of interest expense:
F-24
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
1999 2000 2001
---- ---- ----
(Dollars in millions)
Interest incurred on debt.............................................. $ 77 $ 69 $ 54
Amortization of debt issuance costs.................................... 2 2 2
Interest imputed on antitrust fine..................................... 5 4 4
------- ------- -------
Total interest expense............................................ $ 84 $ 75 $ 60
======= ======= =======
(9) SUPPLEMENTARY BALANCE SHEET DETAIL
AT DECEMBER 31,
-------------------
2000 2001
------ ------
(Dollars in millions)
Notes and accounts receivable:
Trade........................................................................... $ 105 $ 81
Other........................................................................... 20 19
------ -------
125 100
Allowance for doubtful accounts................................................. (4) (5)
------ -------
$ 121 $ 95
====== =======
Property, plant and equipment:
Land and improvements........................................................... $ 41 $ 38
Buildings....................................................................... 164 158
Machinery and equipment and other............................................... 745 708
Construction in progress........................................................ 37 27
------ -------
$ 987 $ 931
====== =======
Other assets:
Goodwill........................................................................ $ 34 $ 29
Accumulated amortization........................................................ (12) (12)
------ -------
Goodwill (net).................................................................. 22 17
Deferred income taxes........................................................... 97 140
Benefits protection trust....................................................... 2 2
Long term receivables........................................................... 5 6
Long term investments........................................................... 1 6
Deferred charge related to sale leaseback....................................... 22 -
Capitalized bank fees........................................................... 13 14
Other........................................................................... 7 9
------ -------
$ 169 $ 194
====== =======
Accounts payable:
Trade........................................................................... $ 92 $ 96
Other........................................................................... 7 5
------ -------
$ 99 $ 101
====== =======
Other accrued liabilities:
Accrued accounts payable........................................................ $ 13 $ 19
Accrued imputed interest........................................................ 3 6
Payrolls........................................................................ 4 3
Restructuring................................................................... 26 12
Employee compensation and benefits.............................................. 14 9
Liabilities and expenses associated with antitrust investigations and related
lawsuits and claims......................................................... 24 -
Current portion of DOJ fine..................................................... - 2
F-25
Other........................................................................... 6 6
------ -------
$ 90 $ 57
====== =======
Other long term obligations:
Postretirement benefits......................................................... $ 83 $ 80
Employee severance costs........................................................ 4 4
Pension and related benefits.................................................... 20 26
Liabilities and expenses associated with antitrust investigations and related
lawsuits and claims......................................................... 34 52
AT DECEMBER 31,
-------------------
2000 2001
------ ------
(Dollars in millions)
Long term portion of DOJ fine................................................... 49 47
Other........................................................................... 19 22
------ -------
$ 209 $ 231
====== =======
The following table presents an analysis of the
allowance for doubtful accounts:
AT DECEMBER 31,
-------------------------------------
1999 2000 2001
---------- ---------- ----------
(Dollars in millions)
Balance at beginning of year........................................... $ 5 $ 5 $ 4
Additions.............................................................. 1 1 2
Deductions............................................................. (1) (2) (1)
------- ------ -----
Balance at end of year................................................. $ 5 $ 4 $ 5
======= ====== =====
(10) LEASES AND OTHER LONG TERM OBLIGATIONS
Lease commitments under noncancelable operating leases extending for
one year or more will require the following future payments:
(Dollars in millions)
2002...................................................... $2
2003...................................................... 2
2004...................................................... 2
F-26
2005...................................................... 1
2006...................................................... 1
After 2006................................................. 1
Total lease and rental expenses under noncancelable operating leases
extending one month or more were $5 million in 1999, $4 million in 2000 and $3
million in 2001.
During 2001, we outsourced our information technology function to CGI
Group Inc. ("CGI"), an information technology firm. Under this ten-year
agreement, CGI will manage our data services, networks, desktops,
telecommunications and legacy systems. The following is a schedule of future
payments for base services:
(Dollars in millions)
2002 ............................................... $7
2003 ............................................... 6
2004 ............................................... 5
2005 ............................................... 5
2006 ............................................... 5
After 2006............................................... 22
In addition, we have committed to purchase $10 million in services
above the base level over the term of the agreement.
(11) BENEFIT PLANS
RETIREMENT PLANS AND POSTRETIREMENT BENEFIT PLANS
Until February 25, 1991, we participated in the U.S. retirement plan of
Union Carbide Corporation ("Union Carbide"). Effective February 26, 1991, we
formed our 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 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. All our
employees who retired prior to February 25, 1991 are covered under the Union
Carbide plan. Pension benefits under our plan are based primarily on years of
service and compensation levels prior to retirement. Net pension cost for our
plan was $6 million in 1999, $7 million in 2000 and $7 million in 2001. Prior to
January 1, 2002, our plan was a defined benefit plan. Effective January 1, 2002,
a new defined contribution plan was established for U.S. employees. Some
employees will have the option to remain in the defined benefit plan for five
more years. At the end of five years, the value of the employees' retirement
benefit will be frozen, and the employee will then begin participating in the
defined contribution plan. Those employees without the option to remain in the
defined benefit plan will begin participating in the defined contribution plan
and their benefits under the defined benefit plan was frozen at December 31,
2001. Under the new defined contribution plan, we will make quarterly
contributions to the individual employee account equal to 2.5% of the employee's
pay up to the social security wage base ($84,000 in 2002) plus 5% of their pay
above the social security wage base.
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 $2 million in 1999, nil in 2000 and $4 million in 2001
(which includes a $4 million settlement loss for the Canadian pension plan).
The components of our consolidated net pension costs are as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1999 2000 2001
------ ------ ------
(Dollars in millions)
Service cost...................................................... $ 7 $ 7 $ 7
Interest cost..................................................... 14 15 14
Expected return on assets......................................... (14) (15) (14)
Amortization ..................................................... 1 - -
Settlement (gain) loss............................................ (1) - 4
Curtailment loss.................................................. 1 - -
----- ----- -----
Net pension cost............................................. $ 8 $ 7 $ 11
===== ===== =====
F-27
We also provide health care and life insurance benefits for eligible
retired employees. These benefits are provided through various insurance
companies and health care providers. We accrue the estimated net postretirement
benefit costs during the employees' credited service periods. The components of
our consolidated net postretirement benefit costs are as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1999 2000 2001
------ ------ ------
(Dollars in millions)
Service cost....................................................... $ 2 $ 2 $ 2
Interest cost...................................................... 6 6 6
Amortization of prior service cost................................. (2) (1) (2)
----- ----- -----
Net postretirement benefit cost............................... $ 6 $ 7 $ 6
===== ===== =====
The reconciliation of beginning and ending balances of benefit
obligations under, and fair value of assets of, all of our pension and
postretirement benefit plans, and the funded status of the plans, are as
follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
AT DECEMBER 31, AT DECEMBER 31,
---------------------- -----------------------
2000 2001 2000 2001
--------- ----------- ---------- ----------
(Dollars in millions)
Changes in benefit obligation:
Net benefit obligation at beginning of year.......... $ 195 $ 205 $ 75 $ 83
Service cost......................................... 7 7 2 2
Interest cost........................................ 15 14 6 6
Plan amendments...................................... - - - (68)
Foreign currency exchange rate changes............... (7) (8) (1) (2)
Actuarial (gain) loss................................ 7 4 7 48
Curtailment.......................................... (1) - - -
Settlement........................................... (1) (36) - -
Gross benefits paid.................................. (10) (9) (6) (6)
------ ------ ------ ------
Net benefit obligation at end of year............ $ 205 $ 177 $ 83 $ 63
====== ====== ====== ======
Changes in plan assets:
Fair value of plan assets at beginning of year....... $ 191 $ 179 $ - $ -
Actual return on plan assets......................... - (5) - -
Foreign currency exchange rate changes............... (8) (10) - -
Employer contributions............................... 7 8 5 6
Participants contributions........................... - - 1 -
Settlement........................................... (1) (36) - -
Gross benefits paid.................................. (10) (9) (6) (6)
------ ------ ------ ------
Fair value of plan assets at end of year......... $ 179 $ 127 $ - $ -
====== ====== ====== ======
Reconciliation of funded status:
Funded status at end of year......................... $ (27) $ (50) $ (83) $ (63)
Unrecognized net transition obligation
(asset).......................................... (4) (2) - -
Unrecognized prior service cost...................... 1 1 (3) (67)
Unrecognized net actuarial (gain) loss............... 3 21 3 50
------ ------ ------ ------
Net amount recognized at end of year............ $ (27) $ (30) $ (83) $ (80)
======= ====== ====== ======
F-28
Assumptions used to determine net pension costs, pension projected
benefit obligation, net postretirement benefit costs and postretirement benefits
projected benefit obligation are as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
AT DECEMBER 31, AT DECEMBER 31,
---------------------- -------------------------
2000 2001 2000 2001
--------- --------- --------- ---------
Weighted average assumptions as of
measurement date:
Discount rate....................................... 7.44% 7.34% 7.69% 7.79%
Expected return on plan assets ..................... 8.59% 8.59% - -
Rate of compensation increase....................... 3.93% 4.73% 4.01% 3.39%
Health care cost trend on covered charges:
Initial....................................... N/A N/A 8.04% 6.88%
Ultimate...................................... N/A N/A 5.80% 5.34%
Years to ultimate............................. N/A N/A 6 6
Assumed health care cost trend rates have a significant effect on the
amounts reported for net postretirement benefits. A one percentage point change
in the health care cost trend rate would change the accumulated postretirement
benefits net benefit obligation by approximately $5 million at December 31, 2000
and December 31, 2001 and change net postretirement benefit costs by
approximately $1 million for both 2000 and 2001.
OTHER NON-QUALIFIED PLANS
Since January 1, 1995, we have established various unfunded,
non-qualified supplemental retirement and deferred compensation programs for
certain eligible employees. We established benefits protection trusts (the
"Trust") to partially provide for the benefits of employees participating in
these plans. At December 31, 2000 and 2001, the Trust had assets of
approximately $2 million, which are included in other assets on the Consolidated
Balance Sheets. In addition, we issued 426,400 shares of common stock to the
Trust in March 2001. These shares, if later sold, could be used for partial
funding of our future obligations under certain of our compensation and benefit
plans. The shares held in trust are not considered outstanding for purposes of
calculating earnings per share until they are committed to be sold or otherwise
used for funding purposes.
SAVINGS PLAN
Our employee savings plan provides eligible employees the opportunity
for long term savings and investment. Participating employees can contribute
1.0% to 7.5% of employee compensation as basic contributions and an additional
0.5% to 10.0% of employee compensation as supplemental contributions. For 2000
and 2001, we contributed on behalf of each participating employee an amount
equal to 50% of the employee's basic contribution. We contributed $2 million in
each of 1999 and 2000 and $1 million in 2001.
INCENTIVE PLANS
In 1998, we implemented a global profit sharing plan for our worldwide
employees. This plan is based on our global financial performance. The cost for
this plan was nil 1999, $2 million in 2000 and nil in 2001.
(12) RESTRUCTURING AND IMPAIRMENT CHARGES
F-29
In the 2001 fourth quarter, we recorded a $7 million restructuring
charge and a $27 million impairment loss on long-lived and other assets. The
restructuring charge relates primarily to exit costs related to the mothballing
of our graphite electrode operations in Caserta, Italy. Twenty four million
dollars of the impairment loss on long-lived assets relates to assets located at
our facility in Caserta. The remaining $3 million relates to impairment of
available-for-sale securities.
In the 2001 third quarter, we recorded a $2 million restructuring
charge and impairment loss on long-lived assets related to our restructuring and
realignment of our businesses into AET and GPS, the relocation of our corporate
headquarters and the shutdown of our coal calcining operations located in
Niagara Falls, New York. As part of the realignment, we have centralized
management functions of AET in Cleveland, Ohio, and management functions of GPS
in Etoy, Switzerland. We have relocated our corporate headquarters, consisting
of approximately 10 employees, from Nashville, Tennessee, to Wilmington,
Delaware. The relocation was substantially completed by the end of 2001. The
charge includes severance and related benefits associated with a workforce
reduction of 24 employees and impairment of leasehold improvement assets.
In 2001 third quarter, we reversed $2 million of prior restructuring
charges based on revised lower estimates of workforce reductions and plant
closure costs, and we reclassified $4 million of prior restructuring charges
related to on-site waste disposal post monitoring costs to the other long term
obligations.
In the 2001 second quarter, we recorded a $58 million charge for
restructuring and impairment loss on long-lived assets related to the shutdown
of our graphite electrode manufacturing operations in Clarksville and Columbia,
Tennessee and our coal calcining operations in Niagara Falls, New York. The $58
million charge includes restructuring charges of $2 million for severance and
related benefits associated with a workforce reduction of 171 employees and $3
million in plant shutdown and related costs. The remaining $53 million relates
to the impairment loss on long-lived assets. The shutdown was completed on
schedule by the end of the 2001 third quarter.
In the 2000 fourth quarter, we recorded a charge of $4 million in
connection with a corporate restructuring, mainly for severance and related
benefits associated with a workforce reduction of 85 employees. The functional
areas affected included finance, accounting, sales, marketing and
administration. In 2001, we paid about $1 million of these expenses. In the 2001
third quarter, we revised the workforce reduction estimate to 45 employees and
reversed a portion of the $4 million charge. The reversal is part of the $2
million reversal described above.
In the 2000 third quarter, we recorded an impairment loss on long-lived
assets of $3 million in connection with the re-sourcing of our U.S. cathode
production to our facilities in Brazil and France and the reduction of graphite
electrode production capacity to accommodate such increased cathode production
in Brazil and France. This non-cash charge related to the write off of certain
long-lived assets located at one of our facilities in the U.S. The charge
affected GPS.
In the 2000 first quarter, we recorded a restructuring charge of $6
million in connection with a restructuring of our advanced graphite materials
business. Key elements of the restructuring included elimination of certain
product lines and rationalization of operations to reduce costs and improve
profitability of remaining product lines. This rationalization included
discontinuing certain manufacturing processes at one of our facilities in the
U.S. that will be performed at our other facilities in the future. Based on
subsequent developments in the 2000 third quarter, we decided not to demolish
certain buildings. Therefore, in the 2000 third quarter, we reversed the $4
million of the charge related to demolition and related environmental costs. The
$2 million balance of the charge included estimated severance costs for 65
employees. The restructuring was completed in 2000.
F-30
During late 1999, our advanced graphite materials business experienced
significant adverse changes in performance due to a decline in demand and prices
for graphite specialties. In addition, performance adversely changed due to
delays in bringing new or improved products to markets. This change indicated
the need for assessing the recoverability of the long-lived assets of this
business. These assets are located primarily at our plant in Clarksburg, West
Virginia. We estimated the future undiscounted cash flows expected to result
from the use of these assets and concluded they were below the respective
carrying amounts. Accordingly, we recorded an impairment loss of $35 million for
the unrecoverable portion of these assets, effectively writing down the carrying
value of the fixed assets to their estimated fair value of $6 million.
Additionally, an inventory write-down of $8 million was recorded to reduce their
carrying amount to the lower of cost or market.
In September 1998, we recorded a restructuring charge of $86 million in
connection with a global restructuring and rationalization plan. The principal
actions of the plan involved the closure of manufacturing operations at our
facilities in Canada and Germany and the centralization and consolidation of
administrative and financial functions. These actions eliminated 371
administrative and manufacturing positions. The $86 million charge consisted of
a write-off of $29 million of assets and a reserve of $57 million for severance
and related costs, plant shut down and related costs and post monitoring and
environmental costs.
During 1999, it was determined that plant closure activities were
estimated to result in lower cash costs than originally anticipated. These
savings represent lower net anticipated demolition costs resulting primarily
from the outsourcing of a majority of the planned demolition at our Canadian
plant and, to a lesser extent, lower severance related costs. These developments
resulted in a net reduction of the restructuring cost estimate of $6 million in
the 1999 third quarter.
Our German plant ceased production activities in 1998. Our Canadian
plant ceased production activities in April 1999. In addition, the relocation of
our corporate headquarters to Nashville, Tennessee was completed during 1999.
The fair value of the long-lived assets was calculated on the basis of
discounted estimated future cash flows. Estimates of the discounted future cash
flows are subject to significant uncertainties and assumptions. Accordingly,
actual values could vary significantly from such estimates.
The following table summarizes activity relating to the accrued expense
in connection with the restructuring charges.
F-31
SEVERANCE AND PLANT SHUTDOWN POST MONITORING
RELATED COSTS AND RELATED COSTS AND RELATED COSTS TOTAL
----------------- ------------------- ------------------ -----------
(Dollars in millions)
Restructuring charges in 1998............ $ 30 $ 18 $ 9 $ 57
Payments in 1999......................... (16) (3) (4) (23)
Change in estimate and impact of currency
rate charges in 1999................. (1) (5) - (6)
------ ------- ------- -----
Balance at December 31, 1999............. 13 10 5 28
Restructuring charges in 2000............ 6 3 1 10
Payments in 2000......................... (5) (1) (1) (7)
Change in estimate and impact of currency
rate changes in 2000................. (1) (3) (1) (5)
------ ------ ------ -----
Balance at December 31, 2000............. 13 9 4 26
Restructuring charges in 2001............ 4 8 - 12
Payments in 2001......................... (13) (5) - (18)
Non-cash write-offs in 2001.............. - (4) - (4)
Reclassification of on-site disposal and
monitoring costs..................... - - (4) (4)
------ ------ ------ -----
Balance at December 31, 2001............. $ 4 $ 8 $ - $ 12
====== ====== ====== =====
The restructuring accrual is included in other accrued liabilities on
the Consolidated Balance Sheets.
(13) MANAGEMENT COMPENSATION AND INCENTIVE PLANS
STOCK OPTIONS
We have adopted several stock option plans. The aggregate number of
shares reserved under the plans since their initial adoption was 11,000,000 at
December 31, 2000 and 14,500,000 at December 31, 2001. The plans permit options
to be granted to employees and, in the case of one plan since March 1998, also
to non-employee directors.
In 1995, we granted 12-year options to management to purchase 4,761,000
shares at an exercise price of $7.60 per share, of which options for 3,967,400
shares vested at the time of our initial public offering, and the balance were
performance options, one half of which were to vest in each of 1998 and 1999 on
achievement of designated EBITDA targets. In December 1997, UCAR's Board of
Directors accelerated the vesting of the 1998 performance options. We did not
achieve the 1999 performance targets and, accordingly, the 1999 performance
options were cancelled.
In 1996, we granted 10-year options to mid-management to purchase
960,000 shares at an exercise price of $35.00 per share, and granted additional
10-year options to mid-management to purchase 4,000 shares at an exercise price
of $40.44 per share. In 1997, we granted 10-year options to mid-management to
purchase 61,500 shares at an exercise price of $39.31 per share. The options
vest eight years from the grant date. Accelerated vesting occurs if the market
price of the common stock equals or exceeds specified amounts. At December 31,
2001, 456,350 of such options were vested.
In 1997, we granted vested 10-year options to management to purchase
155,000 shares at an exercise price of $37.59 per share. At December 31, 2001,
all such options were vested.
F-32
In 1998, we granted 10-year options to purchase shares as follows:
o Options for 641,000 shares were granted to certain officers and
directors at exercise prices ranging from $29.22 to $34.36 per
share. Options for 320,000 shares vest one year from the grant
date, options for 221,000 shares vest two years from the grant
date and options for 100,000 shares vest three years from the
grant date. At December 31, 2001, all of such options were
vested.
o Options for 1,935,000 shares were granted to certain officers and
management at exercise prices ranging from $15.50 to $17.06 per
share. Options for 17,000 shares vested on the grant date,
options for 628,000 shares vest after one year from the grant
date, and all remaining options vest seven years from the grant
date, subject to accelerated vesting if the market price for the
common stock equals or exceeds specified amounts. At December 31,
2001, 1,847,996 of such options were vested.
In 1999, we granted options to purchase shares as follows:
o Options for 409,000 shares were issued to certain officers,
management and directors at exercise prices ranging from $14.13
to $25.81 per share. Options for 45,359 shares vested on the
grant date, options for 274,101 shares vest one year from the
grant date, and all remaining options vest seven years from the
grant date, subject to accelerated vesting if the market price
for the common stock equals or exceeds specified amounts. At
December 31, 2001, 322,592 of such options were vested.
In 2000, we granted options to purchase shares as follows:
o Options for 2,615,511 shares were issued to certain officers,
management and directors at exercise prices ranging from $8.56 to
$19.06 per share. Options for 2,070,100 shares vest two years
from the grant date, options for 200,000 shares vest five years
from the grant date, 175,901 shares vest one year from the grant
date, options for 12,200 vested at the grant date, options for
35,040 shares vested ratably over the course of the year and all
remaining options vest seven years from the grant date, subject to
accelerated vesting if the market price for the common stock equals
or exceeds specified amounts. At December 31, 2001, 182,855 of such
options were vested.
In 2001, we granted options to purchase shares as follows:
o Options for 1,755,170 shares were issued to certain officers,
management and directors at exercise prices ranging from $8.56 to
$11.95 per share. Options for 1,644,300 shares vest two years
from the grant date and options for 110,870 shares vested at the
grant date. At December 31, 2001, 110,870 of these options were
vested.
We apply APB 25 in accounting for our stock-based compensation expense
plans. Accordingly, no compensation expense has been recognized for our time
vesting options issued at not less than market value. If compensation expense
for our stock-based compensation plans was determined by the fair value method
prescribed by SFAS No. 123, "Accounting for Stock Based Compensation," our net
income (loss) and net income (loss) per share would have been reduced or
increased to the pro forma amounts indicated below:
F-33
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
1999 2000 2001
--------- --------- ---------
(Dollars in millions,
except per share data)
Net income (loss):
As reported.................................................. $ 42 $ 10 $ (87)
Pro forma.................................................... 40 9 (94)
Diluted net income (loss) per share:
As reported.................................................. $ 0.91 $ 0.22 $ (1.75)
Pro forma.................................................... 0.87 0.20 (1.88)
A summary of the status of our stock-based compensation plans at the
dates and for the period indicated is presented below:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1999 2000 2001
----------------------- -------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- ------- ----------- ------- ----------
(Shares in thousands)
Time vesting options:
Outstanding at beginning of
year............................... 5,826 $ 18.48 5,277 $ 20.15 7,842 $ 16.55
Granted at market price.............. 410 19.91 2,615 9.53 1,755 8.99
Granted at price exceeding
market............................. - - - - - -
Granted at price below market........ - - - - - -
Exercised............................ (16) 13.85 (16) 13.81 (188) 7.60
Forfeited/canceled................... (943) 10.19 (34) 32.37 (215) 17.12
-------- -------- -------
Outstanding at end of year......... 5,277 $ 20.15 7,842 $ 16.55 9,194 $ 15.28
======== ======== =======
Options exercisable at year
end................................ 4,176 $ 15.32 4,710 $ 18.65 5,309 $ 18.11
Weighted-average fair value of
options granted during year:
At market.......................... 11.64 5.97 5.58
Exceeding market................... - - -
Below market....................... - - -
Performance vesting options:
Outstanding at beginning of
year............................... 938 $ 7.60 546 $ 7.60 401 $ 7.60
Granted.............................. - - - - - -
Exercised............................ (3) 7.60 (22) 7.60 (23) 7.60
Forfeited/canceled................... (389) 7.60 (123) 7.60 - -
-------- -------- --------
Outstanding at end of year......... 546 7.60 401 7.60 378 7.60
======== ======== ========
Options exercisable at year
end................................ 428 $ 7.60 401 $ 7.60 378 $ 7.60
The fair value of each stock option is estimated on the grant date
using the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1999, 2000 and 2001,
F-34
respectively: dividend yield of 0.0% for all years; expected volatility of 45%
in 1999, 50% in 2000 and 52% in 2001; risk-free interest rates of 5.4% in 1999,
5.5% in 2000 and 4.8% in 2001; and expected lives of 8 years for all years.
The following table summarizes information about stock options
outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICES EXERCISABLE PRICES
----------------------------- ------------------- ------------------- ------------------ -------------- -------------------
(Shares in thousands)
Time vesting options:
$7.60-8.90 4,892 5 years $ 8.43 1,748 $ 7.72
$11.60 to $19.06 2,636 7 years 16.28 2,216 16.96
$22.81 to $29.22 145 7 years 25.67 104 25.91
$30.59 to $40.44 1,521 5 years 34.38 1,241 34.15
----- ------
9,194 $15.28 5,309 $ 18.11
===== =====
Performance vesting options:
$7.60 378 5 years $ 7.60 378 $ 7.60
=== ===
OTHER
In 1998, we entered into a five-year employment agreement with our
current president, chief executive officer and chairman of the board.
Under our executive employee loan program, certain members of
management borrowed less than $1 million in each of 1999 and 2000 and none in
2001. At December 31, 2001, $4 million was outstanding under this program. Also,
under our executive employee stock purchase programs, certain members of
management may purchase common stock at the fair market value on the date of
purchase. Management purchased 26,804 shares in 1999, 18,556 shares in 2000 and
none in 2001.
(14) CONTINGENCIES
ANTITRUST INVESTIGATIONS
In April 1998, pursuant to a plea agreement between the Antitrust
Division of the U.S. Department of Justice (the "DOJ") and UCAR, UCAR pled
guilty to a one count charge of violating U.S. federal antitrust law in
connection with the sale of graphite electrodes and was sentenced to pay a
non-interest-bearing fine in the aggregate amount of $110 million, payable in
six annual installments of $20 million, $15 million, $15 million, $18 million,
$21 million and $21 million, commencing July 23, 1998 (the "DOJ fine"). The plea
agreement was approved by the U.S. District Court for the Eastern District of
Pennsylvania (the "District Court") and, as a result, under the plea agreement,
the Company will not be subject to prosecution by the DOJ with respect to any
other violations of U.S. federal antitrust law occurring prior to April 1998.
Payments due in 1998, 1999 and 2000 were timely made. At our request in January
2001, the due date of each of the remaining three payments was deferred by one
year and that,
F-35
at our request in January 2002, the payment schedule for the remaining $60
million due was changed as described in Note 18.
In March 1999, pursuant to a plea agreement between our Canadian
subsidiary and the Canadian Competition Bureau, our Canadian subsidiary pled
guilty to a one count charge of violating Canadian antitrust law in connection
with the sale of graphite electrodes and was sentenced to pay a fine of Cdn. $11
million. The relevant Canadian court approved the plea agreement and, as a
result, under the plea agreement we will not be subject to prosecution by the
Canadian Competition Bureau with respect to any other violations of Canadian
antitrust law occurring prior to the date of the plea agreement. The fine was
timely paid.
In October 1999, we became aware that the Korean antitrust authority
had commenced an investigation as to whether there had been any violation of
Korean antitrust law by producers and distributors of graphite electrodes. We
have no facilities or employees in Korea. We have received requests for
information from the Korean antitrust authority. We are cooperating with the
Korean antitrust authority in its ongoing investigation. In connection
therewith, we have produced and are producing documents and/or witnesses. In
February 2002, we became aware that the Korean antitrust authority had issued
its Examiner's Report alleging that we and other producers of graphite
electrodes violated Korean antitrust law in connection with the sale of graphite
electrodes. We believe that the maximum fine, if any, for such a violation is 5%
of a company's sales of the relevant products in Korea during the period of the
violation (or about $5 million in our case) and that any such fine would be
subject to reduction for cooperation.
In January 2000, the Directorate General-Competition of the Commission
of the European Communities, the antitrust enforcement authority of the European
Union (the "EU Competition Authority"), issued a statement of objections
initiating proceedings against us and other producers of graphite electrodes.
The statement alleges that we and other producers violated antitrust laws of the
European Community and the European Economic Area in connection with the sale of
graphite electrodes. On July 18, 2001, the EU Competition Authority issued its
decision regarding the allegations. Under the decision, the EU Competition
Authority assessed a fine of (euro)50.4 million (about $45 million based on
currency exchange rates in effect at December 31, 2001) against us. Seven other
graphite electrode producers were also fined under the decision, with fines
ranging up to (euro)80.2 million. From the initiation of its investigation, we
have cooperated with the EU Competition Authority. As a result of our
cooperation, our fine reflects a substantial reduction from the amount that
otherwise would have been assessed. It is the policy of the EU Competition
Authority to negotiate appropriate terms of payment of antitrust fines including
estimated payment terms. We are discussing payment terms with the EU Competition
Authority. After an in-depth analysis of the decision, however, in October 2001,
we filed an appeal to the Court of First Instance of the European Communities in
Luxembourg challenging the amount of the fine. Appeals of this type may take two
years or longer to be decided and the fine or collateral security therefor would
typically be required to be paid or provided at about the time the appeal was
filed. We are currently in discussions with the EU Competition Authority
regarding the appropriate form of security for payment of the fine during the
pendency of the appeal. If the results of these discussions are not acceptable
to us, we may file an interim appeal with the Court to waive the requirement for
security or to allow us to provide alternative security for payment. We cannot
predict how or when the Court would rule on such interim appeal.
In the 2001 second quarter, we learned that the Brazilian antitrust
authority requested written information from various steelmakers in Brazil. We
have not received a request for information from the Brazilian antitrust
authority.
F-36
Except as described above, the antitrust investigations against the
Company in the U.S., Canada, the European Union and Japan have been resolved and
all fines due have been timely paid. We are continuing to cooperate with some of
the antitrust authorities in their continuing investigations of other producers
and distributors of graphite electrodes. In October 1997, we were served with
subpoenas by the DOJ to produce documents relating to, among other things, its
carbon electrode and bulk graphite businesses. It is possible that antitrust
investigations seeking, among other things, to impose fines and penalties could
be initiated by antitrust authorities in Brazil or other jurisdictions.
The guilty pleas and decisions described above make it more difficult
for us to defend against other investigations as well as civil lawsuits and
claims. We have been vigorously protecting, and intend to continue to vigorously
protect, our interests in connection with the investigations described above. We
may, however, at any time settle any possible unresolved charges.
ANTITRUST LAWSUITS
Through December 31, 2001, except as described in the following
paragraphs, we have settled or obtained dismissal of all of the civil antitrust
lawsuits (including class action lawsuits) previously pending against us,
certain threatened civil antitrust lawsuits threatened against us and certain
possible antitrust claims against us by certain customers who negotiated
directly with us. The settlements cover, among other things, virtually all of
the actual and potential claims against us by customers in the U.S. and Canada
arising out of alleged antitrust violations occurring prior to the date of the
relevant settlement in connection with the sale of graphite electrodes. One of
the settlements also covers the actual and potential claims against us by
certain foreign customers arising out of alleged antitrust violations occurring
prior to the date of that settlement in connection with the sale of graphite
electrodes sourced from the U.S. Although each settlement is unique, in the
aggregate they consist primarily of current and deferred cash payments with some
product credits and discounts. All fines and settlement payments due thereunder
have been timely made.
In 1999 and 2000, we and other producers of graphite electrodes were
served with three complaints commencing three separate civil antitrust lawsuits
in the District Court (the "foreign customer lawsuits"). The first complaint,
entitled FERROMIN INTERNATIONAL TRADE CORPORATION, ET AL. V. UCAR INTERNATIONAL
INC., ET AL. was filed by 27 steelmakers and related parties, all but one of
whom are located outside the U.S. The second complaint, entitled BHP NEW ZEALAND
LTD. ET AL. V. UCAR INTERNATIONAL INC., ET AL. was filed by 4 steelmakers, all
of whom are located outside the U.S. The third complaint, entitled SAUDI IRON
AND STEEL COMPANY V. UCAR INTERNATIONAL INC., ET AL., was filed by a steelmaker
who is located outside the U.S. In each complaint, the plaintiffs allege that
the defendants violated U.S. federal antitrust law in connection with the sale
of graphite electrodes sold or sourced from the U.S. and those sold and sourced
outside the U.S. The plaintiffs seek, among other things, an award of treble
damages resulting from such alleged antitrust violations. We believe that we
have strong defenses against claims alleging that purchases of graphite
electrodes outside the U.S. are actionable under U.S. federal antitrust law. We
filed motions to dismiss the first and second complaints. In June 2001, our
motions to dismiss the first and second complaints were granted with respect to
substantially all of the plaintiffs' claims. Appeals have been filed by the
plaintiffs and the defendants with the Third Circuit Court of Appeals with
regard to these dismissals. The third complaint was dismissed without prejudice
to refile pending the resolution of such appeals.
In 1999 and 2000, we were served with three complaints commencing three
civil antitrust lawsuits (the "carbon electrode lawsuits"). The first complaint,
filed in the District Court, is entitled GLOBE METALLURGICAL, INC. V. UCAR
INTERNATIONAL INC., ET AL. The second complaint, filed in the U.S. Bankruptcy
Court for the Northern District of Ohio, is entitled IN RE SIMETCO, INC. The
third complaint, filed in the U.S. District Court for the Southern District of
West Virginia, is entitled ELKEM METALS
F-37
COMPANY INC and ELKEM METALS COMPANY ALLOY LLP V. UCAR CARBON COMPANY INC., ET
AL. SGL Carbon AG is also named as a defendant in the first complaint and SGL
Carbon Corporation is also named as a defendant in the first and third
complaints. In the complaints, the plaintiffs allege that the defendants
violated U.S. federal antitrust law in connection with the sale of carbon
electrodes and seek, among other things, an award of treble damages resulting
from such alleged violations. We filed motions to dismiss the second and third
complaints. In May 2001, our motion to dismiss the second complaint was denied.
In October 2001, we settled the lawsuit commenced by the third complaint. The
guilty pleas and decisions described above do not relate to carbon electrodes.
The foreign customer lawsuits and two of the three carbon electrode
lawsuits are still in their early stages. We have been vigorously defending, and
intend to continue to vigorously defend, against these remaining lawsuits as
well as all threatened lawsuits and possible unasserted claims. We may at any
time, however, settle these lawsuits as well as any threatened lawsuits and
possible claims. It is possible that additional civil antitrust lawsuits
seeking, among other things, to recover damages could be commenced against us in
the U.S. and in other jurisdictions.
1997 AND 2001 SECOND QUARTER ANTITRUST EARNINGS CHARGES
We recorded a pre-tax charge of $340 million against results of
operations for 1997 and, as a result of the assessment of a fine by the EU
Competition Authority, we recorded a pre-tax charge of an additional $10 million
against results of operations for the 2001 second quarter, as a reserve for
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims. The aggregate reserve of $350 million is
calculated on a basis net of, among other things, imputed interest on
installment payments of the DOJ fine. Actual aggregate liabilities and expenses
(including settled investigations, lawsuits and claims as well as continuing
investigations, pending appeals and unsettled pending, threatened and possible
lawsuits and claims mentioned above) could be materially higher than $350
million and the timing of payment thereof could be sooner than anticipated. In
the aggregate (including the assessment of the fine by the EU Competition
Authority, the assessment of the fine by the Korean antitrust authority and the
additional $10 million charge), the fines and net settlements and expenses are
within the amounts we used to evaluate the aggregate charge of $350 million. To
the extent that aggregate liabilities and expenses, net, are known or reasonably
estimable, at December 31, 2001, $350 million represents our estimate of these
liabilities and expenses. Our insurance has not and will not materially cover
liabilities that have or may become due in connection with antitrust
investigations or related lawsuits and claims.
Through December 31, 2001, we have paid an aggregate of $249 million of
fines and net settlement and expense payments and $11 million of imputed
interest. At December 31, 2001, $101 million remained in the reserve. The
balance of the reserve is available for the DOJ fine, the fines assessed by the
EU Competition Authority and the Korean antitrust authority and other matters.
The aggregate amount of remaining committed payments payable to the U.S.
Department of Justice for imputed interest at December 31, 2001 (without giving
effect to the more favorable restructured payment schedule for the fine payable
to the DOJ established in January 2002) was about $9 million.
OTHER PROCEEDINGS AGAINST US
We are involved in various other investigations, lawsuits, claims and
other legal proceedings incidental to the conduct of our business. While it is
not possible to determine the ultimate disposition of each of them, we do not
believe that their ultimate disposition will have a material adverse effect on
us.
F-38
LAWSUIT INITIATED BY US AGAINST OUR FORMER PARENTS
In February 2000, at the direction of a special committee of
independent directors of UCAR's Board of Directors, we commenced a lawsuit in
the U.S. District Court for the Southern District of New York against our former
parents, Mitsubishi Corporation and Union Carbide Corporation. The other
defendants named in the lawsuit include two of the respective representatives of
Mitsubishi and Union Carbide who served on UCAR's Board of Directors at the time
of our 1995 leveraged equity recapitalization, Hiroshi Kawamura and Robert D.
Kennedy. Mr. Kennedy, who was a director of UCAR at the time the lawsuit was
commenced, resigned as such on March 14, 2000.
In the lawsuit, we allege, among other things, that, in January 1995,
Mitsubishi and Union Carbide had knowledge of facts indicating that UCAR had
engaged in illegal graphite electrode price fixing activities and that any
determination of UCAR's statutory capital surplus would be overstated as a
result of those activities. We also allege that certain of their representatives
knew or should have known about those activities. In January 2000, Mitsubishi
was indicted by the DOJ on a one count charge of aiding and abetting violations
of U.S. federal antitrust law in connection with the sale of graphite
electrodes. Mitsubishi entered a plea of not guilty. In February 2001, a jury
found Mitsubishi guilty of the charge. Mitsubishi has entered into a sentencing
agreement with the DOJ, which has been approved by the District Court, pursuant
to which Mitsubishi has agreed to pay a fine of $134 million and not appeal its
conviction. Mitsubishi has also been named as a defendant in several civil
antitrust lawsuits commenced by electric arc furnace steel producers with
respect to its alleged participation in those activities. In addition, we allege
that, in January 1995, UCAR did not have the statutory capital surplus required
to lawfully authorize the payments that UCAR made to its former parents. We also
allege that Mitsubishi and Union Carbide were unjustly enriched by receipts from
their investments in UCAR and that they knowingly induced or actively and
substantially assisted former senior management of UCAR to engage in illegal
graphite electrode price fixing activities in breach of their fiduciary duties
to UCAR.
Based on the allegations summarized above, we are seeking to recover
from Mitsubishi and Union Carbide more than $1.5 billion in damages, including
interest. Some of our claims provide for joint and several liability; however,
damages from our various claims would not generally be additive to each other.
The defendants have filed motions to dismiss this lawsuit and a motion
to disqualify certain of our counsel from representing us in this lawsuit. We
are vigorously opposing those motions. Oral hearings were held on those motions
in the 2001 first and second quarters. No decision on those motions has been
rendered.
Successful prosecution of this litigation is subject to risks,
including: the failure to successfully defend against motions to dismiss and
other procedural motions prior to trial; the failure to successfully establish
our theories of liability and damages or otherwise prove our claims at trial;
the successful assertion by the defendants of substantive defenses, including
statute of limitation defenses, to liability at trial or on appeal; and the
successful assertion by the defendants of counterclaims or cross claims,
including claims for indemnification, at trial or on appeal. We cannot predict
the ultimate outcome of this litigation, including the possibility, timing or
amount of any recovery of damages by us or any liability we may have in
connection with any counterclaims or cross claims. In addition, we cannot assure
you as to the possibility, timing or amount of any settlement or the legal
expenses to be incurred by us or as to the effect of this lawsuit on
management's focus and time available for our ongoing operations.
Litigation such as this lawsuit is complex. Complex litigation can be
lengthy and expensive. These expenses will be accounted as operating expenses
and will be expensed as incurred. Through
F-39
December 31, 2001, we had incurred $4 million of these expenses. This lawsuit is
in its earliest stages. We may at any time settle this lawsuit.
(15) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of SFAS No. 128, adopted in 1997, using the following share data:
1999 2000 2001
------------- ------------ -----------
Weighted-average common shares outstanding for basic
calculation.......................................... 45,114,278 45,224,204 49,719,938
Add: Effect of stock options............................. 1,388,874 589,208 -
------------- ------------ -----------
Weighted-average common shares outstanding, adjusted
for diluted calculation.............................. 46,503,152 45,813,412 49,719,938
============= ============ ===========
As a result of the net loss from operations reported in 2001, all
690,992 potential common shares underlying dilutive securities have been
excluded from the calculation of diluted earnings (loss) per share because their
effect would reduce the loss per share. The calculation of weighted average
common shares outstanding for the diluted calculation excludes options for
1,898,657 shares in 1999 and 3,669,498 shares in 2000 and 5,243,593 shares in
2001 because they were not dilutive due to the fact that the exercise prices
were greater than the weighted average market price of the common stock.
(16) STOCKHOLDER RIGHTS PLAN
Effective August 7, 1998, we adopted a Stockholder Rights Plan (the
"Rights Plan"). Under the Rights Plan, one preferred stock purchase right (a
"Right") was distributed as a dividend on each outstanding share of common
stock. Each share of common stock issued after the distribution is accompanied
by a Right.
When a Right becomes exercisable, it entitles the holder to buy one
one-thousandth of a share of a new series of preferred stock for $110. The
Rights are subject to adjustment upon the occurrence of certain dilutive events.
The Rights will become exercisable only when a person or group becomes the
beneficial owner of 15% or more of the outstanding shares of common stock or 10
days after a person or group announces a tender offer to acquire beneficial
ownership of 15% or more of the outstanding shares of common stock. No
certificates representing the Rights will be issued unless the Rights become
exercisable.
Under certain circumstances, holders of Rights, except a person or
group described above and certain related parties, will be entitled to purchase
shares of common stock at 50% of the price at which the common stock traded
prior to the acquisition or announcement. In addition, if UCAR is acquired after
the Rights become exercisable, the Rights will entitle those holders to buy the
acquiring company's shares at a similar discount.
We are entitled to redeem the Rights for one cent per Right under
certain circumstances. If not redeemed, the Rights will expire on August 7,
2008.
The preferred stock issuable upon exercise of Rights consists of Series
A Junior Participating Preferred Stock, par value $.01 per share, of UCAR. In
general, each share of that preferred stock will be entitled to a minimum
preferential quarterly dividend declared on the common stock, will be entitled
to a liquidation preference of $110,000 and will have 1,000 votes, voting
together with the common stock.
F-40
(17) OTHER TRANSACTIONS
In June 2001, our subsidiary, Graftech, entered into a new exclusive
development and collaboration agreement and a new exclusive long term supply
agreement with Ballard Power Systems Inc. The scope of the new agreements
significantly expands upon Graftech's and Ballard's initial collaboration
announced in 1999. The development agreement, which has been extended from 2002
in the initial collaboration to 2011, includes natural graphite-based materials
and components for use in proton exchange membrane fuel cells and fuel cell
systems for transportation, stationary and portable applications. The joint
development program will concentrate on the development of cost-effective
graphitic materials and components, including flow field plates and gas
diffusion layers. As a part of this arrangement, Graftech will also develop and
manufacture prototype materials and components and provide early stage testing
of these prototypes in an on-site fuel cell testing center. In addition, Ballard
invested $5.0 million in shares of Ballard common stock for a 2.5% equity
ownership interest in Graftech. As an investor in Graftech, Ballard has rights
of first refusal with respect to certain equity ownership transactions, tag
along and drag along rights and preemptive and other rights to acquire
additional equity ownership under certain limited circumstances.
During the 2001 first quarter, we contributed our Brazilian cathode
manufacturing operations with a net book value of $3 million to Carbone Savoie.
Pechiney, the 30% minority owner of Carbone Savoie, contributed approximately $9
million to Carbone Savoie as part of this transaction. The cash contribution is
being used to upgrade manufacturing operations in Brazil and France, which is
expected to be completed in early 2002. Ownership in Carbone Savoie remains 70%
by us and 30% by Pechiney. Under our now broadened alliance, Carbone Savoie
holds our entire cathode manufacturing capacity, which is about 40,000 metric
tons of cathodes annually.
During the 2001 first quarter, we signed a ten year service contract
with CGI pursuant to which CGI became the delivery arm for our global
information technology services requirements, including the design and
implementation of our global information and advanced manufacturing and demand
planning processes, using J.D. Edwards software. Pursuant to the outsourcing
provisions of the contract, CGI manages our data center services, networks,
desktops, telecommunications and legacy systems operations. Twenty-four of our
U.S. based employees were integrated into CGI's U.S. operations as part of the
initial phase of services under this contract. The contract became effective
April 16, 2001.
In December 2000, we entered into a license and technical services
agreement with Conoco Inc. to license our proprietary technology for use at the
carbon fiber manufacturing facility that Conoco is building in Ponca City,
Oklahoma.
Under a separate manufacturing tolling agreement entered into in
February 2001, we are providing manufacturing services to Conoco at our facility
in Clarksburg, West Virginia for carbon fibers. Under the three-year
manufacturing tolling agreement, we are using raw materials provided by Conoco
to manufacture carbon fibers. In addition in 2001, we entered into a seven-year
supply agreement with Conoco relating to petroleum coke. This agreement contains
customary terms and conditions.
In March 2001, we issued 426,400 shares of common stock to the UCAR
Carbon Benefits Protection Trust. These shares, if later sold, could be used for
partial funding of our future obligations under certain of our compensation and
benefits plans. The shares held in trust are not considered outstanding for
purposes of calculating earnings per share until they are committed to be sold
or otherwise used for funding purposes.
F-41
(18) SUBSEQUENT EVENTS
On February 15, 2002, UCAR Finance issued $400 million of 10.25% Senior
Notes due in 2012. The Senior Notes are unsecured senior obligations of UCAR
Finance, and are senior in right of payment to any future subordinated
obligation of UCAR Finance. Interest is payable semi-annually. After February
15, 2007, UCAR Finance is entitled at its option to redeem all or a portion of
the notes. Redemption prices range from 105.125% commencing on February 15, 2007
to 100% commencing on February 15, 2010. The notes are guaranteed by UCAR, UCAR
Global and UCAR Carbon and other U.S. subsidiaries holding a substantial
majority of our U.S. assets. In addition, the Senior Notes are secured by a
pledge of certain unsecured intercompany term notes issued by some of our
foreign subsidiaries and guarantees of those intercompany term notes issued by
some of our foreign subsidiaries. The guarantee by UCAR Carbon is secured by a
junior pledge of shares of our subsidiary, Graftech.
We paid approximately $13 million for debt issuance costs related to
the Senior Notes. The debt issuance cost is being amortized over the term of the
Senior Notes. The $387 million net proceeds from the Senior Notes were used to
repay a portion of the term loans outstanding under the Senior Facilities. As
the amount of term loans due in 2002 has been refinanced through the issuance of
the Senior Notes, the $35 million current portion of long term debt has been
reclassified to long term debt in the Consolidated Balance Sheet as of December
31, 2001.
In January 2002, we announced a new major cost savings plan designed to
generate cost savings to strengthen our balance sheet. The key elements of the
2002 plan include:
o the rationalization of graphite electrode manufacturing capacity
at our higher cost facilities and the incremental expansion of
capacity at our lower cost facilities;
o the redesign and implementation of changes in our U.S. benefit
plans for active and retired employees;
o the implementation of work process changes, including
consolidating and streamlining order fulfillment, purchasing,
finance and accounting, and human resource processes, along with
the identification and implementation of outsourcing
opportunities;
o the implementation of additional plant and corporate overhead
cost reductions; and
o the corporate realignment of our subsidiaries, consistent with
the operational realignment of our divisions, to generate
significant tax savings.
We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years. The non-strategic businesses
being considered contributed net sales of about $25 million in 2001.
We have finalized discussions with the U.S. Department of Justice to
restructure the payment schedule for the remaining $60 million due on our 1998
antitrust fine. Currently, we are scheduled to make payments of $18 million in
the 2002 second quarter and $21 million in both the 2003 and 2004 second
quarters. The revised payment schedule requires a $2.5 million payment in 2002,
a $5.0 million payment in 2003 and, beginning with the 2004 second quarter,
quarterly payments ranging from $3.25 million to $5.375 million through the 2007
first quarter. Interest will begin to accrue on the unpaid balance, commencing
with the 2004 second quarter, at the statutory rate of interest then in effect.
The current statutory rate of interest is 2.13% per annum. Accrued interest will
be payable together with each quarterly payment. The revised payment schedule
has been approved by the District Court.
F-42
(19) FINANCIAL INFORMATION ABOUT THE PARENT, THE ISSUER, THE GUARANTORS AND
THE SUBSIDIARIES WHOSE SECURITIES SECURE THE SENIOR NOTES AND RELATED
GUARANTEES
On February 15, 2002, UCAR Finance (the "Issuer") issued $400 million
aggregate principal amount of Senior Notes. The Senior Notes have been
guaranteed on a senior basis by UCAR (the "Parent") and UCAR Global, UCAR Carbon
and other subsidiaries holding a substantial majority of our U.S. assets, which
subsidiaries are UCAR International Holdings Inc., UCAR International Trading
Inc., UCAR Carbon Technology LLC, UCAR Composites Inc. and UCAR Holdings III
Inc. The guarantors (other than the Parent) are collectively called the "U.S.
Guarantors." The guarantees of the U.S. Guarantors are unsecured, except that
the guarantee of UCAR Carbon has been secured by a pledge of all of our shares
of Graftech, but in no event will the value of the pledged portion of such
shares exceed 19.99% of the principal amount of the then outstanding Senior
Notes. All of the guarantees are full, unconditional and joint and several and
the Issuer and each of the U.S. Guarantors are 100% owned by the Parent.
Graftech and our other subsidiaries which are not guarantors are called the
"Non-Guarantors." The following table sets forth condensed consolidating balance
sheets and statements of operations and cash flows at December 31, 2000 and 2001
and for each of the years in the three years ended December 31, 2001 of the
Parent, the Issuer, the U.S. Guarantors and the Non-Guarantors. Provisions in
the Senior Facilities restrict the payment of dividends by the Subsidiaries to
the Parent. At December 31, 2001, retained earnings of the Subsidiaries subject
to such restrictions were approximately $524 million. Investment in subsidiary
companies are recorded on the cost basis.
F-43
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
(Dollars in millions)
At December 31, 2001
--------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents................... $ - $ 16 $ 8 $ 14 $ - $ 38
Notes and accounts receivable............... - 885 442 416 (1,648) 95
Inventories:
Raw materials and supplies.............. - - 3 32 (2) 33
Work in process......................... - - 45 66 - 111
Finished goods.......................... - - 8 26 (1) 33
-------- ---------- ---------- --------- --------- ---------
-------- ---------- ---------- --------- --------- ---------
56 124 (3) 177
Prepaid expenses and deferred income taxes.. - - 7 5 - 12
-------- ---------- ---------- --------- --------- ---------
-------- ---------- ---------- --------- --------- ---------
Total current assets.................... - 901 513 559 (1,651) 322
Net fixed assets............................ - - 52 233 (4) 281
Other assets................................... 77 29 518 202 (632) 194
-------- ---------- ---------- --------- --------- ---------
Total assets................................ $ 77 $ 930 $ 1,083 $ 994 $ (2,287) 797
======== ========== ========== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................ $ 8 $ 9 $ 50 $ 134 $ (100) $ 101
Short-term debt............................. 397 278 407 450 (1,525) 7
Accrued income and other taxes.............. (15) - 42 18 - 45
Other accrued liabilities................... - - 39 42 (24) 57
-------- ---------- ---------- --------- --------- ---------
-------- ---------- ---------- --------- --------- ---------
Total current liabilities............... 390 287 538 644 (1,649) 210
Long-term debt................................. - 626 - 21 (16) 631
Other long-term obligations.................... - - 197 34 - 231
Deferred income taxes.......................... - - 5 32 (5) 32
Minority stockholders' equity in consolidated 2
entities..................................... - - - 23 25
Stockholders' equity (deficit)................. (313) 17 343 240 (619) (332)
-------- ---------- ---------- --------- --------- ---------
Total liabilities and stockholders' equity $ 77 $ 930 $ 1,083 $ 994 $ (2,287) 797
(deficit).................................
======== ========== ========== ========= ========= =========
F-44
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
(Dollars in millions)
At December 31, 2000
--------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents................... $ - $ 31 $ 7 $ 9 $ - $ 47
Notes and accounts receivable............... - 445 38 407 (769) 121
Inventories:
Raw materials and supplies.............. - - 7 35 (1) 41
Work in process......................... - - 43 61 (1) 103
Finished goods.......................... - - 8 25 (2) 31
-------- ---------- ---------- --------- --------- ---------
-------- ---------- ---------- --------- --------- ---------
- - 58 121 (4) 175
Prepaid expenses and deferred income taxes.. - - 11 5 2 18
-------- ---------- ---------- --------- --------- ---------
-------- ---------- ---------- --------- --------- ---------
Total current assets.................... - 476 114 542 (771) 361
Net fixed assets............................ - - 91 359 (72) 378
Other assets................................... 77 481 467 47 (903) 169
-------- ---------- ---------- --------- --------- ---------
Total assets................................ $ 77 $ 957 $ 672 $ 948 $ (1,746) $ 908
======== ========== ========== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................ $ 8 $ 8 $ 42 $ 135 $ (94) $ 99
Short-term debt............................. 453 231 165 258 (1,104) 3
Payments due within one year on long-term
debt...................................... - 27 - - - 27
Accrued income and other taxes.............. - - 22 20 (1) 41
Other accrued liabilities................... - - 42 70 (22) 90
-------- ---------- ---------- --------- --------- ---------
-------- ---------- ---------- --------- --------- ---------
Total current liabilities............... 461 266 271 483 (1,221) 260
Long-term debt................................. - 700 - 22 (17) 705
Other long-term obligations.................... - - 175 34 - 209
Deferred income taxes.......................... - - (1) 37 - 36
Minority stockholders' equity in consolidated -
entities..................................... - - - 14 14
Stockholders' equity (deficit)................. (384) (9) 227 358 (508) (316)
-------- ---------- ---------- --------- --------- ---------
Total liabilities and stockholders' equity $ 77 $ 957 $ 672 $ 948 $ (1,746) 908
(deficit).................................
======== ========== ========== ========= ========= =========
F-45
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2001
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net sales....................................... $ - $ - $ 246 $ 547 $ (139) $ 654
Cost of sales................................... - - 215 372 (118) 469
-------- ---------- ---------- --------- --------- ---------
Gross profit................................. - - 31 175 (21) 185
Selling, administrative and other expenses...... 4 (2) 113 93 (13) 195
-------- ----------
Operating profit (loss)...................... (4) 2 (82) 82 (8) (10)
Interest income.............................. - (73) (4) (21) 98 -
Interest expense................................ 34 74 25 24 (97) 60
-------- ---------- ---------- --------- --------- ---------
Income (loss) before provision for income
taxes...................................... (38) 1 (103) 79 (9) (70)
Provision for (benefit from) income taxes....... (15) - 9 21 - 15
-------- ---------- ---------- --------- --------- ---------
Income (loss) of consolidated entries........ (23) 1 (112) 58 (9) (85)
Minority stockholders' share of income.......... - - - 2 - 2
-------- ---------- ---------- --------- --------- ---------
Net income (loss)......................... $ (23) $ 1 $ (112)$ 56 $ (9) $ (87)
======== ========== ========== ========= ========= =========
For the Year Ended December 31, 2000
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net sales...................................... $ - $ - $ 306 $ 626 $ (156) $ 776
Cost of sales.................................. - - 275 422 (137) 560
-------- ---------- ---------- --------- --------- ---------
Gross profit................................ - - 31 204 (19) 216
Selling, administrative and other expenses..... 1 (4) (2) 73 37 105
-------- ---------- ---------- --------- --------- ---------
Operating profit (loss)..................... (1) 4 33 131 (56) 111
Interest income............................. (8) (60) (32) (21) 121 -
Interest expense............................... 38 61 74 23 (121) 75
-------- ---------- ---------- --------- --------- ---------
Income (loss) before provision for income
taxes..................................... (31) 3 (9) 129 (56) 36
Provision for (benefit from) income taxes...... - 2 (20) 28 - 10
-------- ---------- ---------- --------- --------- ---------
Income (loss) of consolidated entries....... (31) 1 11 101 (56) 26
Minority stockholders' share of income......... - - - 3 - 3
-------- ---------- ---------- --------- --------- ---------
Income (loss) before extraordinary item..... (31) 1 11 98 (56) 23
Extraordinary item, net of tax................. - 3 10 - - 13
-------- ---------- ---------- --------- --------- ---------
Net income (loss)........................ $ (31) $ (2) $ 1$ 98 $ (56) $ 10
======== ========== ========== ========= ========= =========
For the Year Ended December 31, 1999
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net sales....................................... $ - $ - $ 324 $ 677 $ (170) $ 831
Cost of sales................................... - - 284 423 (134) 573
-------- ---------- ---------- --------- --------- ---------
-------- ---------- ---------- --------- --------- ---------
Gross profit................................. - - 40 254 (36) 258
Selling, administrative and other expenses...... - - 69 94 (35) 128
-------- ---------- ---------- --------- --------- ---------
Operating profit (loss)...................... - - (29) 160 (1) 130
Interest income.............................. (16) - (28) (15) 59 -
Interest expense................................ 29 - 88 27 (60) 84
-------- ---------- ---------- --------- --------- ---------
-------- ---------- ---------- --------- --------- ---------
Income (loss) before provision for income
taxes...................................... (13) - (89) 148 - 46
Provision for (benefit from) income taxes....... - - (32) 33 - 1
-------- ---------- ---------- --------- --------- ---------
-------- ---------- ---------- --------- --------- ---------
Income (loss) of consolidated entries........ (13) - (57) 115 - 45
Minority stockholders' share of income.......... - - - 3 - 3
-------- ---------- ---------- --------- --------- ---------
Net income (loss)......................... $ (13) $ - $ (57)$ 112 $ - $ 42
======== ========== ========== ========= ========= =========
F-46
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2001
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net cash provided by (used in) operating activities. $ (38) $ 11 $ 186 $ 34 $ (176) $ 17
Net cash provided by (used in) investing activities. - 18 (427) (168) 538 (39)
Net cash provided by (used in) financing activities. 38 (44) 242 141 (362) 15
Net increase in cash and cash equivalents........... - (15) 1 7 - (7)
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - (2) - (2)
Cash and cash equivalents at beginning of period.... - 31 7 9 - 47
-------- ---------- ---------- --------- --------- ---------
Cash and cash equivalents at end of period.......... $ - $ 16 $ 8 $ 14 $ - $ 38
======== ========== ========== ========= ========= =========
For the Year Ended December 31, 2000
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net cash provided by (used in) operating activities. $ (169) $ (26) $ 240 $ 96 $ (47) $ 94
Net cash provided by (used in) investing activities. 97 (873) 396 (58) 388 (50)
Net cash provided by (used in) financing activities. 72 930 (630) (44) (341) (13)
Net increase in cash and cash equivalents........... - 31 6 (6) - 31
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - (1) - (1)
Cash and cash equivalents at beginning of period.... - - 1 16 - 17
-------- ---------- ---------- --------- --------- ---------
Cash and cash equivalents at end of period.......... $ - $ 31 $ 7 $ 9 $ - $ 47
======== ========== ========== ========= ========= =========
For the Year Ended December 31, 1999
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net cash provided by (used in) operating activities. $ (68) $ - $ 149 $ 44 $ (45) $ 80
Net cash provided by (used in) investing activities. 193 - (28) (4) 200 (39)
Net cash provided by (used in) financing activities. (125) - (122) (78) 245 (80)
Net increase in cash and cash equivalents........... - - (1) (38) - (39)
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - (2) - (2)
Cash and cash equivalents at beginning of period.... - - 2 56 - 58
-------- ---------- ---------- --------- --------- ---------
Cash and cash equivalents at end of period.......... $ - $ - $ 1 $ 16 $ - $ 17
======== ========== ========== ========= ========= =========
--------------------
Investments in subsidiary companies are recorded on the cost basis.
F-47
Unsecured intercompany term notes in an aggregate principal amount, at
December 31, 2001, equal to $391 million (based on currency exchange rates in
effect at December 31, 2001), and guarantees of those unsecured intercompany
term notes, issued to UCAR Finance by certain of our foreign subsidiaries have
been pledged by UCAR Finance to secure the Senior Notes, subject to the
limitation that at no time will the combined value of the pledged portion of any
foreign subsidiary's unsecured intercompany term note and unsecured guarantee of
unsecured intercompany term notes issued by other foreign subsidiaries exceed
19.99% of the principal amount of the then outstanding Senior Notes.
As described above, the guarantee of the Senior Notes by UCAR Carbon
has been secured by a pledge of all of our shares of Graftech, but at no time
will the value of the pledged portion of such shares exceed 19.99% of the
principal amount of the then outstanding Senior Notes.
Rule 3-16 of Regulation S-X adopted by the SEC provides that, for each
of the registrant's affiliates whose securities constitute a "substantial"
portion of the collateral for registered securities, financial statements (that
would be required to be filed if the affiliate were a registrant) must be filed
with this Registration Statement. Under Rule 3-16(b), securities of a person
will be deemed to constitute a "substantial" portion of the collateral if the
aggregate principal amount, par value, or book value of securities as carried by
the registrant, or the market value of such securities, whichever is the
greatest, equals 20% or more of the principal amount of the registered
securities. In this case, the pledges of common stock of Graftech and the
intercompany notes and related guarantees have been limited such that they will
never be more than 19.99% of the principal amount of the outstanding Senior
Notes. Therefore, no such financial statements are required to be included in
this Registration Statement.
F-48
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
UCAR maintains a director's and officer's liability insurance policy
which indemnifies directors and officers for certain losses arising from claims
by reason of a wrongful act, as defined therein, under certain circumstances.
Directors and officers indemnified under the policy include directors and
officers of subsidiaries of UCAR.
In addition, in response to this Item 20, the following information is
incorporated by reference: the information included in the description of UCAR's
capital stock contained in UCAR's registration statement on Form 8-A dated July
28, 1995, as updated by any amendment or report filed for the purpose of
updating such description; the information included in the description of UCAR's
preferred stock purchase rights contained in UCAR's registration statement on
Form 8-A dated September 10, 1998, as updated by any amendment or report filed
for the purpose of updating such description; Articles Tenth and Eleventh of the
Amended and Restated Certificate of Incorporation of UCAR incorporated by
reference as Exhibit 4.1 to the Registration Statement on Form S-3, as amended
(File No. 333-63848) filed on June 26, 2001 (the "JUNE 26, 2001 REGISTRATION
STATEMENT"); and Article V of the Amended and Restated By-Laws of UCAR
incorporated by reference as Exhibit 4.2 to the June 26, 2001 Registration
Statement ("UCAR'S BY-LAWS"). The charter and by-laws of the other Registrants
contain comparable provisions. UCAR's By-Laws also cover directors and officers
of subsidiaries of UCAR.
Section 145 of the General Corporation Law of the State of Delaware
(the "LAW") provides as follows:
"(a) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation shall have the power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and
II-1
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the present or
former director, officer, employee or agent is proper in the circumstances
because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made with
respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership,
II-2
joint venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its separate
existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees)."
Section 102(b) (7) of the Law provides as follows:
"(b) In addition to the matters required to be set forth in the
certificate of incorporation by subsection (a) of this section, the certificate
of incorporation may also contain any or all of the following matters: (7) A
provision eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director: (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of this title; or (iv) for any transaction from
which the director derived an improper personal benefit. No such provision shall
eliminate or limit the liability of a director for any act or omission occurring
prior to the date when such provision becomes effective. All references in this
paragraph to a director shall also be deemed to refer (x) to a member of the
governing body of a corporation which is not authorized to issue capital stock,
and (y) to such other person or persons, if any, who, pursuant to a provision of
the certificate of incorporation in accordance with Section 141(a) of this
title, exercise or perform any of the powers or duties otherwise conferred or
imposed upon the board of directors by this title."
II-3
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
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 among
Blackstone Capital Partners II Merchant Banking Fund L.P., Blackstone Offshore Capital
Partners II L.P., Blackstone Family Investment Partnership II L.P., Chase Equity
Associates and UCAR International Inc.
2.3 - [omitted]
2.4 - [omitted]
2.5 - [omitted]
2.6 - [omitted]
2.7 - [omitted]
2.8 - [omitted]
2.9 - [omitted]
2.10 - [omitted]
2.11 - [omitted]
2.12 - [omitted]
2.13 - [omitted]
2.14 - [omitted]
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.
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 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.
II-4
Exhibit Number Description of Exhibit
-------------- ----------------------
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(1) - 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 - [omitted]
2.34(6) - 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.
3.1(a)(9) - Certificate of Designations of Series A Junior Participating Preferred Stock.
3.2(3) - Amended and Restated By-Laws of UCAR International Inc.
3.2(a)(9) - Amendment to By-Laws of UCAR International Inc.
4.1(16) - Indenture dated as of February 15, 2002 among UCAR Finance Inc., UCAR International Inc.,
UCAR Global Enterprises Inc., UCAR Carbon Company Inc., and the Subsidiary Guarantors from
time to time party thereto and State Street Bank and Trust Company, as Trustee.
4.2(16) - Registration Rights Agreement dated as of February 15, 2002 among UCAR International Inc.,
each of the Subsidiaries listed therein, Credit Suisse First Boston Corporation, J.P.
Morgan Securities Inc., ABN AMRO Incorporated, Fleet Securities Inc. and Scotial Capital
(USA) Inc.
4.3(9) - Rights Agreement dated as of August 7, 1998 between UCAR International Inc. and The Bank
of New York, as Rights Agent.
4.4(16) - Amendment No. 1 to such Rights Agreement dated as of November 1, 2000.
5.1* - Opinion of Kelley Drye & Warren LLP.
10.1(11) - Credit Agreement dated as of February 22, 2000 among UCAR International Inc., UCAR Global
Enterprises Inc., UCAR Finance Inc., the LC Subsidiaries from time to time party thereto,
the Lenders from time to time party thereto, and Morgan Guaranty Trust Company of New
York, as Administrative Agent.
10.2(11) - Guarantee Agreement dated as of February 22, 2000 made by UCAR International Inc., UCAR
Global Enterprises Inc., UCAR Finance Inc. and each Domestic Subsidiary party thereto in
favor of Morgan Guaranty Trust Company of New York, as Collateral Agent for the Secured
Parties.
II-5
Exhibit Number Description of Exhibit
-------------- ----------------------
10.3(11) - Security Agreement dated as of February 22, 2000 made by UCAR International Inc., UCAR
Global Enterprises Inc., UCAR Finance Inc. and the subsidiaries of UCAR from time to time
party thereto, in favor of Morgan Guaranty Trust Company of New York, as Collateral Agent
for the Secured Parties.
10.4(11) - Indemnity, Subrogation And Contribution Agreement dated as of February 22, 2000 among UCAR
International Inc., UCAR Global Enterprises Inc., UCAR Finance Inc., each of the Domestic
Subsidiaries party thereto and Morgan Guaranty Trust Company of New York, as Collateral
Agent for the Secured Parties.
10.5(11) - Pledge Agreement dated as of February 22, 2000 by UCAR International Inc., UCAR Global
Enterprises Inc., UCAR Finance Inc. and the direct and indirect subsidiaries of UCAR that
are signatories thereto in favor of Morgan Guaranty Trust Company of New York, as
Collateral Agent for the Secured Parties.
10.6(11) - Intellectual Property Security Agreement dated as of February 22, 2000 made by UCAR
International Inc., UCAR Global Enterprises Inc., UCAR Finance Inc. and the subsidiaries
of UCAR from time to time party thereto in favor of Morgan Guaranty Trust Company of New
York, as Collateral Agent for the Secured Parties.
10.7(12) - First Amendment to such Credit Agreement dated as of October 11, 2000.
10.8(13) - Second Amendment to such Credit Agreement dated as of April 25, 2001.
10.9(13) - Third Amendment to such Credit Agreement dated as of July 10, 2001.
10.10(16) - Fourth Amendment to such Credit Agreement dated as of December 6, 2001.
10.11(16) - Fifth Amendment to such Credit Agreement dated as of January 18, 2002.
10.12(16) - Reaffirmation Agreement dated as of February 15, 2002 among UCAR International Inc., UCAR
Global Enterprises Inc., UCAR Finance, Inc., each Subsidiary Loan Party named therein,
each LC Subsidiary named therein and JPMorgan Chase Bank as Administrative Agent and
Collateral Agent under the Credit Agreement.
10.13(16) - Pledge Agreement dated as of February 15, 2002, by UCAR SA in favor of UCAR Finance Inc.
10.14 - [omitted]
10.15 - [omitted]
10.16 - [omitted]
10.17 - [omitted]
10.18 - [omitted]
10.19 - [omitted]
10.20 - [omitted]
10.21(1) - Form of Non-Qualified Stock Option Agreement (Original Version).
10.22(9) - UCAR International Inc. Management Stock Option Plan as amended and restated through
September 29, 1998.
10.22(a)(9) - UCAR International Inc. Management Stock Option Plan effective as of September 29, 1998
(Senior Management Version).
10.23(8) - Employment Agreement dated as of June 22, 1998 between UCAR International Inc. and Gilbert
E. Playford.
10.24(9) - Forms of Non-Qualified Stock Option Agreement (Standard Option Version and Directors
Version).
10.25(11) - UCAR International Inc. Compensation Deferral Program effective January 1, 2000.
10.26(14) - Restricted Stock Agreement dated as of January 1, 2000 between UCAR International Inc. and
Gilbert E. Playford.
10.27(14) - Amendment to the UCAR International Inc. Management Stock Option Plan (Senior Management
Version) effective as of June 29, 2000.
II-6
Exhibit Number Description of Exhibit
-------------- ----------------------
10.28(14) - Amendment to the UCAR International Inc. Management Stock Option Plan (Original Version)
effective as of June 29, 2000.
10.29(15) - Amendment to Employment and Restricted Stock Agreements between UCAR International Inc.
and Gilbert E. Playford dated as of August 25, 2001.
10.30(17) - UCAR International Inc. Management Stock Option Plan effective as of September 29, 1998
(Mid-Management Version), as amended.
10.31(11) - UCAR International Inc. Management Incentive Plan amended and restated as of January 1,
1999.
10.32 - [omitted]
10.33(9) - UCAR International Inc. Executive Employee Stock Purchase Program (Senior Management
Version).
10.34(9) - UCAR International Inc. Executive Employee Loan Program.
10.35 - [omitted]
10.36(11) - UCAR Carbon Company Inc. Equalization Benefit Plan amended and restated as of October 1,
1998.
10.37(11) - First Amendment to Equalization Benefit Plan effective, as to paragraph 1, January 1, 2000
and, as to paragraph 2, October 1, 1998.
10.38(11) - UCAR Carbon Company Inc. Supplemental Retirement Income Plan amended and restated as of
July 1, 1998.
10.38(a)(11) - First Amendment to Supplemental Retirement Income Plan effective, as to paragraph 1,
January 1, 2000 and, as to paragraph 2, July 1, 1998.
10.39(11) - UCAR Carbon Company Inc. Enhanced Retirement Income Plan amended and restated as of July
1, 1998.
10.39(a)(11) - First Amendment to Enhanced Retirement Income Plan effective, as to paragraph 1, January
1, 2000 and, as to paragraph 2, July 1, 1998.
10.40(14) - Forms of Severance Compensation Agreement (U.S. Version and International Version).
10.41(14) - UCAR Carbon Company Inc. Benefits Protection Trust amended and restated as of November 20,
2000.
10.42(16) - First Amendment to such Benefits Protection Trust effective as of November 20, 2000.
10.43(3) - UCAR International Inc. 1995 Equity Incentive Plan effective as of August 15, 1995.
10.43(a)(5) - First Amendment to such Equity Incentive Plan dated July 29, 1996.
10.44(14) - Amendment to such Equity Incentive Plan effective as of June 29, 2000.
10.45(14) - UCAR Carbon Company Inc. Compensation Deferral Program Trust effective as of November 1,
2000.
10.46(16) - First Amendment to such Deferral Program Trust effective as of November 20, 2000.
10.47(16) - Second Amendment to such Enhanced Retirement Income Plan effective as of January 1, 2001.
10.48(16) - Third Amendment to such Enhanced Retirement Income Plan effective as of May 23, 2001.
10.49(7) - Plea Agreement between the U.S. of America and UCAR International Inc. executed April 7,
1998.
II-7
Exhibit Number Description of Exhibit
-------------- ----------------------
10.50(10) - Stipulation and Agreement of Settlement dated October 13, 1999 among David Jaroslawicz and
Robert P. Krass, Robert J. Hart, Peter B. Mancino, William P. Wiemels, Fred C. Wolf,
Eugene Cartledge, John R. Hall, Glenn H. Hutchins, Robert D. Kennedy, Howard A. Lipson,
Peter G. Peterson, Stephen A. Schwarzman and UCAR International Inc.
10.51(10) - Stipulation and Agreement of Settlement dated October 13, 1999 among the Florida State
Board of Administration and UCAR International Inc., Peter G. Peterson, Stephen A.
Schwarzman, Howard A. Lipson, Glenn H. Hutchins, Robert P. Krass, Robert J. Hart, William
P. Wiemels, Fred C. Wolf and Peter B. Mancino.
10.52(16) - Second Amendment to such Supplemental Retirement Income Plan effective as of January 1,
2001.
10.53(16) - Third Amendment to such Supplemental Retirement Income Plan effective as of May 23, 2001.
10.54(16) - Second Amendment to such Equalization Benefit Plan effective as of January 1, 2001.
10.55(13) - Outsourcing Services Agreement, dated as of March 30, 2001, effective April 2001, between
CGI Information Systems and Management Consultants, Inc. and UCAR International Inc.
(Confidential treatment granted as to certain portions.)
10.56(13) - Joint Development and Collaboration Agreement, effective June 5, 2001, among UCAR Carbon
Company Inc., Graftech Inc., and Ballard Power Systems Inc. (Confidential treatment
granted as to certain portions)
10.57(13) - Master Supply Agreement, effective June 5, 2001 between UCAR Carbon Company Inc. and
Ballard Power Systems Inc. (Confidential treatment granted as to certain portions)
10.58(13) - Agreement, effective as of January 1, 2001, between Conoco Limited and UCAR S.A.
(Confidential treatment granted as to certain portions.)
10.59(13) - Agreement, effective as of January 1, 2001, between Cononco Inc. and UCAR Carbon Company
Inc. and UCAR S.A. (Confidential treatment granted as to certain portions)
10.60(16) - Third Amendment to such Equalization Benefit Plan effective as of May 23, 2001.
12.1** - Ratio of Earnings to Fixed Charges.
21.1** - List of subsidiaries of UCAR International Inc.
23.1** - Consent of KPMG LLP.
23.2** - Consent of Deloitte & Touche LLP.
23.3* - Consent of Kelley Drye & Warren LLP (to be included in its opinion, which will be filed as
Exhibit 5.1)
24.1** - Powers of Attorney (included on signature pages)
25.1** - Statement of Eligibility of State Street Bank and Trust Company on Form T-1 relating to
10 1/4% Senior Notes due 2012 issued by UCAR Finance Inc. and guaranteed by UCAR
International Inc. and certain of its subsidiaries.
II-8
Exhibit Number Description of Exhibit
-------------- ----------------------
99.1* - Letter of Transmittal relating to 10 1/4% Senior Notes due 2012 issued by UCAR Finance Inc.
and guaranteed by UCAR International Inc. and certain of its subsidiaries.
99.2* - Notice of Guaranteed Delivery relating to 10 1/4% Senior Notes due 2012 issued by UCAR
Finance Inc. and guaranteed by UCAR International Inc. and certain of its subsidiaries.
---------------
* To be filed by amendment.
** Filed herewith.
(1) Incorporated by reference to the Registration Statement of UCAR
International Inc. and UCAR Global Enterprises Inc. on Form S-1
(Registration No. 33-84850).
(2) Incorporated by reference to the Annual Report of UCAR International
Inc. on Form 10-K for the year ended December 31, 1995 (File No.
1-13888).
(3) Incorporated by reference to the Registration Statement of UCAR
International Inc. on Form S-1 (Registration No. 33-94698).
(4) Incorporated by reference to the Quarterly Report of UCAR International
Inc. on Form 10-Q for the quarter ended March 31, 1996 (File No.
1-13888).
(5) Incorporated by reference to the Quarterly Report of UCAR International
Inc. on Form 10-Q for the quarter ended June 30, 1996 (File No.
1-13888).
(6) Incorporated by reference to the Quarterly Report of UCAR International
Inc. on Form l0-Q for the quarter ended September 30, 1997 (File No.
1-13888).
(7) Incorporated by reference to the Quarterly Report of UCAR International
Inc. on Form 10-Q for the quarter ended March 31, 1998 (File No.
1-13888).
(8) Incorporated by reference to the Annual Report of UCAR International
Inc. on Form 10-K for the year ended December 31, 1997 (File No.
1-13888).
(9) Incorporated by reference to the Annual Report of UCAR International
Inc. on Form 10-K for the year ended December 31, 1998 (File No.
1-13888).
(10) Incorporated by reference to the Quarterly Report of UCAR International
Inc. on Form 10-Q for the quarter ended September 30, 1999 (File No.
1-13888).
(11) Incorporated by reference to the Annual Report of UCAR International
Inc. on Form 10-K for the year ended December 31, 1999 (File No.
1-13888).
(12) Incorporated by reference to the Quarterly Report of UCAR International
Inc. on Form 10-Q for the quarter ended September 30, 2000 (File No.
1-13888).
(13) Incorporated by reference to the Quarterly Report of UCAR International
Inc. on Form 10-Q for the quarter ended June 30, 2001 (File No.
1-13888).
(14) Incorporated by reference to the Annual Report of UCAR International
Inc. on Form 10-K for the year ended December 31, 2000 (File No.
1-13888).
(15) Incorporated by reference to the Quarterly Report of UCAR International
Inc. on Form 10-Q for the quarter ended September 30, 2001 (File No.
1-13888).
(16) Incorporated by reference to the Annual Report of UCAR International
Inc. on Form 10-K for the year ended December 31, 2001 (File No.
1-13888).
(17) Incorporated by reference to the Registration Statement of UCAR
International Inc. on Form S-8 (Registration No. 333-75774).
II-9
(b) Supplemental Financial Statement Schedules:
None.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrants hereby undertake:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement, but, notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Commission by any of the Registrants pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934,
that are incorporated by reference in this registration statement.
(2) that, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned Registrants hereby undertake to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-10
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of any of the Registrants pursuant to the foregoing provisions, or
otherwise, each of the Registrants has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by any of the
Registrants of expenses incurred or paid by a director, officer or controlling
person of such Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, such Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(d) Each of the undersigned Registrants hereby undertake to file an
application for the purpose of determining the eligibility of the trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Act.
(e) Each of the undersigned Registrants hereby undertake that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of an annual report by any of the Registrants pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an annual report pursuant to Section 15(d) of the Securities Exchange
Act of 1934 by an employee benefit plan of any of the Registrants) that is
incorporated by reference in this registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilmington, State of Delaware, on the 30th day of April, 2002.
UCAR INTERNATIONAL INC.
By: /s/ CORRADO F. DE GASPERIS
-------------------------------------
Corrado F. De Gasperis
Vice President, Chief Financial
Officer and Chief Information
Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Gilbert E. Playford, Corrado F. De
Gasperis and Karen G. Narwold, and each of them individually, his true and
lawful agent, proxy and attorney-in-fact, with full power of substitution and
resubstitution, for him or her and in his or her 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 registration statement (which
includes any additional registration statement under Rule 462(b)) together with
all schedules and exhibits thereto, (ii) act on, sign and file with the
Securities and Exchange Commission any and all exhibits to this registration
statement and any and all exhibits and schedules thereto, (iii) act on, sign and
file any and all applications, registration statements, notices, reports and
other documents necessary or appropriate in connection with the registration or
qualification under foreign and state securities laws of the securities
described in this registration statement or any amendment thereto, or obtain an
exemption therefrom, in connection with the offering described therein, and (iv)
take any and all such 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 approving,
ratifying and confirming all that such agents, proxies and attorneys-in-fact,
any of them or any of his or her or their substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on the 30th day of April,
2002.
Signature Title(s)
--------- --------
/s/ GILBERT E. PLAYFORD President, Chief Executive Officer
------------------------------------ and Chairman of the Board of
Gilbert E. Playford Directors (Principal Executive
Officer)
II-12
Signature Title(s)
--------- --------
/s/ CORRADO F. DE GASPERIS Vice President, Chief Financial
------------------------------------ Officer and Chief Information
Corrado F. De Gasperis Officer (Principal Financial
Officer and Principal Accounting
Officer)
/s/ R. EUGENE CARTLEDGE Director
------------------------------------
R. Eugene Cartledge
/s/ MARY B. CRANSTON Director
------------------------------------
Mary B. Cranston
/s/ JOHN R. HALL Director
------------------------------------
John R. Hall
/s/ THOMAS MARSHALL Director
------------------------------------
Thomas Marshall
/s/ FERRELL P. MCCLEAN Director
------------------------------------
Ferrell P. McClean
/s/ MICHAEL C. NAHL Director
------------------------------------
Michael C. Nahl
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilmington, State of Delaware, on the 30th day of April, 2002.
UCAR FINANCE INC.
UCAR GLOBAL ENTERPRISES INC.
By: /s/ CORRADO F. DE GASPERIS
-----------------------------------------
Corrado F. De Gasperis
Vice President, Chief Financial Officer
and Chief Information Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Gilbert E. Playford, Corrado F. De
Gasperis and Karen G. Narwold, and each of them individually, his true and
lawful agent, proxy and attorney-in-fact, with full power of substitution and
resubstitution, for him or her and in his or her 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 registration statement (which
includes any additional registration statement under Rule 462(b)) together with
all schedules and exhibits thereto, (ii) act on, sign and file with the
Securities and Exchange Commission any and all exhibits to this registration
statement and any and all exhibits and schedules thereto, (iii) act on, sign and
file any and all applications, registration statements, notices, reports and
other documents necessary or appropriate in connection with the registration or
qualification under foreign and state securities laws of the securities
described in this registration statement or any amendment thereto, or obtain an
exemption therefrom, in connection with the offering described therein, and (iv)
take any and all such 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 approving,
ratifying and confirming all that such agents, proxies and attorneys-in-fact,
any of them or any of his or her or their substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on the 30th day of April,
2002.
Signature Title(s)
--------- --------
/s/ GILBERT E. PLAYFORD President (Principal Executive
------------------------------------ Officer)
Gilbert E. Playford
/s/ CORRADO F. DE GASPERIS Vice President, Chief Financial
------------------------------------ Officer, Chief Information Officer
Corrado F. De Gasperis and Director (Principal Financial
Officer and Principal Accounting
Officer)
II-14
Signature Title(s)
--------- --------
/s/ ERICK R. ASMUSSEN Director
------------------------------------
Erick R. Asmussen
/s/ KAREN G. NARWOLD Director
------------------------------------
Karen G. Narwold
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilmington, State of Delaware, on the 30th day of April, 2002.
UCAR CARBON COMPANY INC.
UCAR HOLDINGS III INC.
By: /s/ CORRADO F. DE GASPERIS
---------------------------------
Corrado F. De Gasperis
Vice President and Chief
Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Gilbert E. Playford, Corrado F. De
Gasperis and Karen G. Narwold, and each of them individually, his true and
lawful agent, proxy and attorney-in-fact, with full power of substitution and
resubstitution, for him or her and in his or her 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 registration statement (which
includes any additional registration statement under Rule 462(b)) together with
all schedules and exhibits thereto, (ii) act on, sign and file with the
Securities and Exchange Commission any and all exhibits to this registration
statement and any and all exhibits and schedules thereto, (iii) act on, sign and
file any and all applications, registration statements, notices, reports and
other documents necessary or appropriate in connection with the registration or
qualification under foreign and state securities laws of the securities
described in this registration statement or any amendment thereto, or obtain an
exemption therefrom, in connection with the offering described therein, and (iv)
take any and all such 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 approving,
ratifying and confirming all that such agents, proxies and attorneys-in-fact,
any of them or any of his or her or their substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on the 30th day of April,
2002.
Signature Title(s)
--------- --------
/s/ GILBERT E. PLAYFORD President and Chief Executive
------------------------------------ Officer (Principal Executive
Gilbert E. Playford Officer)
/s/ CORRADO F. DE GASPERIS Vice President, Chief Financial
------------------------------------ Officer and Director (Principal
Corrado F. De Gasperis Financial Officer and Principal
Accounting Officer)
II-16
Signature Title(s)
--------- --------
/s/ ERICK R. ASMUSSEN Director
------------------------------------
Erick R. Asmussen
/s/ KAREN G. NARWOLD Director
------------------------------------
Karen G. Narwold
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilmington, State of Delaware, on the 30th day of April, 2002.
UCAR CARBON TECHNOLOGY LLC
By: UCAR CARBON COMPANY INC., its Sole Member
By: /s/ CORRADO F. DE GASPERIS
---------------------------------------------
Corrado F. De Gasperis
Vice President and Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Gilbert E. Playford, Corrado F. De
Gasperis and Karen G. Narwold, and each of them individually, his true and
lawful agent, proxy and attorney-in-fact, with full power of substitution and
resubstitution, for him or her and in his or her 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 registration statement (which
includes any additional registration statement under Rule 462(b)) together with
all schedules and exhibits thereto, (ii) act on, sign and file with the
Securities and Exchange Commission any and all exhibits to this registration
statement and any and all exhibits and schedules thereto, (iii) act on, sign and
file any and all applications, registration statements, notices, reports and
other documents necessary or appropriate in connection with the registration or
qualification under foreign and state securities laws of the securities
described in this registration statement or any amendment thereto, or obtain an
exemption therefrom, in connection with the offering described therein, and (iv)
take any and all such 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 approving,
ratifying and confirming all that such agents, proxies and attorneys-in-fact,
any of them or any of his or her or their substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on the 30th day of April,
2002.
Signature Title(s)
--------- --------
/s/ GILBERT E. PLAYFORD President and Chief Executive
------------------------------------ Officer of UCAR Carbon Company Inc.
Gilbert E. Playford (Principal Executive Officer)
II-18
Signature Title(s)
--------- --------
/s/ CORRADO F. DE GASPERIS Vice President, Chief Financial
------------------------------------ Officer and Director of UCAR Carbon
Corrado F. De Gasperis Company Inc. (Principal Financial
Officer and Principal Accounting
Officer)
/s/ ERICK R. ASMUSSEN Director of UCAR Carbon Company
------------------------------------ Inc.
Erick R. Asmussen
/s/ KAREN G. NARWOLD Director of UCAR Carbon Company
------------------------------------ Inc.
Karen G. Narwold
II-19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilmington, State of Delaware, on the 30th day of April, 2002.
UCAR COMPOSITES INC.
By: /s/ SCOTT C. MASON
-----------------------------------------
Scott C. Mason
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Gilbert E. Playford, Corrado F. De
Gasperis and Karen G. Narwold, and each of them individually, his true and
lawful agent, proxy and attorney-in-fact, with full power of substitution and
resubstitution, for him or her and in his or her 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 registration statement (which
includes any additional registration statement under Rule 462(b)) together with
all schedules and exhibits thereto, (ii) act on, sign and file with the
Securities and Exchange Commission any and all exhibits to this registration
statement and any and all exhibits and schedules thereto, (iii) act on, sign and
file any and all applications, registration statements, notices, reports and
other documents necessary or appropriate in connection with the registration or
qualification under foreign and state securities laws of the securities
described in this registration statement or any amendment thereto, or obtain an
exemption therefrom, in connection with the offering described therein, and (iv)
take any and all such 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 approving,
ratifying and confirming all that such agents, proxies and attorneys-in-fact,
any of them or any of his or her or their substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on the 30th day of April,
2002.
Signature Title(s)
--------- --------
/s/ SCOTT C. MASON Chief Executive Officer and
------------------------------------ Director (Principal Executive
Scott C. Mason Officer)
/s/ WILLIAM J. KANSKY Vice President and Chief Financial
------------------------------------ Officer (Principal Financial
William J. Kansky Officer and Principal Accounting
Officer)
II-20
Signature Title(s)
--------- --------
/s/ CORRADO F. DE GASPERIS Director
------------------------------------
Corrado F. De Gasperis
/s/ ERICK R. ASMUSSEN Director
------------------------------------
Erick R. Asmussen
/s/ KAREN G. NARWOLD Director
------------------------------------
Karen G. Narwold
II-21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilmington, State of Delaware, on the 30th day of April, 2002.
UCAR INTERNATIONAL TRADING INC.
By: /s/ CORRADO F. DE GASPERIS
--------------------------------------
Corrado F. De Gasperis
Vice President, Chief Financial
Officer and Treasurer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Gilbert E. Playford, Corrado F. De
Gasperis and Karen G. Narwold, and each of them individually, his true and
lawful agent, proxy and attorney-in-fact, with full power of substitution and
resubstitution, for him or her and in his or her 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 registration statement (which
includes any additional registration statement under Rule 462(b)) together with
all schedules and exhibits thereto, (ii) act on, sign and file with the
Securities and Exchange Commission any and all exhibits to this registration
statement and any and all exhibits and schedules thereto, (iii) act on, sign and
file any and all applications, registration statements, notices, reports and
other documents necessary or appropriate in connection with the registration or
qualification under foreign and state securities laws of the securities
described in this registration statement or any amendment thereto, or obtain an
exemption therefrom, in connection with the offering described therein, and (iv)
take any and all such 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 approving,
ratifying and confirming all that such agents, proxies and attorneys-in-fact,
any of them or any of his or her or their substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on the 30th day of April,
2002.
Signature Title(s)
--------- --------
/s/ GILBERT E. PLAYFORD President (Principal Executive
------------------------------------ Officer)
Gilbert E. Playford
/s/ CORRADO F. DE GASPERIS Vice President, Chief Financial
------------------------------------ Officer, Treasurer and Director
Corrado F. De Gasperis (Principal Financial Officer and
Principal Accounting Officer)
II-22
Signature Title(s)
--------- --------
/s/ ERICK R. ASMUSSEN Director
------------------------------------
Erick R. Asmussen
/s/ KAREN G. NARWOLD Director
------------------------------------
Karen G. Narwold
II-23
INDEX OF EXHIBITS
Exhibit
Number Description
--------------------------------------------------------------------------------
12.1 - Ratio of Earnings to Fixed Charges.
21.1 - List of subsidiaries of UCAR International Inc.
23.1 - Consent of KPMG LLP.
23.2 - Consent of Deloitte & Touche LLP.
25.1 - Statement of Eligibility of State Street Bank and Trust Company
on Form T-1 relating to 10 1/4% Senior Notes due 2012 issued by
UCAR Finance Inc. and guaranteed by UCAR International Inc.
and certain of its subsidiaries.