-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WOS+5SkW7H3M94Zde66zuDSycWEDn4Jw/qIuMjNLUzfWg0s7XkOp7LaIU8xydhqw oKGcnXWU56IfQQYBKF75Aw== 0000931148-96-000028.txt : 19960606 0000931148-96-000028.hdr.sgml : 19960606 ACCESSION NUMBER: 0000931148-96-000028 CONFORMED SUBMISSION TYPE: 10-K405 CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960605 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UCAR INTERNATIONAL INC CENTRAL INDEX KEY: 0000931148 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 061385548 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-13888 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 39 OLD RIDGEBURY ROAD STREET 2: J-4 CITY: DANBURY STATE: CT ZIP: 06817 BUSINESS PHONE: 2032077740 MAIL ADDRESS: STREET 1: 39 OLD RIDGEBURY ROAD STREET 2: J-4 CITY: DANBURY STATE: CT ZIP: 06817-0001 10-K405 1 UCAR INTERNATIONAL INC. FORM 10-K FOR DECEMBER 31, 1995 _______________________________________________________________________________ THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON MARCH 22, 1996. ----------------------------------------------------------------- ______________________________________________________________________________ - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________________________ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For The Transition Period From ...................... To .................... (1-13888) Commission File Number: ...................................................... UCAR INTERNATIONAL INC. (Exact Name Of Registrant As Specified In Its Charter) DELAWARE 06-1385548 - -------------------------------- ------------------ (State Or Other Jurisdiction (I.R.S. Employer Of Incorporation Or Organization) Identification No.) 39 OLD RIDGEBURY ROAD, DANBURY, CONNECTICUT 06817-0001 - -------------------------------------------- ----------- (Address Of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (203) 207-7700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - -------------------------------------- ------------------------- COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 15, 1996, 46,155,518 shares of Common Stock, par value $.01 per share, were outstanding. The aggregate market value of the outstanding Common Stock on March 15, 1996 (based upon closing sale price of the Common Stock on the New York Stock Exchange on such date) held by non-affiliates of the registrant was approximately $1,333 million. DOCUMENTS INCORPORATED BY REFERENCE The information required under Part II (Items 5, 6, 7 and 8) is, in part, incorporated by reference from the UCAR International Inc. Annual Report to Stockholders for 1995, which is filed as an exhibit hereto. The information required under Part III is incorporated by reference from the UCAR International Inc. Proxy Statement for the Annual Meeting of Stockholders for 1996, which is being filed concurrently with the filing hereof. _______________________________________________________________________________ - ------------------------------------------------------------------------------- 1 UCAR INTERNATIONAL INC. AND SUBSIDIARIES TABLE OF CONTENTS PAGE ---- PART I ............................................................. 1 Item 1. Business..................................................... 1 Summary...................................................... 1 Business Strategies.......................................... 2 Growth Strategies............................................ 3 Corporate History and Recent Developments.................... 4 Markets and Industry Overview................................ 5 Manufacturing Processes and Operations....................... 7 Products..................................................... 8 Raw Materials and Suppliers.................................. 9 Sales and Customer Service; Research and Development......... 9 Distribution................................................. 10 Patents and Trademarks....................................... 10 Competition.................................................. 10 Environmental Matters........................................ 11 Insurance.................................................... 13 Employees.................................................... 13 Description of Senior Bank Facilities........................ 14 Description of Subordinated Notes............................ 15 Item 2. Properties................................................... 16 Item 3. Legal Proceedings............................................ 17 Item 4. Submission of Matters to a Vote of Security Holders.......... 17 PART II ............................................................. 18 Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters........................ 18 Item 6. Selected Financial Data...................................... 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 18 Item 8. Financial Statements and Supplementary Data.................. 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 18 PART III ............................................................. 19 Items 10 to 13 inclusive..................................... 19 Executive Officers and Directors............................. 19 PART IV ............................................................. 21 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................ 21 2 UCAR INTERNATIONAL INC. AND SUBSIDIARIES PART I ITEM 1. BUSINESS Unless otherwise indicated or the context otherwise requires, all references to 'UCAR' mean UCAR International Inc. and all references to the 'Company' mean UCAR, its wholly and majority owned subsidiaries (including UCAR Global Enterprises Inc., a direct, wholly owned subsidiary of UCAR ('Global'), and its and their predecessors (insofar as a predecessor's activities related to the carbon and graphite products business), collectively. Unless otherwise indicated, all financial information refers to that of the Company on a consolidated basis (using the equity method for EMSA (Pty.) Ltd., its 50% owned affiliate ('EMSA')). Unless otherwise indicated, all information has been adjusted to reflect (i) the exchange effected on December 31, 1993 described in note 1 to the Consolidated Financial Statements at December 31, 1994 and 1995 and for each of the years in the three year period ended December 31, 1995 and (ii) the reclassification of the common stock of UCAR, and the stock splits effected after, par value $.01 per share (the 'Common Stock') in connection with, the consummation of a leveraged recapitalization of the Company on January 26, 1995 (the 'Recapitalization'), in each case as described in note 1 to such Consolidated Financial Statements. SUMMARY The Company is the largest manufacturer of graphite and carbon electrodes in the world, with sales in over 70 countries and manufacturing facilities on four continents. Graphite electrodes, the Company's principal product, are used primarily in the production of steel in an electric arc furnace ('EAF'), the steelmaking technology used by virtually all 'mini-mills,' as well as in the refining of steel using ladle furnaces. Carbon electrodes are used primarily to produce silicon metal, which is used in the manufacture of aluminum. The Company estimates that approximately two-thirds of EAF steelmakers worldwide purchased graphite electrodes from the Company in 1995. The Company further estimates that, in 1995, it sold approximately 42% of all graphite electrodes purchased in the United States, Western Europe and the other countries in which the Company operates manufacturing facilities (the 'Home Markets'), and that EMSA sold approximately 99% of all graphite electrodes purchased in South Africa, which represents approximately an additional 4% of all graphite electrodes purchased in the Home Markets (including, for this purpose, South Africa). Graphite electrodes and carbon electrodes accounted for approximately 75% and 6%, respectively, of the Company's net sales in 1995. The Company also manufactures other graphite and carbon products, as well as cooling systems and components for steelmaking furnaces and other high temperature applications. The Company has benefited from reduced costs resulting from its successful restructuring and re-engineering projects, as well as from significant increases in electrode pricing (attributable in large part to an industry-wide capacity reduction) which have taken place since mid-1992. The Company's net sales have increased to $901 million in 1995 from $659 million in 1992. Electrodes act as conductors of electricity in a furnace, generating sufficient heat to melt scrap metal or other raw materials used to produce steel, silicon metal or other materials. The electrodes are gradually consumed in the course of such production. In the case of graphite electrodes in an EAF, one electrode must be replaced, on average, every eight to ten operating hours ('a stick a shift'). Graphite electrodes are presently the only products available that are capable of sustaining the levels of heat required in an EAF and, therefore, demand for graphite electrodes is directly related to the amount of EAF steel produced. Worldwide EAF steel production represented approximately 33% of total steel production in 1995 as compared to approximately 18% in 1975, according to industry and Company estimates. The Company estimates that EAFs operating worldwide produced an aggregate of approximately 245 million metric tons of steel in 1995. During 1995, the Company estimates that the net increase in EAF steel production capacity was approximately 20 million metric tons. The Company supplied all or a portion of the graphite electrodes consumed by approximately 50% of the new EAFs which commenced operation during 1995. The Company believes that EAF steelmaking has become more efficient and cost effective due to technological improvements in EAF steelmaking processes and equipment design and in graphite electrodes. This 1 3 improved efficiency has resulted in a decrease in the quantity of graphite electrodes consumed per metric ton of steel produced (known as 'Specific Consumption'). From 1985 through mid-1992, this decrease was offset by increased levels of EAF steel production, which resulted in relatively stable demand for graphite electrodes. The Company believes that since mid-1992 the increased levels of production have more than offset the decrease in Specific Consumption and that, as a result, global demand for graphite electrodes has increased at a rate exceeding 2% per year. The rapid growth in EAF steel production through the 1970s led to over expansion in capacity for the manufacture of graphite electrodes. Beginning in the early 1980s, this expansion, together with declining Specific Consumption, resulted in downward pressure on pricing, significant consolidation in the number of manufacturers and industry-wide capacity reduction. The Company estimates that capacity worldwide, excluding China, the former Soviet Union, India and Eastern Europe other than the former East Germany (the 'Free World'), and capacity of the Company have each been reduced by approximately one-third since 1985. Presently, there is only one global manufacturer of electrodes in the Free World other than the Company (which, together with the Company's approximate 31% share of the Free World market, accounted for approximately 58% of the Free World market in 1995, according to Company estimates) and there are in total only eight other Free World manufacturers. Additionally, EMSA supplied approximately 99% of the South African market in 1995, which accounted for approximately 3% of the Free World market. BUSINESS STRATEGIES Restructuring and Re-engineering Projects. The Company has implemented three successful restructuring and re-engineering projects since the mid-1980s which have eliminated work, improved operating efficiency and reduced costs. In connection with these projects, the Company has reduced or eliminated production at higher cost facilities, maximized production at lower cost facilities, lowered inventory levels, significantly reduced the number of employees worldwide, significantly shortened the average graphite electrode production cycle time, closed manufacturing facilities, consolidated manufacturing operations and consolidated sales offices. As a result of these projects, the quantity of graphite and carbon electrodes sold per employee has increased since 1990 by approximately 43% from 53 metric tons of electrodes per employee in 1990 to 76 metric tons per employee in 1995. In addition, by the end of 1994, the Company had achieved annual cost savings of approximately $101 million (as compared to 1990). The Company expects to achieve approximately $15 million in additional annual cost savings from these projects by the end of 1996 (as compared to 1994). In January 1995, UCAR's Board of Directors approved an additional project (the 'Rationalization Project') to close certain high cost manufacturing operations and expand modern lower cost manufacturing operations at the Company's North American graphite electrode plants. The Rationalization Project is expected to yield approximately $23 million in additional annual cost savings, with approximately $8 million in savings having been realized in 1995, $20 million expected to be realized in 1996 and the full $23 million expected to be realized during 1997 (in each case, as compared to 1994). Other smaller projects to improve raw materials technology, enhance equipment technology and upgrade certain production facilities (collectively, the 'Technology Improvement Projects'), identified by the Company and being implemented in 1996 and 1997, are expected to yield approximately $5 million of additional annual cost savings by the end of 1997 (as compared to 1994). The Company intends to continue to pursue other opportunities for cost savings. In connection with these business strategies, beginning in the mid-1980s, the Company formally began training employees in total quality control concepts and created teams which use statistical process control techniques to measure the capabilities of the Company's manufacturing processes. As a result of this training and the activities of these teams, the Company was able to reduce waste and redundant efforts in many of its manufacturing processes and systems and to statistically stabilize manufacturing to more consistently produce high quality products at lower costs. In 1991, the Company, with the assistance of consultants and employee work teams, began performing further re-engineering activities, including the evaluation of labor and work flow, systems design and other factors in the Company's manufacturing processes and operations. As a result of these activities, the Company was able to further reduce its work force, eliminate management layers, streamline manufacturing processes and reduce further shorten production cycle time periods. The Company intends to continue to implement total quality control techniques and use teams to manage and operate, and to continue its 2 4 re-engineering activities, in every phase of its manufacturing processes to improve efficiency and achieve cost savings. Emphasis on Customer Service. The Company is committed to providing a high level of technical service support to its customers, focused (particularly in the case of graphite electrode customers) on maximizing customers' operating efficiency. The Company employs approximately 60 engineers who work together with the Company's sales force at both the Company's facilities and customers' plants. They prepare detailed theoretical and practical studies relating to the EAF production process and provide technical assistance to customers in, among other things, all areas of EAF operation and design, including equipment evaluation and control, electrode size and grade, process flow, transformer size and characteristics, electrical control, power utilization and electrode purchase management. They also provide training in the use of Company products. Such technical assistance includes periodically monitoring certain customers' EAF efficiency levels via computer modem. In addition, the Company employs a global direct sales force in 18 sales offices on four continents to serve its customers more effectively. The Company believes that its customer service program is unique in the electrode industry and provides an important competitive advantage. Technical Improvements. The Company conducts research and development activities, both independently and in conjunction with suppliers, customers and others, designed to improve product quality and manufacturing processes. Research and development activities are conducted by approximately 80 technical professionals at a dedicated technology center. These activities include the performance of statistically designed, multi-variable experiments, which are assessed by both business and technology personnel. The Company's research and development activities are integrated with the efforts of over 100 engineers at the Company's manufacturing facilities who are focused on improving manufacturing processes. Since 1984, the Company has developed such technological advances as, larger and stronger electrodes (increasing the Company's ability to supply various 'supersized' electrodes), new chemical additives to enhance raw materials used in graphite electrodes and new applications for water-spray cooling technology, which have resulted in the development of more cost effective and more efficient EAF steel and graphite electrode production. Over the past ten years, the Company has received recognition from its customers for the high quality of its products under several programs around the world and has been awarded certified or preferred supplier status by many major steel, metal alloy and other manufacturing companies. These programs are conducted by many of the Company's customers as a part of their total quality programs to enhance the quality of the products and services used in their operations. Under these programs, the customers evaluate certain specifications and performance data with respect to their suppliers' products and send teams of engineers to inspect the suppliers' manufacturing facilities. As a result of these procedures, the customers rank the suppliers on a comparative basis and award those suppliers whose average score exceeds a specified target with certified or preferred supplier status. GROWTH STRATEGIES The Company expects demand for graphite electrodes to increase in the near term due to increased EAF steel production from existing and proposed new EAFs. The Company believes that it currently has adequate manufacturing capacity to meet increased sales volume resulting from such increased near term demand. In addition, the Company is actively studying opportunities to leverage its core competencies, technologies and products for growth. Management teams, working with outside consultants, continually seek to define the Company's strengths and evaluate opportunities to use these strengths to increase the Company's net sales at or near the margins that exist today. Areas of potential growth currently being pursued or considered include expansion of manufacturing operations, geographic expansion of graphite electrode and specialty graphite product sales in emerging markets and product line extensions. In addition, in line with its strategy of achieving growth both domestically and internationally, the Company actively reviews possible acquisitions and other business opportunities on a regular basis. In addition, on September 11, 1995, pursuant to a tender offer, the Company acquired a substantial percentage of the shares of its Brazilian subsidiary that were owned by public shareholders in Brazil. The Company has since then purchased, and is seeking to purchase, the remaining shares of its Brazilian subsidiary owned by public shareholders in Brazil. At December 31, 1995, such remaining shares represented 4% of all of the outstanding shares of its Brazilian subsidiary. The Company believes that its increased ownership of its 3 5 Brazilian subsidiary will enable the Company to integrate better the operations of its Brazilian subsidiary with those of its other worldwide operations, recognize production efficiencies at its Brazilian subsidiary's manufacturing facility to lower average Company-wide cost of sales and better capture and manage cash flow from operations of its Brazilian subsidiary. In December 1995, UCAR's Board of Directors approved the construction of an integrated 'focused factory' at its manufacturing facility in Clarksburg, West Virginia (the 'Focused Factory Project') at an estimated cost of $16 million. The Focused Factory Project will add additional manufacturing processes and new technology (developed and tested over the past two years by the Company at its technology center) to expand capacity to manufacture 'superfine grain' graphite specialty products on a cost competitive basis. The Company believes that worldwide industry sales of such products approach $400 million annually, that demand for these products has grown and will continue to grow for at least the next several years, primarily for use in semiconductor, continuous casting and electrical discharge machining applications, and that all of the significant Free World manufacturers of these products are currently operating at or near capacity. The Company expects that production at this facility will commence by the end of 1996 and that the Focused Factory Project will be completed by the end of 1998. CORPORATE HISTORY AND RECENT DEVELOPMENTS The Company's business was founded in 1886 by National Carbon Company. In 1917, National Carbon Company, along with Union Carbide Company and three other companies, became subsidiaries of a new corporation named Union Carbide and Carbon Company, now known as Union Carbide Corporation ('Union Carbide'). In the 1950s, National Carbon Company was dissolved, and its business subsequently became the Carbon Products Division of Union Carbide. Effective January 1, 1989, Union Carbide realigned each of its worldwide businesses into separate subsidiaries (the 'Realignment'). In connection therewith, the business of the Carbon Products Division was separated from Union Carbide's other businesses and became owned by the Company, which was then wholly-owned by Union Carbide. In addition, the Company (i) assumed all liabilities (including environmental and tax liabilities) relating to Union Carbide's worldwide carbon and graphite products business (subject to limited exceptions) and (ii) entered into agreements which provide for Union Carbide to render certain services and lease certain office space to the Company, for allocation of certain multi-business liabilities and for cross-indemnification among the Company, Union Carbide and Union Carbide's then other subsidiaries and affiliates. On February 25, 1991, Union Carbide sold to Mitsubishi Corporation ('Mitsubishi') 50% of the common equity of the Company (the 'Mitsubishi Purchase'). Since the Mitsubishi Purchase, the Company has operated on a stand alone basis in all material respects and all material transactions which it has effected with Union Carbide and Mitsubishi have been effected on terms at least as favorable to the Company as the Company could have obtained on an arms' length basis. In this regard, the Company has been self-financing, except for certain credit enhancements which were provided by Union Carbide and Mitsubishi and which the Company terminated in their entirety in September 1994. On January 26, 1995, the Company consummated the Recapitalization pursuant to the Recapitalization and Stock Purchase and Sale Agreement (the 'Recapitalization Agreement'), dated as of November 14, 1994, among Union Carbide, Mitsubishi, UCAR and a corporation affiliated with Blackstone Capital Partners II Merchant Banking Fund L.P. and its affiliates (collectively, 'Blackstone'). In connection with the Recapitalization: (i) Blackstone, Chemical Equity Associates (an affiliate of Chemical Bank) and certain members of management (collectively, the 'Investors') purchased from UCAR shares of Common Stock representing approximately 75% of the then outstanding Common Stock for $203 million; (ii) Global and certain of its subsidiaries borrowed $585 million under senior secured bank credit facilities arranged through Chemical Bank and established in connection with the Recapitalization (the 'Recapitalization Bank Facilities'); (iii) Global issued $375 million of 12% senior subordinated notes due 2003 (the 'Subordinated Notes'); (iv) the Company repaid approximately $250 million of then existing indebtedness; (v) UCAR repurchased and canceled all of the common equity then held by Mitsubishi for $406 million; (vi) UCAR paid to Union Carbide a cash dividend of $347 million on the common equity then held by Union Carbide, which common equity was reclassified and immediately thereafter represented approximately 25% of the then outstanding Common Stock; 4 6 and (vii) certain members of management received restricted stock matching a portion of the Common Stock purchased by them and options to purchase up to an aggregate of 12% of the then outstanding Common Stock on a fully diluted basis, subject to certain vesting provisions. In connection with the Recapitalization, UCAR transferred all the stock of its operating subsidiaries to Global or subsidiaries of Global and currently holds no material assets other than common stock of Global. On August 15, 1995, UCAR completed an initial public offering of Common Stock (the 'IPO'). In connection with the IPO, UCAR sold Common Stock representing 22% of the Common Stock outstanding immediately after the IPO for net proceeds of $227 million and Union Carbide sold all of the Common Stock then owned by it. UCAR used net proceeds from the IPO to contribute to Global an amount sufficient to redeem $175 million aggregate principal amount of the Subordinated Notes at a redemption price equal to 110% of the aggregate principal amount thereof, plus accrued interest thereon of $4 million (the 'Redemption'). The Redemption reduced the Company's annual interest expense by $21 million. UCAR used the balance of the net proceeds for general corporate purposes and to reduce other outstanding indebtedness. On October 19, 1995, the Company refinanced the Recapitalization Bank Facilities with new senior secured bank credit facilities (the 'Senior Bank Facilities') at more favorable interest rates and with more favorable covenants. The Refinancing will result in a reduction of the Company's annual interest expense by approximately $13 million (based on the principal amount outstanding at the time of the Refinancing). MARKETS AND INDUSTRY OVERVIEW The worldwide market for graphite and carbon electrodes was approximately $2.8 billion in 1995, according to Company estimates. These products are sold primarily to customers in the steel, silicon metal, ferronickel and thermal phosphorous industries. Customers in these industries are located in virtually every industrialized country in the world. Graphite Electrodes. The Company estimates that, in 1995, its share of the Home Markets for graphite electrodes was approximately 42% and its share of the Free World market was approximately 31%. Further, EMSA's share of the South African market was approximately 99%, which represented approximately an additional 4% share of the Home Markets (including, for this purpose, South Africa), according to Company estimates. The Company estimates that in 1995 (i) its share of the market for graphite electrodes in Mexico exceeded 93% and in Brazil exceeded 69%, (ii) sales in the United States accounted for approximately 25% of the Company's net sales of graphite electrodes and (iii) the Company sold graphite electrodes in over 70 countries, with no other country accounting for more than 10% of the Company's net sales of graphite electrodes. There are two primary technologies for steelmaking, basic oxygen furnace ('BOF') steel production and EAF steel production. EAF steelmakers are called 'market mills' or 'mini-mills' because of their smaller capacity as compared to BOF steelmakers. Graphite electrodes, which accounted for approximately 75% of the Company's net sales in 1995, are used primarily in, and are essential to, EAF steel production, and to a lesser extent, ladle furnace steel production. Electric arc furnaces typically range in size from those which produce approximately 25 metric tons of steel per production cycle (or 'Heat') to those which produce approximately 150 metric tons per Heat. Graphite electrodes act as conductors of electricity in the furnace, generating sufficient heat to melt scrap metal or other material used to produce steel or other materials. The electrodes are gradually consumed in the course of such production. Each of those furnaces typically uses nine electrodes (in three columns of three electrodes each) at one time. The size of those electrodes varies depending on the size of the furnace, the size of the furnace's electric transformer and the planned productivity of the furnace. In a typical furnace operating at a typical number of Heats per day, one of those nine electrodes is fully consumed (requiring the addition of a new electrode), on average, every eight to ten operating hours ('a stick a shift'). The actual rate of consumption and addition of electrodes for a particular furnace depend primarily on the efficiency and productivity of the furnace. Graphite electrodes are presently the only products capable of sustaining the high levels of heat required in an EAF and, therefore, the demand for graphite electrodes is directly related to the amount of EAF steel produced. EAF steel production has been for many years the growth sector of the steel industry. There are presently in excess of 2,000 EAF's operating worldwide, and worldwide EAF steel production has grown from 113 million 5 7 metric tons (approximately 18% of total steel production) in 1975 to 245 million metric tons (approximately 33% of total steel production) in 1995, according to Company and industry estimates. During 1995, the Company estimates that the net increase in EAF steel production capacity was approximately 20 million metric tons. The Company supplied all or a portion of the graphite electrodes consumed by approximately 50% of the new EAF's which commenced operation during 1995. The Company is aware of announced plans to add additional net new EAF steel production capacity in excess of approximately 75 million metric tons during 1996, 1997 and 1998. There can be no assurance that the addition of such capacity will occur. As a result of recent advances in EAF steel production, EAFs are capable of producing nearly all of the product lines available from BOF steelmakers. The steel industry is generally cyclical, reflecting regional and global economic conditions, and experiences significant fluctuations in profits based on numerous factors. Sales of the Company's electrodes have historically been somewhat adversely affected by weakness in the steel industry. EAF steel production, however, has experienced only two relatively minor downturns over the past 20 years. Although no assurance can be given that such will be the case, the Company believes that EAF steel production will continue to be the growth sector of the worldwide steel industry during the 1990s and that such growth is likely to be particularly strong in the Middle East and the Asia Pacific region. The worldwide growth in EAF steel production has been due primarily to the cost effectiveness and operating efficiency of EAF steelmaking. Technological improvements in equipment design and production processes (stemming from the now largely completed conversion of the EAF base in the Free World from a refractory lined system to a water cooled system which sharply reduced the 'burn rate' of electrodes in molten steel), use of higher quality scrap metals and other raw materials and improvements in the size, strength and quality of graphite electrodes (including improvements which were developed by the Company) resulted, on average, in increased efficiency and lower costs in EAF steel production. This improved efficiency resulted in a decrease in Specific Consumption. Specific Consumption in the Free World declined from approximately 6.4 kilograms of graphite electrodes per metric ton of steel produced in 1974 to approximately 2.8 kilograms per metric ton in 1995, according to Company estimates. The rapid growth in EAF steel production through the 1970's led to an expansion in capacity for the manufacture of graphite electrodes. Beginning in the early 1980s, there was significant excess graphite electrode manufacturing capacity due to decreases in Specific Consumption and such expansion of manufacturing capacity in the late 1970s. From 1985 through mid-1992, concurrently with the consolidation in the number of producers and reduction in capacity described below, the decrease in Specific Consumption was offset by increased levels of EAF steel production, which resulted in a relatively stable demand for graphite electrodes. The Company believes that since mid-1992 the increased levels of production have more than offset the decrease in Specific Consumption and that, as a result, demand for graphite electrodes has increased at a rate exceeding 2% per year. The Company believes that, on average, as the costs (relative to the benefits) increase for EAF steelmakers to achieve significant further efficiencies in EAF graphite electrode consumption, the decline in Specific Consumption will continue at a more gradual pace. The Company further believes that the rate of such decline in the future will be impacted by the addition of net new EAF steelmaking capacity, which has the effect of reducing industry-wide graphite electrode consumption rates due to the efficiency of new EAFs while at the same time creating additional demand for graphite electrodes. There can be no assurance, however, that such will be the case. Since the mid-1980s, there has been a consolidation in the number of Free World graphite electrode producers and reduction of Free World graphite electrode manufacturing capacity. Company capacity and Free World capacity, as estimated by the Company, each have been reduced by one-third since 1985. In 1992 and 1993, in two separate transactions, three of the Company's largest competitors combined to form Sigri Great Lakes Carbon GmbH ('SGL'). The Company believes that SGL's capacity is approximately one-third less than the combined capacity of those three competitors in 1986. Principally as a result of this consolidation and reduction, the Company believes that Free world capacity and demand are currently in relative balance. The Company is not presently aware of any construction of new graphite electrode manufacturing facilities in the Free World. The excess graphite electrode manufacturing capacity and decreases in Specific Consumption during the 1980s resulted in downward pressure on worldwide pricing. The Company believes that, from 1982 to mid-1992, the average Free World industry-wide price (in dollars and net of changes in currency exchange rates) for 6 8 graphite electrodes declined by approximately one-third. Since mid-1992, there has been a significant improvement in Free World electrode pricing (attributable, in large part, to such industry-wide reduction in capacity). The Company believes that there were Free World industry-wide graphite electrode price increases in 1992 and 1993 (other than in Japan) and also in 1994 and 1995 (including Japan), the effect of which was to increase average Free World industry-wide prices (in dollars and net of changes in currency exchange rates) by approximately 9% in 1993 as compared to 1992, by approximately 12% in 1994 as compared to 1993 and by approximately 9% in 1995 as compared to 1994. The Company estimates that the price of graphite electrodes represents only approximately 3% of the price of finished steel produced by EAF steelmakers in the Free World. Carbon Electrodes. Carbon electrodes are used primarily to produce silicon metal, which is used in the manufacture of aluminum. Free World demand for carbon electrodes has been relatively stable over the past ten years at approximately 75,000 metric tons annually, and the Company expects it to be relatively stable or to decline gradually over the next several years. The Company is the only major manufacturer of carbon electrodes in North and South America. Other Products. The Company's other products include flexible graphite (which is called GRAFOIL(Registered)), graphite specialty products and systems and components for steelmaking furnaces. See '--Products.' Flexible graphite is used in the manufacture of internal combustion engines for the automotive and other industries and in the chemical and petrochemical industries. Sales of flexible graphite have grown at an average annual rate of 14% over the past 10 years, due primarily to demand for a high quality sealing material to replace asbestos and to a decline in prices resulting from reduced manufacturing costs as a result of improvements in manufacturing processes. The Company's graphite specialty products are used in the metals, chemicals, transportation, energy, semiconductor and aerospace industries. MANUFACTURING PROCESSES AND OPERATIONS The manufacture of graphite electrodes takes, on average, approximately two months. Graphite electrodes range in size from three inches to 30 inches in diameter and two feet to nine feet in length and weigh between 20 pounds and 4,800 pounds (2.2 metric tons). The manufacture of graphite electrodes involves the six main processes described below. Forming. Calcined petroleum coke is crushed, screened, sized and blended in a heated vessel with coal tar pitch. The resulting plastic mass is extruded through a forming press and cut into cylindrical lengths (called 'green' electrodes) before cooling in a water bath. Baking. The 'green' electrodes are baked at approximately 1,700 degrees Fahrenheit in specially designed furnaces to further carbonize the pitch. After cooling, the electrodes are cleaned, inspected and sample-tested. Impregnation. Baked electrodes are impregnated with a special pitch when higher density, mechanical strength and capability to withstand higher electric currents are required. Rebaking. The impregnated electrodes are rebaked to 'coke out' the pitch, thereby adding strength to the electrodes. Graphitizing. Using a process developed by the Company, the rebaked electrodes are heated in longitudinal electric resistance furnaces at approximately 5,000 degrees Fahrenheit to restructure the carbon to its characteristically crystalline form, graphite. After this process, the electrodes are gradually cooled, cleaned, inspected and sample-tested. Machining. After graphitizing, the electrodes are machined to comply with international specifications governing outside diameters, overall lengths and joint details. Tapered sockets are machine-threaded at each end of the electrode to permit the joining of electrodes in columns by means of correspondingly double-tapered machine-threaded graphite nipples. Carbon electrodes are manufactured by a comparable process (excluding impregnation and graphitization). The Company uses robotics and statistical process controls in its manufacturing processes. The Company generally warrants to its customers that its electrodes will meet the Company's specifications therefor, and 7 9 electrode returns and replacements have aggregated less than 1% of net sales in each of the last three years. The Company utilizes 'pipeline' or 'just in time' manufacturing systems at most of its facilities. Major maintenance on the Company's facilities is conducted on an on-going basis. Manufacturing operations are subject to curtailment due to new legislation or governmental regulations and to risks inherent in carrying on business outside the United States. The Company currently has the capacity to manufacture approximately 245,000 metric tons of graphite electrodes (and EMSA has the capacity to manufacture approximately an additional 25,000 metric tons of graphite electrodes) and approximately 43,000 metric tons of carbon electrodes annually. In 1993, 1994 and 1995, The Company sold 217,000 metric tons, 196,000 metric tons and 217,000 metric tons, respectively, of graphite electrodes and 31,000 metric tons, 27,000 metric tons and 30,000 metric tons, respectively, of carbon electrodes. EMSA sold 25,000 metric tons, 24,000 metric tons and 26,000 metric tons of graphite electrodes in 1993, 1994 and 1995, respectively. The Company currently operates 13 manufacturing facilities and three machine shops located in the United States, France, Italy, Spain, England, Canada, Brazil and Mexico. EMSA also operates a manufacturing facility in South Africa. Graphite electrodes are manufactured in each country (other than England) in which the Company has a manufacturing facility, and carbon electrodes are manufactured in the United States. Graphite specialty products, which are made by a process similar to the process for manufacturing graphite electrodes but using different mixtures of raw materials and different processing time periods, are manufactured in the United States and France. Flexible graphite, which is made from mined natural graphite flake that is acid treated, heat treated and rolled into sheets of desired thickness and width, is manufactured in the United States. As a result of its international operations, the Company is subject to risks associated with operating in foreign countries, including devaluations and fluctuations in currency exchange rates, imposition of limitations on conversion of foreign currencies into dollars or remittance of dividends and other payments by foreign subsidiaries, imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries, hyperinflation in certain foreign countries and imposition or increase of investment and other restrictions by foreign governments. Although such risks have not had a material adverse effect on the Company within the past decade, no assurance can be given that such risks will not have a material adverse effect on the Company in the future. PRODUCTS Electrodes. The principal products manufactured by the Company are graphite and carbon electrodes. Graphite electrodes are used primarily in the production of steel in EAFs as well as in the refining of steel in ladle furnaces, and carbon electrodes are used primarily in the production of silicon metal, which is used in the manufacture of aluminum and also in the production of ferronickel and thermal phosphorous. EAF steel production requires significant heat (as high as 5,000 degrees Fahrenheit, which the Company believes is the hottest operating temperature in any industrial or commercial manufacturing process worldwide) to melt scrap metal, iron ore or other raw materials for processing into ingots or semi-finished continuously cast shapes. That heat is generated by graphite electrodes as electricity (as much as 150,000 amps) passes through them and creates an electric arc between the graphite electrodes and the raw materials. The graphite electrodes are gradually consumed in the production process. The production of silicon metal involves similar processes, but at lower temperatures. The Company believes that it provides the broadest range of sizes in graphite electrodes and that the quality of its graphite electrodes is equal to or better than that of any other manufacturer. The Company also believes that there are presently no commercially viable substitutes for graphite electrodes in EAF steelmaking. Other Products. The Company manufactures GRAFOIL(Registered), which is used primarily to make gaskets for combustion engine, pipe flange and other industrial applications. The Company also manufactures graphite specialty products for use in the metals, chemicals, transportation, energy, semi-conductor and aerospace industries. The Company's graphite specialty products consist primarily of molded and extruded graphite shapes sold to specialty machine shops and end users for machining and, to a lesser extent, molds, insulation substrates and other machined products. Most of these machined products are manufactured for specific applications or to meet customer specifications. 8 10 The Company sells proprietary water-spray cooling systems and components for steelmaking furnaces, exhaust systems and other high temperature applications. These systems and components are designed by the Company, were first sold in 1986 and are fabricated by third party contractors in the United States and various other countries. The Company believes that its systems represent a significant improvement over prior technologies. The improvement results from both the increased life of furnace components resulting from the improved cooling processes and the reduction in maintenance down time resulting from various design improvements. RAW MATERIALS AND SUPPLIERS The primary raw materials for graphite electrodes and graphite specialty products are petroleum cokes which are engineered by-products of the petroleum industry (needle coke for electrodes and regular grades for specialty products), coal tar pitch and petroleum pitch. The primary raw materials for carbon electrodes are anthracite coal and coal tar pitch and, in some instances, a petroleum coke based material. The primary raw material for flexible graphite is natural graphite flake. The Company purchases it raw materials from a variety of sources and has no material long-term purchase contracts with respect to any raw materials. Over the past several decades, the Company has purchased a majority of its petroleum coke from multiple plants of a single major petroleum company and, since 1988, has done so pursuant to annual purchase contracts. The Company believes that the quality of its raw materials is the highest available and that, under current conditions, its raw materials are available in adequate quantities at market prices. Electric power or natural gas used in manufacturing processes is purchased from local suppliers under short-term contracts or in the spot market. The availability and price of raw materials and energy may be subject to curtailment or change due to limitations which may be imposed under new legislation or governmental regulations, suppliers' allocations to meet demand of other purchasers during periods of shortage (or, in the case of energy suppliers, extended cold weather), interruptions in production by suppliers, and market and other events and conditions. Petroleum products, including petroleum coke, have been subject to significant price fluctuations and, recently, market prices of petroleum coke have increased for the Company and its competitors. Over the past several years, the Company has mitigated the effect of such price increases on its results of operations through a combination of improved operating efficiency, permanent on-going cost savings and passing such price increases on to customers. However, there can be no assurance that such measures will successfully mitigate future increases in the price of petroleum coke or other raw materials or energy. A substantial increase in raw material or energy prices which cannot be mitigated or passed on to customers or a continued interruption in supply, particularly in the supply of petroleum coke, would have a material adverse effect on the Company's results of operations. SALES AND CUSTOMER SERVICE; RESEARCH AND DEVELOPMENT Sales of the Company's products in the Home Markets are made primarily by the Company's direct sales force, which operates from the Company's 18 sales offices and is supported by the Company's customer technical service personnel. EMSA also operates a sales office in South Africa. Sales of the Company's products in markets other than the Home Markets (the 'Export Markets') are made by the Company's direct sales force and, to a lesser extent, by independent sales agents, most of whom have worked with the Company for many years, in various countries around the world. The Company has a global business with a diversified customer base. Sales to customers outside the United States accounted for approximately 68% of the Company's net sales in 1995. No single customer or group of affiliated customers accounted for more than 4% of the Company's net sales in 1995. The Company has had, for many years, a strong commitment to provide a high level of technical service to customers which supports the Company's sales activities. Under its customer technical service program, the Company seeks to provide timely and knowledgeable assistance to customers with respect to EAF design and operation, electrode specification and use and related matters to maximize customer production and minimize customer costs. The Company's net sales of graphite electrodes fluctuate from quarter to quarter due to such factors as scheduled plant shut downs by customers, vacations, 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. Generally, these factors tend to adversely affect the Company's results of operations, particularly during the first and third quarters. In addition, 9 11 in the past, typically during the period prior to the effective date of a price increase, customers tended to buy additional quantities of graphite electrodes at the then lower pricing ('Customer Buy-Ins'), which added to the Company's net sales during that period. During the period following the effective date of a price increase, customers tended to use those additional quantities before placing further orders, which reduced the Company's net sales during that period. Accordingly, the results of operations for any quarter are not necessarily indicative of the results of operations for a full year or otherwise. In order to mitigate the effect of Customer Buy-Ins on period-to-period net sales, the Company has recently begun announcing price increases at different times in different geographic regions. The Company is committed to increasing the value of its products and services. It conducts, at its dedicated technology center located in Parma, Ohio and its manufacturing facilities throughout the world, a focused technology program to improve product quality and manufacturing processes. This program, which is conducted both independently and in conjunction with suppliers, customers and others, was initiated in 1984. Approximately 80 technical professionals are directly involved in this program. The Company's research and development expenses (other than certain expenses at the Company's manufacturing facilities, which are included in cost of sales) in 1993, 1994 and 1995 were $7 million, $7 million and $8 million, respectively. DISTRIBUTION Customers generally place orders for electrodes three to six months prior to the specified delivery date. Such orders are cancelable by the customer and, therefore, the Company manufactures electrodes to meet rolling sales forecasts. The Company manages electrode inventory levels to meet forecasted sales. Other products are generally manufactured or fabricated to meet customer orders. Accordingly, the Company does not maintain significant inventories of those finished products. Finished products are generally stored at the Company's manufacturing facilities. The Company ships its finished products to customers primarily by truck and ship, using 'just in time' techniques where practicable. Proximity of manufacturing facilities to customers can provide a competitive advantage in terms of cost of delivery of electrodes to customers. The significance of these costs is affected by fluctuations in exchange rates, methods of shipment, import duties and whether the manufacturing facilities are located in the same economic trading region as the customer. The Company believes that it is generally better positioned in terms of such proximity than its competitors (other than Japanese manufacturers supplying Japanese customers) to supply the Free World market. PATENTS AND TRADEMARKS The Company owns and has obtained licenses to various domestic and foreign patents, patent applications and trademarks related to its products, processes and business. These patents expire at various times over the next 17 years. While these patents and patent applications in the aggregate are important to the Company's competitive position, no single patent or patent application is material to the Company. The trade name 'UCAR' and certain trademarks incorporating the name 'UCAR' are owned by Union Carbide and licensed to the Company on a royalty-free basis under a license expiring 2015. While that tradename and those trademarks (and the trademark GRAFOIL(Registered), which is owned by the Company) are important to the Company's business, no other trademark is material to the Company. COMPETITION The graphite and carbon products industry is highly competitive. Competition with respect to electrodes is based primarily on price, product quality and customer service. In particular, graphite electrodes are subject to rigorous price competition. Although the Company has periodically increased prices of graphite electrodes over the past several years, there can be no assurance that the Company will be able to increase such prices in the future. In addition, further increases in prices of graphite electrodes by the Company or price reductions by competitors, decisions by the Company with respect to maintaining profit margins rather than market share, or other competitive or market factors or strategies could adversely affect the Company's market share or results of operations. Competition could prevent institution of increases or could require reductions in prices of graphite 10 12 electrodes or increased spending on research and development, marketing and sales which could adversely affect the Company's results of operations. There are 10 manufacturers of graphite electrodes in the Free World. Of these 10 manufacturers, the Company is the largest and SGL is the second largest. SGL, which operates manufacturing plants in North America and Europe, is a public company whose principal shareholder is Hoechst AG. The Company estimates that it supplied approximately 42% of the graphite electrodes sold in the Home Markets and approximately 31% of those sold in the Free World in 1995 and that SGL supplied approximately 29% of those sold in the Home Markets and approximately 27% of those sold in the Free World in 1995. Additionally, EMSA supplied approximately 99% of the graphite electrodes sold in the South African market in 1995, which represented approximately an additional 3% of those sold in the Free World, according to Company estimates. Other manufacturers of graphite electrodes include: The Carbide/Graphite Group, Inc., all of whose plants are located in the United States (which the Company believes supplied approximately 5% of the graphite electrodes sold in the Free World in 1995); and four manufacturers in Japan (which the Company believes collectively supplied approximately 27% of the graphite electrodes sold in the Free World in 1995), one of which has a plant located in the United States. Government-controlled and independent manufacturers in the non-Free World (the 'Non-Free World Manufacturers') generally provide less reliable delivery and produce lower quality products (with higher rates of breakage and Specific Consumption) for use in their respective countries and in countries which are their traditional trading partners and, in any event, most of those countries and partners are generally net importers of graphite electrodes. The Company does not know whether its competitors operate through affiliates or otherwise and, as a result, the percentages above reflect the Company's estimates of the total sales of such competitors. There are only two significant manufacturers of carbon electrodes in the world (excluding the Non-Free World Manufacturers). The Company believes that it is the largest of these two manufacturers and SGL is the second largest and that together the Company and SGL supplied more than 85% of the Free World market in 1995. The manufacture of high quality graphite and carbon electrodes is a mature, capital intensive business which requires extensive process know-how developed over years of experience working with the various raw materials and their suppliers, furnace manufacturers and steelmakers (including working on the specific applications for the finished electrodes). It also requires high quality raw material sources and a developed energy supply infrastructure. There have been no significant new entrants in the manufacture of electrodes since 1950. Accordingly, while no assurance can be given that such will be the case, the Company believes that it is unlikely that there will be significant new entrants in the manufacture of electrodes in the next several years and that, to the extent that increased demand might induce new entrants, such demand would be readily satisfied by existing manufacturers. Competition with respect to the Company's other products is significant and is based primarily on price, delivery and quality. The Company competes with other graphite product manufacturers as well as manufacturers of non-graphite products used for similar purposes. ENVIRONMENTAL MATTERS Since the 1970s, a wide variety of federal, state, local and foreign environmental laws and regulations have been, and continue to be, adopted and amended. The Company is subject to many of these laws and regulations. Certain of the Company's facilities have experienced some level of regulatory scrutiny, have been required to take remedial action and have incurred related costs (which, to date, have not been material, individually or in the aggregate) in the past and may experience further regulatory scrutiny, and be required to take further remedial action and incur additional costs in the future. The principal domestic laws and regulations to which the Company is subject are described below. The Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Safe Drinking Water Act and similar state or local laws regulate air emissions, water discharges and hazardous waste generation, treatment, storage, handling, transportation and disposal. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ('Superfund'), and similar state laws provide for responses to and liability for releases of hazardous substances into the environment. The Toxic Substances Control Act and related laws are designed to assess the risk to health 11 13 and the environment of new products at early developmental stages. In addition, laws adopted or proposed in various states impose or may impose, as the case may be, reporting or remediation requirements if operations cease or property is transferred or sold. The Company believes that it is currently in material compliance with the federal, state, local and foreign environmental laws and regulations to which it is subject (and regulatory orders relating to alleged prior violations thereof). The Clean Air Act, however, was amended in 1990. While the Company believes that its facilities meet current regulatory standards applicable to air emissions, some of its facilities will be required to comply with new standards for air emissions to be adopted by the United States Environmental Protection Agency (the 'USEPA') and state environmental protection agencies over the next several years pursuant to regulations that are currently being drafted or that have been recently promulgated in draft form. In addition, the amendments to the Clean Air Act will result in revisions to state implementation plans, which may necessitate the installation of additional controls for certain of the Company's emission sources. At this time, the Company cannot estimate when, or in what form, such new regulations will be adopted or what controls or changes in manufacturing processes the Company may be required to install or undertake in order to achieve compliance with any new regulations. The Company is also subject to certain regulatory orders relating to alleged prior violations of environmental laws and regulations which could also require the Company to install additional controls for certain of its emission sources or undertake changes in its manufacturing processes in future years. Based on information currently available to it, the Company believes that compliance with such regulations under the Clean Air Act, when adopted, and with such regulatory orders will not have a material adverse effect on the Company. The Company, like other companies in the United States, has received and continues periodically to receive notices from the USEPA or state environmental protection agencies, as well as claims from others, alleging that the Company is a potentially responsible party (a 'PRP') under Superfund and similar state laws for past and future remediation costs at hazardous waste 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 hazardous waste to the site. In 1993, the New York State Department of Environmental Conservation (the 'DEC') notified Union Carbide that it was a PRP at a site known as the Booth Oil site and that the DEC had a claim against it for remediation and reimbursement of related costs and expenses estimated by the Company to be $1 million to date. Approximately 12 other large corporate PRPs have been named at this site. The DEC has recommended remediation estimated to cost approximately $47 million. An informal PRP group, which includes approximately 20 companies, has retained a contractor to review the recommendation and propose an alternative remedy, which is estimated to cost in the range of $6 million to $7 million, and is negotiating with the DEC regarding the proper remedy for the site. To date, there have been no discussions among the PRPs or with the DEC regarding allocation of costs among the PRPs. Pursuant to the Environmental Management Services and Liabilities Allocation Agreement among Union Carbide, the Company and Union Carbide's then other subsidiaries and affiliates, entered into in connection with Realignment (the 'Environmental Management Agreement'), Union Carbide is managing this matter on behalf of itself and such subsidiaries and affiliates (including the Company). The Environmental Management Agreement provides that any alleged violation of an environmental law or regulation is the responsibility of the party whose business, or former business, caused the violation and provides for cross-indemnification. All of the parties to the Environmental Management Agreement used the Booth Oil site in the past for waste oil recycling. In addition, the DEC has alleged that the Company contributed approximately 200 pounds of spent sludges containing 1,1,1-trichloroethane from degreasing operations to the site. After negotiations among the PRPs and the DEC concerning total cost and allocation of cost have been completed, it is anticipated that Union Carbide will be assigned its percentage of the total cost based on the volumetric contribution made by Union Carbide and such subsidiaries and affiliates to the site. This percentage will be further allocated, pursuant to the Environmental Management Agreement, among Union Carbide and such subsidiaries and affiliates. Based on the Company's knowledge of the Booth Oil site and its past experience at inactive hazardous waste sites, the Company does not expect the contribution by the Company to be material to the Company. 12 14 The Company sold its Republic plant in Niagara Falls, New York in 1986. Adjacent to the Republic plant is a solid waste landfill. Ownership of the landfill was retained by the Company, and the landfill was closed by the Company in 1987 in accordance with a DEC closure plan. In early 1991, the DEC notified the Company that it was investigating the landfill as a former inactive hazardous waste site. The site is currently classified as a site for which the DEC has insufficient information to determine whether hazardous wastes or substances are present, and the DEC's investigation is on-going. To date, the costs associated with this site have not been, and the Company does not anticipate that future costs will be, material to the Company. The Company owns a facility in Lakewood, Ohio which was previously owned by Union Carbide. During the period of Union Carbide's ownership, the facility housed several businesses unrelated to the Company. In 1989, the Company retained a contractor to conduct a site assessment and groundwater investigation in two areas of the site. The assessment concluded that there was no significant risk to human health or the environment from these areas, but recommended that the Company continue to monitor them. The on-going monitoring has continued to show no significant risk. The Company has established and continues to establish accruals for environmental liabilities where it is probable that a liability will be incurred and the amount of the liability can be reasonably estimated. The Company adjusts accruals as new remediation and other commitments are made and as information becomes available which changes estimates previously made. Estimates of future costs of environmental protection are necessarily imprecise due to numerous uncertainties, including the impact of new laws and regulations, the availability and application of new and diverse technologies, the extent of insurance coverage, the identification of new hazardous waste sites at which the Company may be a PRP and, in the case of sites subject to Superfund and similar state laws, the ultimate allocation of costs among PRPs and the final determination of the remedial requirements. Subject to the inherent imprecision in estimating such future costs, but taking into consideration the Company's experience to date regarding environmental matters of a similar nature and facts currently known, the Company believes that costs and capital expenditures (in each case, before adjustment for inflation) for environmental protection will not increase materially over the next several years. Expenses relating to environmental protection were approximately $13 million, $10 million and $15 million in 1993, 1994, and 1995 respectively. Capital expenditures relating to environmental protection were approximately $3 million, $5 million and $6 million in 1993, 1994, and 1995, respectively. INSURANCE The Company's policy is to obtain public liability, property and other insurance, to the extent that it is currently available, which provides coverage that it believes is appropriate upon terms and conditions and at a price that it considers fair and reasonable. The Company believes that it has public liability insurance in an amount sufficient to meet its current needs in light of pending, threatened and anticipated future litigation and claims. There can be no assurance, however, that the Company will not incur losses beyond the limits of, or outside the coverage of, its insurance. EMPLOYEES At December 31, 1995, the Company had approximately 4,120 employees, of which approximately 1,560 were in the united States, 1,140 were in Europe, 1,110 were in Mexico and South America, 310 were in Canada and 3 were in the Asia Pacific region. At December 31, 1995, the Company had approximately 2,850 hourly employees. At December 31 1995, EMSA had approximately 450 employees, of which approximately 330 were hourly, in South Africa. Approximately 66% of the Company's employees are covered by collective bargaining or similar agreements which expire at various times in each of the next several years. At December 31, 1995, approximately 1,310, or 32%, of the Company's employees were covered by such agreements which expire, or are subject to renegotiation, at various times during the remainder of 1996. The Company believes that its relationships with its unions are satisfactory and that it will be able to renew or extend its collective bargaining or similar agreements on reasonable terms as they expire. There can be no assurance, however, that renewed or extended agreements will be reached without a work stoppage or strike or will be reached on terms satisfactory to the Company. A prolonged work stoppage at any one of its manufacturing facilities could have a material adverse 13 15 effect on the Company's results of operations. The Company has not had any material work stoppages or strikes during the past decade. DESCRIPTION OF SENIOR BANK FACILITIES The Senior Bank Facilities consist of: (a) a Tranche A Facility in an aggregate principal amount of $355 million (the 'Tranche A Facility') consisting of (i) a Tranche A Senior Secured Letter of Credit Facility providing for the issuance of $310 million of U.S. dollar-denominated letters of credit (the 'Letter of Credit Facility') for the purpose of supporting $300 million of U.S. dollar-denominated loans (the 'Tranche A Foreign Subsidiary Loans') and 90 days' interest thereon to certain foreign subsidiaries of Global (together with Global, the 'Credit Parties') under facilities arranged with local lending institutions and (ii) a Tranche A Senior Secured Term Loan Facility (the 'Tranche A Term Facility') providing for term loans ('Tranche A Term Loans') of $45 million to Global; (b) a Tranche B Senior Secured Term Loan Facility providing for term loans of $175 million to Global (the 'Tranche B Term Facility' and, together with the Tranche A Term Facility, the 'Term Facilities'); and (c) a Senior Secured Revolving Credit Facility (the 'Revolving Facility') providing for revolving and swing line loans to Global and the issuance of U.S. dollar-denominated letters of credit for the account of Global or other designated Credit Parties in an aggregate principal and stated amount at any time not to exceed $100 million. The Tranche A Facility (including the letters of credit issued thereunder) amortizes in quarterly installments over six years, with installments ranging from $40 million in year one to $85 million in year six and with the final installment payable on December 31, 2001. The Tranche B Term Facility amortizes over seven years with nominal quarterly installments during the first five years, quarterly installments aggregating $50 million in the sixth year and quarterly installments aggregating $120 million in the seventh year, with the final installment payable on December 31, 2002. The Revolving Facility terminates on December 31, 2001. The Credit Parties are required to make mandatory prepayments of loans, and letters of credit will be mandatorily reduced, at specified times and subject to certain exceptions, in amounts equal to (a) 85% of consolidated excess cash flow of Global and its subsidiaries (after giving effect to debt service on the Senior Bank Facilities and the Subordinated Notes), (b) 100% of the net proceeds of certain dispositions of assets or the stock of subsidiaries or the incurrence of certain indebtedness by UCAR, Global or any of their subsidiaries and (c) 50% of the net proceeds of the issuance of any equity securities by UCAR. At Global's option, loans may be prepaid, and revolving credit commitments or letters of credit may be permanently reduced, in whole or in part, at any time in specified minimum amounts. Any optional prepayment of fixed rate loans other than at the end of an interest period will be subject to reimbursement of redeployment costs. The obligations of the Credit Parties under the Senior Bank Facilities are unconditionally and irrevocably guaranteed by UCAR and each of its direct or indirect domestic subsidiaries (collectively, the 'Guarantors'). In addition, the Senior Bank Facilities and such guarantees are secured by first priority or equivalent security interests in substantially all capital stock and the tangible and intangible personal property of Global and the Guarantors, including all the capital stock of, or other equity interests in, each other direct or indirect domestic subsidiary of Global and 65% of the capital stock of, or other equity interests in, each direct foreign subsidiary of Global or any Guarantor or, in any case in which Global or any Guarantor holds directly less than 65% of such stock or equity interests in any foreign subsidiary, all such stock or equity interests held by Global or such Guarantor (to the extent permitted by applicable contractual and legal provisions). Certain of the foreign subsidiaries have agreed to provide additional credit support for obligations of foreign Credit Parties in respect of the Tranche A Facility in the form of collateral and/or cross guarantees. At Global's option, the interest rates per annum applicable to the Senior Bank Facilities are either adjusted LIBOR plus a margin ranging from 1.50% to 2.00% or an alternate base rate plus a margin ranging from 0.50% to 1.00%. The alternate base rate is the higher of Chemical Bank's prime rate or the federal funds effective rate plus 0.50%. At the relevant foreign Credit Party's option, the interest rate per annum applicable to the Tranche A Foreign Subsidiary Loans is either adjusted LIBOR plus 0.25% or the alternate base rate (or the local equivalent thereof). Global pays a per annum fee equal to 1.50% of the aggregate face amount of outstanding letters of credit under the Letter of Credit Facility and the Revolving Facility and a per annum fee equal to 0.375% on the 14 16 undrawn portion of the commitments in respect of the Term Facilities, the Letter of Credit Facility and the Revolving Facility. The Senior Bank Facilities contain a number of significant covenants that, among other things, restrict the ability of Global and its subsidiaries to dispose of assets, incur additional indebtedness, repay other indebtedness or amend other debt instruments, create liens on assets, enter into leases, investments or acquisitions, engage in mergers or consolidations, make capital expenditures or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. In addition, under the Senior Bank Facilities, Global is required to comply with specified financial ratios and tests, including minimum interest coverage and maximum leverage ratios. Under the Senior Bank Facilities, Global and UCAR are permitted to pay dividends to their respective stockholders only in an aggregate amount equal of a percentage, ranging from 25% to 35% based on certain financial tests, of cumulative adjusted consolidated net income (provided that, in any event, dividends aggregating up to $15 million are permitted in any twelve-month period). In addition, Global is permitted to pay dividends to UCAR (i) in respect of UCAR's administrative fees and expenses and (ii) for the specific purpose of the purchase or redemption by UCAR of capital stock held by present or former officers of the Company up to $5 million per year or $25 million in the aggregate. The Senior Bank Facilities prohibit any modification of the Indenture pursuant to which the Subordinated Notes were issued (the 'Subordinated Note Indenture') in any manner adverse to the lenders under the Senior Bank Facilities and limit Global's ability to refinance the Subordinated Notes without the consent of such lenders. In addition to the failure to pay principal and interest on amounts outstanding under, and fees in respect of letters of credit outstanding and undrawn commitments under, the Senior Bank Facilities, events of default under the Senior Bank Facilities include failure to comply with the covenants in the Senior Bank Facilities, acceleration of or failure to pay when due other indebtedness exceeding $7.5 million, judgment defaults in excess of $7.5 million to the extent not covered by insurance, certain events of bankruptcy and certain changes in control. For this purpose, a change in control occurs on the date on which any person (other than Blackstone and Company management) beneficially owns more than 25% of the total voting power of UCAR and Blackstone and Company management beneficially own less than a majority of such voting power, a majority of the directors of UCAR then serving are individuals who were neither nominated by Blackstone and Company management or by a majority of the directors of UCAR (or by directors so nominated) then serving or a change in control of UCAR or Global occurs with respect to any other indebtedness exceeding $7.5 million. DESCRIPTION OF SUBORDINATED NOTES In connection with the Recapitalization, Global issued $375 million aggregate principal amount of Subordinated Notes pursuant to the Subordinated Note Indenture, $175 million of which were redeemed in connection with the Redemption. Interest on the Subordinated Notes is payable semi-annually on January 15 and July 15 of each year at the rate of 12% per annum. The Subordinated Notes mature on January 15, 2005. Except as described below, Global may not redeem the Subordinated Notes prior to January 15, 2000. On or after such date, Global may redeem the remaining Subordinated Notes, in whole or in part, at specified redemption prices beginning at 104.5% of the principal amount of the Subordinated Notes redeemed for the year commencing January 15, 2000 and reducing to 100% of such principal amount for the years 2003 and thereafter, in each case together with accrued and unpaid interest thereon. Upon the occurrence of a change of control, (i) Global will have the option to redeem the then outstanding Subordinated Notes in whole but not in part at a redemption price equal to 100% of the principal amount thereof, plus a specified premium, plus accrued and unpaid interest thereon and (ii) if Global does not so redeem the Subordinated Notes, Global will be required to make an offer to repurchase the Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest thereon. For this purpose, a change in control occurs on (i) the date on which any person other than Blackstone and Company management beneficially owns more than 35% of the total voting power of UCAR and Blackstone and Company management beneficially own a lesser percentage of such voting power and do not have the right or ability to elect or designate for election a majority of UCAR's Board of Directors or (ii) the date, at the end of any two year period (or any time during the two year period ending 15 17 January 26, 1997), on which individuals, who at the beginning of such period were directors of UCAR (or individuals nominated or elected by a vote of 66 2/3% of such directors or directors previously so elected or nominated), cease to constitute a majority of UCAR's Board of Directors. The Subordinated Notes are unsecured and subordinated to all existing and future senior indebtedness of Global. The Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of Global and senior to all other subordinated indebtedness of Global. The Subordinated Notes are unconditionally guaranteed on a senior subordinated basis by UCAR. The Subordinated Note Indenture contains various covenants which, among other things and in each case subject to significant specified exceptions, limit the ability of the Company to incur additional indebtedness, limit the ability of Global and its subsidiaries to pay dividends, make certain investments and other restricted payments, create or permit to exist restrictions on distributions from such subsidiaries, or sell assets and subsidiary stock unless the net cash proceeds are used to repay debt, invest in assets or repurchase Subordinated Notes, restrict transactions with affiliates, prohibit UCAR from engaging in any business activities other than holding the stock of Global and certain permitted investments and limit the ability of Global to sell any capital stock of its subsidiaries or enter into certain mergers and consolidations. The Subordinated Note Indenture restricts the payment of dividends by Global to UCAR if (a) at the time of such proposed dividend, Global is unable to meet certain indebtedness incurrence and income tests or (b) the total amount of the dividends paid exceeds specified aggregate limits based on consolidated net income, net proceeds from asset and stock sales and certain other transactions. Such restrictions are not applicable to dividends paid to UCAR (i) in respect of UCAR's administrative fees and expenses and (ii) for the specific purpose of the purchase or redemption by UCAR of capital stock held by present or former officers of the Company in the amount of up to $5 million per year or $25 million in the aggregate. In addition to the failure to pay principal and interest on, or repurchase when require, Subordinated Notes, events of default under the Subordinated Note Indenture include failure to comply with certain covenants in the Subordinated Note Indenture, acceleration of other indebtedness exceeding $25 million, judgment defaults in excess of $25 million to the extend not covered by insurance and certain events of bankruptcy. The Subordinated Note Indenture also contains provisions as to legal defeasance and covenant defeasance. ITEM 2. PROPERTIES The Company currently operates the following facilities, which are owned or leased as indicated.
LOCATION OF FACILITY PRIMARY USE OWNED OR LEASED - --------------------------------------------- ------------------------------------------------ ---------------- UNITED STATES Irvine, California......................... Machine Shop and Sales Office Leased Danbury, Connecticut....................... Corporate Headquarters and Sales Office Leased Niagara Falls, New York.................... Coal Calcining Facility Owned Lakewood, Ohio............................. Flexible Graphite Manufacturing Facility and Sales Office Owned Parma, Ohio................................ Technology Center Owned Clarksville, Tennessee Electrode Manufacturing Facility and Sales Office Owned Columbia, Tennessee........................ Electrode Manufacturing Facility and Sales Office Owned Lawrenceburg, Tennessee.................... Carbon Specialty Product Manufacturing Facility Owned Clarksburg, West Virginia.................. Graphite Specialty Product Manufacturing Facility and Sales Office Owned 16 18 LOCATION OF FACILITY PRIMARY USE OWNED OR LEASED - --------------------------------------------- ------------------------------------------------ ---------------- INTERNATIONAL * Salvador Bahia, Brazil..................... Electrode Manufacturing Facility Owned Sao Paulo, Brazil.......................... Sales Office Leased Welland, Canada............................ Electrode Manufacturing Facility and Sales Office Owned Beijing, China............................. Sales Office Leased Calais, France............................. Electrode Manufacturing Facility Owned Notre Dame, France......................... Electrode and Graphite Specialty Product Manufacturing Facility and Sales Office Owned Rungis, France............................. Sales Office and European Headquarters Leased Hong Kong.................................. Sales Office Leased Caserta, Italy............................. Electrode Manufacturing Facility Owned Forno Allione, Italy....................... Machine Shop Owned Milano, Italy.............................. Administration and Sales Office Leased Monterrey, Mexico.......................... Electrode Manufacturing Facility and Sales Office Owned Singapore.................................. Sales Office Leased Pamplona, Spain............................ Electrode Manufacturing Facility and Sales Office Owned Geneva, Switzerland........................ Sales Office Leased Sheffield, United Kingdom.................. Machine Shop and Sales Office Owned
- ------------------ * EMSA leases a sales office and owns an electrode manufacturing facility in Meyerton, South Africa. The Company believes that its facilities, which are of varying ages and types of construction, are in good condition, are suitable for the Company's operations and generally provide sufficient capacity to meet the Company's requirements for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings incidental to the conduct of its business. While it is not possible to determine the ultimate disposition of each of these proceedings, the Company believes that the ultimate disposition of such proceedings, individually and in the aggregate (including the lawsuit discussed below), will not have a material adverse effect on the financial position or results of operations of the Company. In 1978, a lawsuit entitled Ortiz, et al. v. Union Carbide Grafito, Inc. was commenced in the Superior Court of Puerto Rico by persons residing near the Company's Yabucoa, Puerto Rico facility alleging property damage and personal injury due to air emissions and noise from the facility. The defendant, Union Carbide Grafito, Inc. ('Grafito'), is a wholly-owned subsidiary of the Company. The Yabucoa facility ceased operations in 1989 and was demolished in 1994. Grafito had no other operations. In 1986, the complaint was dismissed as to approximately two-thirds of the 759 plaintiffs for failure to provide discovery. In 1987, the complaint was dismissed as to the remaining plaintiffs for failure to prosecute the lawsuit. Certain of the plaintiffs thereafter retained new counsel and filed a motion to set aside the 1986 and 1987 dismissals. That motion was denied by the trial court and an appeal was taken to the Supreme Court of Puerto Rico. In 1992, the Supreme Court remanded the case to the Superior Court for a hearing on whether the dismissals should be vacated on the ground that plaintiffs' former counsel had allowed the dismissals to occur due to fraud. The hearing was held in March and June 1995, and a decision was rendered in favor of Grafito. On March 8, 1996, the plaintiffs filed a writ of appeal with the Circuit Court of Appeals. Grafito intends to take all appropriate action to oppose the writ. Pursuant to the Recapitalization Agreement, Union Carbide and Mitsubishi have agreed to indemnify UCAR and Blackstone for any liabilities in excess of $20 million arising out of this lawsuit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 17 19 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The information required by this Item appears on page 52 of the UCAR International Inc. Annual Report to Stockholders for 1995 and is incorporated by reference in this Annual Report on Form 10-K. In addition, the information set forth below is provided as required by this Item. Prior to, and in connection with, the Recapitalization, the Company made cash distributions to Union Carbide and Mitsubishi. Although the Company is currently able to pay dividends, subject to limitations under the Senior Bank Facilities, it is the current policy of UCAR's Board of Directors to retain earnings to repay debt and finance operations of the Company and not to pay any cash dividends on the Common Stock. Any declaration and payment of cash dividends on the Common Stock will be subject to the discretion of UCAR's Board of Directors and will be dependent upon the Company's financial condition, results of operations, cash requirements and future prospects, the limitations contained in the Senior Bank Facilities and the Subordinated Note Indenture and other factors deemed relevant by UCAR's Board of Directors. There can be no assurance that any such dividends will be declared or paid. UCAR is a holding company that derives all of its cash flow from Global, the common stock of which constitutes UCAR's only material asset. Consequently, UCAR's ability to pay dividends is dependent upon the earnings of Global and its subsidiaries and the distribution of those earnings by Global to UCAR. Global's ability to make distributions to UCAR is limited under the Senior Bank Facilities and, to a lesser extent, under the Subordinated Note Indenture. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item appears on page 21 of the UCAR International Inc. Annual Report to Stockholders for 1995 and is incorporated by reference in this Annual Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item appears on pages 22 through 27 of the UCAR International Inc. Annual Report to Stockholders for 1995 and is incorporated by reference in this Annual Report on Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item appears on pages 28 through 51 of the UCAR International Inc. Annual Report to Stockholders for 1995 and is incorporated by reference in this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 20 PART III ITEMS 10 TO 13 INCLUSIVE The information required by Items 10, 11, 12 and 13 will appear in the UCAR International Inc. Proxy Statement for the Annual Meeting of Stockholders to be held May 7, 1996, which will be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the 'Exchange Act'), and is incorporated by reference in this Annual Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K (other than the portions thereof not deemed to be 'filed' for the purpose of Section 18 of the Securities Exchange Act). In addition, the information set forth below is provided as required by Item 10. EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to the current executive officers and directors of UCAR.
NAME AGE * POSITION - ---------------------------------------------------- ---- ---------------------------------------------------- Robert P. Krass..................................... 59 Chairman of the Board, President and Chief Executive Officer Robert J. Hart...................................... 58 Vice President and General Manager (North and South America) Peter B. Mancino.................................... 53 Vice President, General Counsel and Secretary Maurice Marcellin................................... 61 Vice President and General Manager (Europe and South Africa) William P. Wiemels.................................. 51 Vice President, Chief Financial Officer and Treasurer Fred C. Wolf........................................ 51 Vice President, Administration and Strategic Projects R. Eugene Cartledge................................. 66 Director John R. Hall........................................ 63 Director Glenn H. Hutchins................................... 40 Director Robert D. Kennedy................................... 63 Director Howard A. Lipson.................................... 32 Director Peter G. Peterson................................... 69 Director Stephen A. Schwarzman............................... 49 Director
- ------------------ * At March 1, 1996. Robert P. Krass was elected director and Chairman of the Board in connection with the Recapitalization. The Company is a successor to the Carbon Products Division of Union Carbide Corporation ('Union Carbide'). Mr. Krass joined Union Carbide in 1963 and held various sales and management positions in the United States and Europe including Director of Marketing, Europe, of the Carbon Products Division and Managing Director of the Division's business in the United Kingdom. He was Vice President, Marketing, of the Electrode Systems Division from 1983 to 1986. In 1987, he became President of the Carbon Products Division and Vice President of Union Carbide. He has been President of the Company since 1989 and Chief Executive Officer of the Company since 1991. Mr. Krass is a member of the Compensation and Nominating Committees of the Board. Robert J. Hart joined Union Carbide in 1961 and held various manufacturing and marketing positions in the Carbon Products Division in the United States, Europe and South America. In 1986, he returned from South America to the United States as Vice President and General Manager of the Carbon Products Division, first for the Pan American and South African regions and later worldwide. He has been Vice President and General Manager, North and South America, of the Company since 1991. Peter B. Mancino joined the Law Department of Union Carbide in 1975 and became Division Counsel of the Industrial Gases and Carbon Products Divisions in 1980. In 1989, he became General Counsel of the Company. Mr. Mancino has been a Vice President and the Secretary of the Company since 1991. 19 21 Maurice Marcellin joined Union Carbide in 1962 and held various positions in the Carbon Products Division in Europe. He has been Vice President and General Manager, Europe and South Africa, of the Company and Managing Director of the Company's French subsidiary since 1991. William P. Wiemels joined Union Carbide in 1967 and held various technical, sales and marketing positions in the Carbon Products Division in the United States and Europe. He became Director of Marketing in Europe in 1986 and Director of Technology of the Company in 1989. Mr. Wiemels was Vice President, U.S.A. Operations, of the Company from 1991 to 1994 and has been Vice President, Chief Financial Officer and Treasurer of the Company since 1994. Fred C. Wolf joined Union Carbide in 1967 and held various financial and management positions in the Carbon Products Division until 1979. From 1979 to 1985, he held various finance and business positions in the Industrial Gases and Engineering Products and Processes Divisions. He returned to the Carbon Products Division in 1985 as Controller and was a Vice President of the Division from 1986 to 1989. He has been Vice President, Administration and Strategic Projects, of the Company since 1990. R. Eugene Cartledge was elected director of UCAR in February 1996. From 1986 until his retirement in 1994, he was the Chairman of the Board and Chief Executive Officer of Union Camp Corporation, where he had served in various sales and management capacities since 1956. Mr. Cartledge is a director of Union Camp Corporation, Chase Brass Industries, Inc., Sun Company, Inc., Delta Air Lines, Inc., Blount, Inc. and Savannah Foods & Industries, Inc. Mr. Cartledge is a member of the Audit Committee of the Board. John R. Hall was elected director of UCAR in November 1995. He has been the Chairman and Chief Executive Officer of Ashland Inc. since 1981. Mr. Hall served in various engineering and managerial capacities at Ashland Inc. since 1957. Mr. Hall is a director of Banc One Corporation, Canada Life Assurance Company, CSX Corporation, Humana Inc. and Reynolds Metals Company. Mr. Hall is a member of the Audit Committee of the Board. Glenn H. Hutchins was elected director of UCAR in connection with the Recapitalization. He has been a General Partner of Blackstone Group Holdings L.P. since September 1994. Mr. Hutchins was a Managing Director of Thomas H. Lee Co. from 1987 until 1994 and, while on leave from Thomas H. Lee Co. during parts of 1993 and 1994, was a Special Advisor in the White House. Mr. Hutchins is a member of the Compensation, Stock Compensation and Nominating Committees of the Board. Robert D. Kennedy was elected director of the Company in June 1990. He joined Union Carbide in 1955 and held various marketing and management positions in the United States and Europe. He was a Senior Vice President of Union Carbide from 1981 to 1985. In 1985, Mr. Kennedy was elected a director and President of Union Carbide. In 1986, he was elected Chief Executive Officer and Chairman of the Board of Union Carbide. Mr. Kennedy retired as Chief Executive Officer and President of Union Carbide in April 1995 and as Chairman of the Board (but not as a director) of Union Carbide in December 1995. Mr. Kennedy is also a director of Union Camp Corporation and Sun Company, Inc. Mr. Kennedy is a member of the Audit and Stock Compensation Committees of the Board. Howard A. Lipson was elected director of UCAR in connection with the Recapitalization. Mr. Lipson has been a General Partner of Blackstone Group Holdings L.P. since January 1996. Mr. Lipson was a Managing Director from 1994 to 1995, was a Vice President from 1991 to 1994 and joined The Blackstone Group L.P. in 1988. Mr. Lipson is a director of U.S. Radio Inc., Volume Services, Inc. and Ritvik Holdings, Inc. and the Treasurer of Transtar Holdings Inc. Mr. Lipson is a member of the Nominating Committee of the Board. Peter G. Peterson was elected director of UCAR in connection with the Recapitalization. He is a Co-Founding Partner of Blackstone Group Holdings L.P. and has served as Chairman of The Blackstone Group L.P. since 1985. Mr. Peterson is also a director of Rockefeller Center Properties, Inc., Sony Corporation, Transtar Holdings L.P. and the Federal Reserve Bank of New York. Stephen A. Schwarzman was elected director of UCAR in connection with the Recapitalization. He is a Co-Founding Partner of Blackstone Group Holdings L.P. and has served as President and Chief Executive Officer of The Blackstone Group L.P. since 1985. Mr. Schwarzman is also a director of Great Lakes Dredge & Dock Corporation, Transtar, Inc. and Collins & Aikman Corporation. 20 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS The following financial statements appear on the indicated pages of the UCAR International Inc. Annual Report to Stockholders for 1995 and are incorporated by reference in this Annual Report on Form 10-K.
PAGE IN ANNUAL REPORT TO STOCKHOLDERS ----------------------- Consolidated Balance Sheets as of December 31, 1995 and 1994..................... Page 29 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993......................................... Page 30 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993......................................... Page 31 Consolidated Statement of Stockholders' Equity (Deficit) for the Years Ended December 31, 1995, 1994 and 1993............................... Page 32 Notes to Consolidated Financial Statements....................................... Pages 33 to 50 Independent Auditors' Report..................................................... Page 51
FINANCIAL STATEMENT SCHEDULES None. (b) REPORTS ON FORM 8-K During the quarter ended December 31, 1995, UCAR filed a Current Report on Form 8-K dated November 7, 1995 containing Item 5, Other Events, relating to a press release regarding the refinancing of the Recapitalization Bank Facilities with the Senior Bank Facilities. (c) EXHIBITS The exhibits listed in the following table have been filed as part of this Annual Report on Form 10-K.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------- ----------------------------------------------------------------------------------------------------- 2.1 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* Amended and Restated Stockholders' Agreement dated as of February 29, 1996 2.3 Form of Management Common Stock Subscription Agreement 2.4 Form of Management Pledge and Security Agreement, together with form of Promissory Note (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 2.5* Amendment, Waiver and Release in connection with such Management Common Stock Subscription Agreements, Management Pledge and Security Agreements and Promissory Notes 2.6 Indemnification Agreement dated as of January 26, 1995 among Mitsubishi Corporation, Union Carbide Corporation and UCAR International Inc. 2.7 Stock Purchase and Sale Agreement dated as of January 26, 1995 between UCAR International Inc. and UCAR Holdings S.A. 2.8 Exchange Agreements made as of January 26, 1995 between UCAR International Inc. and UCAR Holdings II Inc. 2.9 Stock Purchase and Sale Agreement dated as of January 26, 1995 between UCAR International Inc. and UCAR Inc. 2.10 Exchange Agreement made as of January 26, 1995 between UCAR Carbon Company Inc. and UCAR Holdings Inc. 2.11 Stock Purchase and Sale Agreement dated as of January 26, 1995 between UCAR Carbon Company Inc. and UCAR Mexicana, S.A. de C.V. 21 23 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------- ----------------------------------------------------------------------------------------------------- 2.12 Exchange Agreement made as of January 26, 1995 between UCAR International Inc. and UCAR Global Enterprises Inc. 2.13 Stock Purchase and Sale Agreement dated as of January 26, 1995 between UCAR Carbon Company Inc. and Arapaima s.r.l. 2.14 Deed of Purchase and Sale of 528,999 Shares of UCAR Carbon Navarra S.L. dated as of January 26, 1996 2.15 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 Stock Purchase and Sale Agreement dated as of November 9, 1990 among Mitsubishi Corporation, Union Carbide Corporation and UCAR Carbon Company Inc. 2.17 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 Settlement Agreement dated as of November 30, 1993 among Mitsubishi Corporation, Union Carbide Corporation and UCAR Carbon Company Inc. 2.19 Transfer Agreement dated January 1, 1989 between Union Carbide Corporation and UCAR Carbon Company Inc. 2.20 Amendment No. 1 to such Transfer Agreement dated December 31, 1989 2.21 Amendment No. 2 to such Transfer Agreement dated as of July 2, 1990 2.22 Amendment No. 3 to such Transfer Agreement dated as of February 25, 1991 2.23 Amended and Restated Realignment Indemnification Agreement dated as of June 4, 1992 among Union Carbide Corporation, Union Carbide Chemicals and Plastics Company Inc., Union Carbide Industrial Gases Inc., UCAR Carbon Company Inc. and Union Carbide Coatings Service Corporation 2.24 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 Amendment No. 1 to such Environmental Management Services and Liabilities Allocation Agreement dated as of June 4, 1992 2.26 Lease for premises at 39 Old Ridgebury Road, Danbury, Connecticut dated January 1, 1989 between Union Carbide Corporation, as Landlord, and UCAR Carbon Company Inc., as Tenant 2.27 Trade Name and Trademark License Agreement dated November 1, 1990 between Union Carbide Corporation and UCAR Carbon Technology Corporation 2.28 Amendment to such Trade Name and Trademark License Agreement dated January 26, 1995 2.29 Employee Benefit Services and Liabilities Agreement dated January 1, 1990 between Union Carbide Corporation and UCAR Carbon Company Inc. 2.30 Amendment to such Employee Benefit Services and Liabilities Agreement dated January 15, 1991 2.31 Supplemental Agreement to such Employee Benefit Services and Liabilities Agreement dated February 25, 1991 2.32 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 3.1 Amended and Restated Certificate of Incorporation of UCAR International Inc. (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 3.2 Amended and Restated By-Laws of UCAR International Inc. (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 22 24 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------- ----------------------------------------------------------------------------------------------------- 10.1 Credit Agreement dated as of October 19, 1995 among UCAR International Inc., UCAR Global Enterprises Inc., the other Credit Parties named therein, the Lenders named therein, the Fronting Banks named therein and Chemical Bank, as Administrative Agent and Collateral Agent (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.2 Parent Guarantee Agreement dated as of October 19, 1995 made by UCAR International Inc. and UCAR Global Enterprises Inc. in favor of Chemical Bank as Collateral Agent for the Secured Parties named therein (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.3 Subsidiary Guarantee Agreement dated as of October 19, 1995 executed and delivered by each U.S. Subsidiary of UCAR Global Enterprises Inc. in favor of Chemical Bank as Collateral Agent for the Secured Parties named therein (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.4 Indemnity, Subrogation and Contribution Agreement dated as of October 19, 1995 among UCAR Global Enterprises Inc., the U.S. Subsidiaries of UCAR Global Enterprises Inc. and Chemical Bank as Collateral Agent for the Secured Parties named therein (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.5 Pledge Agreement dated October 19, 1995 among UCAR International Inc., UCAR Global Enterprises Inc., certain U.S. Subsidiaries of UCAR Global Enterprises Inc. and Chemical Bank as Collateral Agent for the Secured Parties named therein (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.6 Intellectual Property Security Agreement dated as of October 19, 1995 made by UCAR Global Enterprises Inc. and certain U.S. Subsidiaries of UCAR Global Enterprises Inc. in favor of Chemical Bank as Collateral Agent for the Secured Parties named therein (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.7 Security Agreement dated as of October 19, 1995 among UCAR International Inc., UCAR Global Enterprises Inc., the U.S. Subsidiaries of UCAR Global Enterprises Inc. and Chemical Bank as Collateral Agent for the Secured Parties named therein (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.8 Rationalization Project Cash Collateral Agreement dated as of October 19, 1995 made by UCAR Global Enterprises Inc. in favor of Chemical Bank as Collateral Agent for the Secured Parties named therein (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.9 Local Facility Credit Agreement dated as of October 19, 1995 between UCAR Holdings S.r.l. and Chemical Bank, Milan Branch, as Administrative Agent (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.10 Local Facility Credit Agreement dated as of October 19, 1995 between UCAR Electrodos S.L. and Chemical Bank, Madrid Branch, as Administrative Agent (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.11 Local Facility Credit Agreement dated as of October 19, 1995 between UCAR Holdings S.A. and Chemical Bank, Paris Branch, as Administrative Agent (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.12 Local Facility Credit Agreement dated as of October 19, 1995 between UCAR Inc. and Chemical Bank of Canada, as Administrative Agent (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.13 Tax Sharing Agreement made as of January 26, 1995 among UCAR International Inc. and its subsidiaries 10.14 Promissory Note dated January 26, 1995 issued by UCAR International Inc. in favor of UCAR Global Enterprises Inc. 23 25 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------- ----------------------------------------------------------------------------------------------------- 10.15 Intercompany Loan Agreement dated January 25, 1995 between UCAR S.A. and UCAR Holdings S.A. 10.16 Employment Agreement dated as of January 26, 1995 between UCAR International Inc. and Robert P. Krass 10.17 Employment Agreement dated as of January 26, 1995 between UCAR International Inc. and Robert J. Hart 10.18 Employment Agreement dated as of January 26, 1995 between UCAR International Inc. and Peter B. Mancino 10.19 Employment Agreement dated as of January 26, 1995 between UCAR International Inc. and William P. Wiemels 10.20 Employment Agreement dated as of January 26, 1995 between UCAR International Inc. and Fred C. Wolf 10.21 Form of Non-Qualified Stock Option Agreement 10.22 UCAR International Inc. Management Stock Option Plan effective as of January 26, 1995 10.23 Amendment to such Management Stock Option Plan effective August 15, 1995 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 10.24 Second Amendment to such Management Stock Option Plan effective August 15, 1995 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.25 UCAR International Inc. Bonus II Plan effective as of January 26, 1995 10.26 UCAR International Inc. Compensation Deferral Program as amended and restated effective November 6, 1995 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.27 First Amendment to such Compensation Deferral Program effective as of January 1, 1995 10.28* Second Amendment to such Compensation Deferral Program effective as of March 15, 1996 10.29 Annual Incentive Compensation Plan effective from January 1, 1991 10.30 Amendment to such Annual Incentive Compensation Plan dated as of January 1, 1994 10.31 Second Amendment to such Annual Incentive Compensation Plan effective July 28, 1995 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 10.32 UCAR Carbon Savings Plan as amended and restated effective January 1, 1994 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 10.33 First Amendment to such UCAR Carbon Savings Plan effective August 9, 1995 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 10.34 Second Amendment to such UCAR Carbon Savings Plan effective August 9, 1995 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.35 UCAR Carbon Retirement Plan as amended and restated effective as of January 1, 1994 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 10.36 Equalization Benefit Plan for Participants of the Retirement Program Plan for Employees of UCAR Carbon Company Inc. effective as of February 25, 1991 10.37 Amendment to such Equalization Benefit Plan effective as of January 1, 1994 10.38 UCAR Carbon Company Inc. Supplemental Retirement Income Plan effective as of February 25, 1991 10.39 First Amendment to such Supplemental Retirement Income Plan effective as of January 1, 1992 10.40 Second Amendment to such Supplemental Retirement Income Plan effective as of January 1, 1994, as to paragraph 1 thereof, and January 1, 1995, as to paragraph 2 thereof 10.41 UCAR International Inc. Benefits Protection Trust effective as of July 27, 1995 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 10.42 Indenture dated as of January 15, 1995 among UCAR International Inc., UCAR Global Enterprises Inc. and the United States Trust Company of New York, as Trustee 24 26 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------- ----------------------------------------------------------------------------------------------------- 10.43 UCAR International Inc. 1995 Equity Incentive Plan effective as of August 15, 1995 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 10.44 UCAR International Inc. 1995 Directors' Stock Plan effective as of August 15, 1995 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 33-94698)) 10.45 First Amendment to such Directors' Stock Plan effective September 1, 1995 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 10.46 UCAR International Inc. 1996 Mid-Management Equity Incentive Plan effective as of February 6, 1996 (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 13.1* UCAR International Inc. Annual Report to Stockholders for 1995 21.1 List of subsidiaries of UCAR International Inc. (incorporated by reference to the Registration Statement of the registrant on Form S-1 (File No. 333-1090)) 23.1* Consent of KPMG Peat Marwick LLP 24.1* Powers of Attorney (included on signature pages) 27 Financial Data Schedule (for SEC use only) (THIS EXHIBIT IS WAS NOT PART OF THE MARCH 22, 1995 FILING, IT IS INCLUDED IN THE CONFIRMING COPY AS REQUIRED BY EDGAR)
- ------------------ * Filed herewith. Unless otherwise indicated, all exhibits have been previously filed or are incorporated by reference to the Registration Statement of UCAR International Inc. and UCAR Global Enterprises Inc. on Form S-1 (File No. 33-84850). 25 27 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. UCAR INTERNATIONAL INC. March 21, 1996 By: /s/ WILLIAM P. WIEMELS ----------------------------- Title: Vice President and Chief Financial Officer KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints Robert P. Krass, William P. Wiemels and Peter B. Mancino, and each of them individually, his true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments to this report together with all schedules and exhibits thereto, (ii) act on, sign and file with the Securities and Exchange Commission any exhibits to this report, (iii) act on, sign and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith and (iv) take any and all actions which may be necessary or appropriate in connection therewith, granting unto such agents, proxies and attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he might or could do in person, hereby approving, ratifying and confirming all that such agents, proxies and attorneys-in-fact, any of them or any of his or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE - -------------------------------------------- ------------------------------------------- ------------------ /s/ROBERT P. KRASS Chairman of the Board, President and Chief March 21, 1996 ROBERT P. KRASS Executive Officer (Principal Executive Officer) /s/WILLIAM P. WIEMELS Vice President, Chief Financial Officer and March 21, 1996 WILLIAM P. WIEMELS Treasurer (Principal Financial and Accounting Officer) /s/R. EUGENE CARTLEDGE Director March 21, 1996 R. EUGENE CARTLEDGE 26 28 SIGNATURES TITLE DATE - -------------------------------------------- ------------------------------------------- ------------------ /s/JOHN R. HALL Director March 21, 1996 JOHN R. HALL /s/GLENN H. HUTCHINS Director March 21, 1996 GLENN H. HUTCHINS /s/ROBERT D. KENNEDY Director March 21, 1996 ROBERT D. KENNEDY /s/HOWARD A. LIPSON Director March 21, 1996 HOWARD A. LIPSON /s/PETER G. PETERSON Director March 21, 1996 PETER G. PETERSON /s/STEPHEN A. SCHWARZMAN Director March 21, 1996 STEPHEN A. SCHWARZMAN
27 29 EX-2.2 2 AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT DATED AS OF FEBRUARY 29, 1996 EXHIBIT 2.2 EXECUTION COPY =========================================================================== 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., CHEMICAL EQUITY ASSOCIATES and UCAR INTERNATIONAL INC. =========================================================================== 1 TABLE OF CONTENTS Page SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Other Definitional Provisions; Interpretation . . . . . . . 4 SECTION 2. TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1 Limitations on Transfer . . . . . . . . . . . . . . . . . . 5 2.2 Transfers to Affiliates . . . . . . . . . . . . . . . . . . 5 2.3 Effect of Void Transfers . . . . . . . . . . . . . . . . . 5 2.4 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.5 Blackstone Drag-Along Rights . . . . . . . . . . . . . . . 6 2.6 Chemical Tag-Along Rights . . . . . . . . . . . . . . . . . 6 SECTION 3. REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . 7 3.1 Blackstone Demand Registration . . . . . . . . . . . . . . 7 3.2 Piggy-Back Rights . . . . . . . . . . . . . . . . . . . . . 8 3.3 Other Registration-Related Matters . . . . . . . . . . . . 9 3.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 4. OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . 13 4.1 Affiliate Transactions . . . . . . . . . . . . . . . . . . 13 4.2 Voting Agreement . . . . . . . . . . . . . . . . . . . . . 14 4.3 Board Observer . . . . . . . . . . . . . . . . . . . . . . 14 4.4 Financial Information . . . . . . . . . . . . . . . . . . . 14 4.5 Chemical Participation Rights . . . . . . . . . . . . . . . 14 SECTION 5. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 15 5.1 Additional Securities Subject to Agreement . . . . . . . . 15 5.2 Termination . . . . . . . . . . . . . . . . . . . . . . . . 15 5.3 Injunctive Relief . . . . . . . . . . . . . . . . . . . . . 16 5.4 Other Stockholders' Agreements . . . . . . . . . . . . . . 16 5.5 Replacement of Chemical Subscription Agreement . . . . . . 16 5.6 Amendments . . . . . . . . . . . . . . . . . . . . . . . . 16 5.7 Successors, Assigns and Transferees . . . . . . . . . . . . 16 5.8 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.9 Integration . . . . . . . . . . . . . . . . . . . . . . . . 17 5.10 Severability . . . . . . . . . . . . . . . . . . . . . . . 18 5.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 18 5.12 Governing Law . . . . . . . . . . . . . . . . . . . . . . . 18 2 AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT, dated as of February 29, 1996, among Blackstone Capital Partners II Merchant Banking Fund L.P., a Delaware limited partnership, Blackstone Offshore Capital Partners II L.P., a Cayman Islands exempted limited partnership, Blackstone Family Investment Partnership II L.P., a Delaware limited partnership (collectively, "Blackstone"), Chemical Equity Associates, a California limited partnership ("Chemical"), and UCAR International Inc., a Delaware corporation (the "Company"). W I T N E S S E T H : WHEREAS, Blackstone and the Company are parties to the Stockholders' Agreement, dated as of January 26, 1995, as supplemented by the Supplement thereto dated as of January 26, 1995 and as amended by the First Amendment thereto dated as of July 31, 1995 ( the "Existing Stockholders' Agreement" ), originally among Blackstone, the Company and Union Carbide Corporation, a New York corporation ("Union Carbide"). WHEREAS, the Company and Chemical are parties to, and Chemical has previously subscribed for shares of Common Stock pursuant to, the Common Stock Subscription Agreement, dated as of January 26, 1995 (the "Chemical Subscription Agreement"), pursuant to which Chemical was granted certain rights including "piggy-back" registration rights and "tag-along" rights relating to the sale of Common Stock and agreed to certain obligations including "drag-along" and voting obligations. WHEREAS, pursuant to the terms of the Existing Stockholders' Agreement, Union Carbide and Blackstone were granted certain rights, including demand registration rights, "drag-along" rights, "piggy-back" rights and "tag-along" rights, relating to the sale of Common Stock and agreed to perform certain other obligations. WHEREAS, in connection with the initial public offering of Common Stock in August 1995, Union Carbide sold all of the shares of Common Stock it then held, thereby terminating any rights and obligations of Union Carbide under the Existing Stockholders' Agreement. WHEREAS, pursuant to the terms of the Existing Stockholders' Agreement, Blackstone has requested, and the Company has agreed to, the filing of a registration statement or registration statements covering the sale of Common Stock by Blackstone, and certain other Selling Stockholders, including Chemical, have exercised their "piggy-back" registration rights under the Chemical Subscription Agreement and the Other Agreements. WHEREAS, the Company, Blackstone and Chemical have agreed to amend and restate the Existing Stockholders' Agreement, which amendment and restatement shall also replace in its entirety the Chemical Subscription Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, terms defined in the heading and the recitals shall have their respective assigned meanings and the following capitalized terms shall have the meanings ascribed to them below: "Affiliate" shall mean, with respect to any Person, (i) any Person that directly or indirectly controls, is controlled by or is under common control with such Person, or (ii) any director, officer, partner or employee of such Person or any Person specified in clause (i) above; provided, that officers, directors or employees of the Company or its Subsidiaries shall not be deemed to be Affiliates of Blackstone for purposes hereof solely by reason of being officers, directors or employees of the Company or its Subsidiaries. "Agreement" shall mean this Amended and Restated Stockholders' Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Blackstone Piggy-Back Shares" shall have the meaning set forth in Subsection 3.2(a). "Chemical Piggy-Back Shares" shall have the meaning set forth in Subsection 3.2(b). "Chemical Subscription Agreement" shall have the meaning set forth in the second recital hereto. "Common Stock" shall mean the common stock, par value $.01 per share, of the Company. "Existing Stockholders' Agreement" shall have the meaning set forth in the first recital hereto. "Indemnified Party" shall have the meaning set forth in Section 3.4. "Issuance" shall have the meaning set forth in Section 4.5. "Observer" shall have the meaning set forth in Section 4.3. "Other Agreements" shall mean each Management Common Stock Subscription Agreement (for Purchased Shares and Matched Shares), dated as of January 26, 1995, each between the Company and an employee of the Company or one of its Subsidiaries (an "Employee"), and any other similar agreement between an Employee and the Company entered into after the date hereof (including any such agreement entered into by an Employee upon the exercise of any options on Common Stock). "Participation Right" shall have the meaning set forth in Section 4.5. "Person" shall mean any individual, corporation, limited liability company, partnership, trust, joint stock company, business trust, unincorporated association, joint venture, governmental authority or other entity of any nature whatsoever. "Piggy-Back Shares" shall mean the Blackstone Piggy-Back Shares, the Chemical Piggy-Back Shares and the shares of Common Stock described in clause (c) of Section 3.2(c). "Public Offering" shall mean the sale of shares of Common Stock to the public pursuant to an effective registration statement filed under the Securities Act. "Recapitalization Agreement" shall mean the Recapitalization and Stock Purchase and Sale Agreement, dated as of November 14, 1994, among Union Carbide, Mitsubishi Corporation, Acquisition (as defined therein) and the Company. "Recapitalization Closing" shall mean January 26, 1995. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance with Section 3.1, 3.2 or 3.3, including, without limitation, (i) all SEC and securities exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses of complying with state securities or blue sky laws (including fees and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Common Stock), (iii) all printing and related messenger and delivery expenses, (iv) the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, (v) the reasonable fees and disbursements of one counsel, other than the Company's counsel, selected by the Stockholders of a majority of the shares of Common Stock being registered, to represent all Stockholders of the shares of Common Stock being registered in connection with each registration under any of such Sections (it being understood that any Stockholder may, at its own expense, retain separate counsel to represent it in connection with such registration), and (vi) any fees and disbursements of underwriters customarily paid by the issuers or sellers of securities, and the reasonable fees and expenses of any special experts retained in connection with such registration, but excluding underwriting discounts and commissions and transfer stamp, or similar taxes, if any. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as the same may be amended from time to time. "Stockholder" shall mean Blackstone or Chemical or any of their successors or assigns who becomes a party hereto and who agrees in writing to be bound by the provisions of this Agreement. "Subsidiary" shall mean any corporation (i) of which the Company owns, directly or indirectly or through one or more subsidiaries, securities having a majority of the ordinary voting power to elect the board of directors of such corporation or (ii) which is a 50%-owned affiliate of the Company on the date hereof. "Tagging Stockholder" shall have the meaning set forth in Section 2.6. "Third Party" shall have the meaning set forth in Section 2.5. "Transfer" shall mean any transfer, gift, sale, assignment, exchange, mortgage, pledge, hypothecation or other disposition (whether for or without consideration and whether voluntary or involuntary or by operation of law) of any shares of Common Stock or any interest therein. "Transferring Stockholder" shall have the meaning set forth in Section 2.6. 1.2 Other Definitional Provisions; Interpretation. (a) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and subsection references are to this Agreement unless otherwise specified. (b) The headings in this Agreement are included for convenience of reference only and shall not limit or otherwise affect the meaning or interpretation of this Agreement. (c) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. TRANSFERS 2.1 Limitations on Transfer. (a) Each Stockholder hereby agrees and acknowledges that, except for Transfers effected pursuant to an effective registration statement filed under the Securities Act and in compliance with this Agreement, no Transfer shall occur unless the Company has been furnished with an opinion in form and substance reasonably satisfactory to the Company of counsel reasonably satisfactory to the Company that such Transfer is exempt from the provisions of Section 5 under the Securities Act. (b) Each Stockholder hereby agrees that, except for Transfers in connection with a Public Offering, Transfers pursuant to Rule 144 under the Securities Act and Transfers pursuant to Section 2.5 and 2.6, no Transfer shall occur unless the transferee shall agree to become a party to, and be bound to the same extent (and entitled to the same benefits (other than the provisions of Section 4.3 in respect of transferees of Chemical)) as its transferor by the terms of, this Agreement. (c) Notwithstanding anything to the contrary contained in this Section 2.1, in the case of a Transfer by Chemical other than pursuant to a Public Offering, pursuant to Rule 144 under the Securities Act or pursuant to Section 2.6, any transferee of Chemical that receives less than 10% of the shares of Common Stock held by Chemical immediately prior to such Transfer shall be bound only by Sections 2.1, 2.3, 2.4, 3.3(a) and, on a pro rata basis based on the number of shares of Common Stock received by such transferee, Section 2.5. 2.2 Transfers to Affiliates. Notwithstanding anything contained herein to the contrary, each Stockholder shall be entitled, from time to time, to Transfer any or all of the shares of Common Stock beneficially owned by it to any of its Affiliates who agree to become a party to, and be bound to the same extent as its transferor by the terms of, this Agreement. Any Transfer by a Stockholder or its Affiliates to any of their respective stockholders (or other equity owners) of any or all of the shares of Common Stock beneficially owned by them (including a distribution of such shares of Common Stock upon a liquidation of such Stockholder or any of its Affiliates or otherwise) shall be deemed to be a Transfer to Affiliates of such Stockholder for purposes of this Section 2.2. 2.3 Effect of Void Transfers. In the event of any purported Transfer of any shares of Common Stock in violation of the provisions of this Agreement, such purported Transfer shall be void and of no effect and the Company shall not give effect to such Transfer. 2.4 Legends. Notwithstanding anything to the contrary contained herein, the certificates representing shares of Common Stock held by the Stockholders currently bear the legend set forth in the Existing Stockholders Agreement and the Chemical Subscription Agreement, respectively, and shall continue to bear such legends and any certificates issued upon a Transfer thereof or in exchange therefor shall, except as otherwise required to give effect to transactions permitted or required by this Agreement, bear substantially similar legends. 2.5 Blackstone Drag-Along Rights. So long as Blackstone owns a number of shares of Common Stock equal to at least one-third of the number of shares of Common Stock held by it immediately following the Recapitalization Closing (as adjusted for stock splits), if any of Blackstone or its Affiliates receives an offer from any Person other than an Affiliate of Blackstone (a "Third Party") to purchase 90% or more of the outstanding shares of Common Stock then owned by Blackstone and such offer is accepted by Blackstone, then Blackstone shall have the right to require Chemical to, and Chemical agrees that it will, transfer all (or if less than all of Blackstone's Common Stock is being sold, a percentage equivalent to the percentage thereof being sold by Blackstone) shares of Common Stock that Chemical owns to such Third Party on the terms of the offer (including the same per share consideration) so accepted by Blackstone. 2.6 Chemical Tag-Along Rights. In the event that Blackstone proposes to Transfer (other than pursuant to Section 2.2) any of the shares of Common Stock owned by Blackstone (in such capacity, a "Transferring Stockholder"), then Blackstone shall have the obligation, and Chemical shall have the right, to require any proposed transferee of shares owned by Blackstone to purchase from Chemical (in such capacity, a "Tagging Stockholder") a number of shares of Common Stock not to exceed a number of shares equal to the product (rounded up to the nearest whole number) of (i) the quotient determined by dividing (A) the aggregate number of shares of Common Stock sought to be included in the contemplated Transfer by the Tagging Stockholder by (B) the aggregate number of shares of Common Stock sought to be included in the contemplated Transfer by the Transferring Stockholder, the Tagging Stockholder and any other Persons who are permitted to include shares of Common Stock in the contemplated Transfer pursuant to any of the Other Agreements (provided that for purposes of this clause (i) a Stockholder shall be deemed to have sought to include an amount equal to all of such Stockholder's shares of Common Stock if such amount exceeds the entire amount to be sold to the transferee in the contemplated Transfer), and (ii) the total number of shares of Common Stock proposed to be Transferred by the Transferring Stockholder to the transferee in the contemplated Transfer, and at the same price per share of Common Stock and upon the same terms and conditions (including, without limitation, time of payment and form of consideration) as to be paid and given to the Transferring Stockholder; provided, that in order to be entitled to exercise its right to sell shares of Common Stock to the proposed transferee pursuant to this Section 2.6, the Tagging Stockholder must agree to make to the transferee the same representations, warranties, covenants, indemnities and agreements as the Transferring Stockholder agrees to make in connection with the proposed Transfer of shares of Common Stock of the Transferring Stockholder; provided further, that all representations and warranties shall be made by the Tagging Stockholder severally and not jointly and that the liability of the Transferring Stockholder and the Tagging Stockholder (whether pursuant to a representation, warranty, covenant, indemnification provision or agreement) for liabilities in respect of the Company shall be evidenced in writings executed by them and the transferee and shall be borne by each of them on a pro rata basis. SECTION 3. REGISTRATION RIGHTS 3.1 Blackstone Demand Registration. (a) Upon the written request from time to time of Blackstone and/or its Affiliates that hold Common Stock that the Company effect the registration under the Securities Act of all or part of the shares of Common Stock owned by Blackstone and/or its Affiliates, the Company will as expeditiously as reasonably practicable use its reasonable efforts to effect the registration under the Securities Act of such shares of Common Stock and cause such registration to remain effective for a period of not less than 120 days; provided, however, that the Company shall not be required to effect more than three registrations pursuant to this Section 3.1 during any fiscal year of the Company. (b) The obligations of the Company to use its reasonable efforts to cause shares of Common Stock to be registered under the Securities Act pursuant to this Section 3.1 are subject to the limitation that the Company shall be entitled to postpone for a reasonable period of time (not to exceed 90 days) the filing or effectiveness of, or suspend for a reasonable period of time the rights of Blackstone and/or its Affiliates to make sales pursuant to, any registration statement otherwise required to be prepared, filed and made and kept effective by it hereunder if there has been a determination made in good faith by the Board of Directors of the Company (the "Board"), in view of the advisability of deferring public disclosure of material corporate developments or other information, that to do so would be in the best interest of the Company at such time. The Company shall extend the period during which such registration statement shall be maintained effective as provided in Section 3.1(a) by a number of days equal to the number of days in the period commencing on and including the date of suspension of the rights of Blackstone and/or its Affiliates to make sales pursuant to such registration statement and ending on the date sales can recommence. 3.2 Piggy-Back Rights. (a) Each time the Company is planning to file a registration statement under the Securities Act in connection with the proposed offer and sale of Common Stock by the Company (other than in connection with an employee stock option, purchase, ownership or other plan or an acquisition, however structured, by the Company or its Subsidiaries of a business, product line, company or assets or properties), the Company shall give prompt written notice to Blackstone regarding Blackstone and its Affiliates' rights under this Section 3.2, at least 30 days prior to the anticipated filing date of such registration statement. Upon the written request of Blackstone made within 20 days after the receipt of any such notice from the Company, which request shall specify the number of shares of Common Stock (the "Blackstone Piggy-Back Shares") then intended to be disposed of by Blackstone and/or its Affiliates in such offering, the Company will use its reasonable efforts to effect the registration under the Securities Act of all Blackstone Piggy-Back Shares which the Company has been so requested to register, to the extent required to permit the disposition of the Blackstone Piggy-Back Shares to be registered; provided, that if, at any time after giving written notice of its intention to register any Common Stock and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration, the Company may at its election give written notice of such determination to Blackstone and thereupon shall be relieved of its obligation to register any Blackstone Piggy-Back Shares in connection with such registration only. (b) If the Company plans to file a registration statement under the Securities Act in connection with the proposed offer and sale of Common Stock by Blackstone, the Company shall give prompt written notice to Chemical regarding Chemical's rights under this Section 3.2, at least 30 days prior to the anticipated filing date of such registration statement. Upon the written request of Chemical made within 20 days after the receipt of any such notice from the Company, which request shall specify the number of shares of Common Stock (the "Chemical Piggy-Back Shares") then intended to be disposed of by Chemical in such offering, the Company will use its reasonable efforts to effect the registration under the Securities Act of all Chemical Piggy-Back Shares which the Company has been so requested to register, to the extent required to permit the disposition of the Chemical Piggy-Back Shares to be registered; provided, that (i) if, at any time after giving written notice of its intention to register any Common Stock and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration, the Company may at its election give written notice of such determination to Chemical and thereupon shall be relieved of its obligation to register any Chemical Piggy-Back Shares in connection with such registration only and (ii) if such registration involves an underwritten offering, the holder of Chemical Piggy-Back Shares requesting to be included such registration must sell its shares to the underwriters on the same terms and conditions as apply to Blackstone. (c) If a registration pursuant to this Section 3.2 involves an underwritten offering and the managing underwriter or underwriters in good faith advise the Company in writing that, in their opinion, the number of shares of Common Stock which the Company, the holders of Piggy-Back Shares and any other Persons intend to include in such registration exceeds the largest number of shares of Common Stock which can be sold in such offering without having an adverse effect on such offering (including the price at which the shares of Common Stock can be sold or the aggregate number of shares of Common Stock that can be sold), then the Company will include in such registration (i) first, 100% of the shares of Common Stock the Company proposes to sell for its own account, if any, and (ii) second, to the extent that the number of shares of Common Stock which the Company proposes to sell is less than the number of shares of Common Stock which the Company has been advised can be sold in such offering without having an adverse effect referred to above, Piggy-Back Shares in an aggregate amount less than or equal to the balance of such number, which will be included in such offering on the basis of the relative percentage relationships of (a) the number of Chemical Piggy-Back Shares, (b) the number of Blackstone Piggy-Back Shares and (c) the number of shares of Common Stock sought to be included by any other Persons who are permitted to include shares of Common Stock in such offering pursuant to any of the Other Agreements. 3.3 Other Registration-Related Matters. (a) Each Stockholder agrees that, if any shares of Common Stock are offered in an underwritten Public Offering pursuant to an effective registration statement under the Securities Act (other than a registration statement relating to an employee stock option, purchase, ownership or other benefit plan of the Company), it shall not, without the prior written consent of the Company, effect any sales of Common Stock during the 14 days prior to, or the 90 day period beginning on, the effective date of that registration statement (whether pursuant to Section 3.1 or 3.2 or otherwise, except as part of such registration) if and to the extent reasonably requested in writing (with reasonable prior notice) by the managing underwriter of such underwritten Public Offering. (b) The Company agrees not to effect any sales of Common Stock during the 14 days prior to, and the 90 day period beginning on, the effective date of any registration statement in which any Stockholder is selling shares of Common Stock in an underwritten Public Offering (other than shares of Common Stock being sold by the Company in such Public Offering), if and to the extent reasonably requested in writing (with reasonable prior notice) by the managing underwriter of the underwritten Public Offering. (c) The Company may require any Person that is selling shares of Common Stock in a Public Offering pursuant to Section 3.1 or 3.2 to furnish to the Company such information regarding such Person and the intended distribution of such shares of Common Stock which are included in such Public Offering as may from time to time reasonably be requested in writing in order to comply with the Securities Act. (d) The Company will pay all Registration Expenses in connection with each registration of Common Stock pursuant to this Section 3, regardless of whether such registration becomes effective, and the Stockholders shall pay all underwriting discounts and commissions and stamp, transfer and other taxes, if any, relating to the sale or disposition of shares of Common Stock owned by such Stockholder pursuant to any registration effected pursuant to this Section 3. 3.4 Indemnification. (a) Indemnification by the Company. In the event of any registration of any securities of the Company under the Securities Act pursuant to Section 3.1 or 3.2, the Company hereby indemnifies and holds harmless, and agrees that in any underwriting agreement entered into in connection with such registration it will indemnify and hold harmless, to the extent permitted by law, each Stockholder of Common Stock covered by such registration statement, each Affiliate of such Stockholder and their respective directors, officers and general and limited partners (and the directors, officers, affiliates and controlling Persons thereof), each Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Stockholder or any such underwriter within the meaning of the Securities Act (collectively, the "Indemnified Parties"), against any and all losses, claims, damages or liabilities, joint or several, and expenses to which such Indemnified Party may become subject under the Securities Act, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof, whether or not such Indemnified Party is a party thereto) arise out of or are based upon (a) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereto, or (b) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and the Company will reimburse such Indemnified Party for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, that the Company shall not be liable to any Indemnified Party in any such case to the extent that any such loss, claim, damage, liability, action, proceeding or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, in any such preliminary, final or summary prospectus, or in any amendment or supplement thereto, in reliance upon and in conformity with written information with respect to such Indemnified Party furnished to the Company by such Indemnified Party for use in the preparation thereof; and provided, further, that the Company will not be liable to any Person who participates as an underwriter in the offering or sale of such securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act, under the indemnity agreement in this Section 3.4, with respect to any preliminary prospectus, final prospectus or final prospectus as amended or supplemented, as the case may be, to the extent that any such loss, claim, damage or liability of such underwriter or controlling Person results from the fact that such underwriter sold such securities to a Person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the final prospectus or of the final prospectus as then amended or supplemented, whichever is most recent, if the Company has previously furnished copies thereof to such underwriter. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of such securities by such Stockholder. (b) Indemnification by the Stockholders and Underwriters. The Company may require, as a condition to including any Common Stock in any registration statement filed in accordance with Section 3, that the Company shall have received an undertaking reasonably satisfactory to it from the selling stockholder of such Common Stock or any underwriter to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 3.4(a), except that the indemnification obligation of Blackstone entities shall be several and not joint and the indemnification obligation of the underwriters shall be several and not joint) the Company and all other selling stockholders, as the case may be, and any of their respective affiliates, directors, officers and controlling Persons, with respect to any untrue statement or alleged untrue statement in or omission or alleged omission from such registration statement, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereto, if such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information with respect to such selling stockholder or underwriter furnished to the Company by such selling stockholder or underwriter expressly for use in the preparation of such registration statement, preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the selling stockholders, or any of their respective affiliates, directors, officers or controlling Persons, and shall survive the transfer of such securities by such selling stockholder. The liability of any Stockholder for any indemnification under this Section 3.4 shall be limited to an amount equal to the net proceeds (after deducting any underwriters' commission or discount) received by such Stockholder in connection with the sale of shares of Common Stock pursuant to such registration statement. (c) Notices of Claims, Etc. Promptly after receipt by an Indemnified Party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 3.4, such Indemnified Party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, that the failure of such Indemnified Party to give notice as provided herein shall not relieve the indemnifying party of its obligations under such Sections 3.4(a) or 3.4 (b), except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action or proceeding is brought against an Indemnified Party, unless in such Indemnified Party's reasonable judgment a conflict of interest between the indemnified and indemnifying parties may exist in respect of the claim to which such action or proceeding relates and separate counsel is not employed as described below, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such Indemnified Party, and after notice from the indemnifying party to such Indemnified Party of its election so to assume the defense thereof, the indemnifying party will not be liable to such Indemnified Party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. If, in such Indemnified Party's reasonable judgment, having common counsel would result in a conflict of interest between the interests of such indemnified and indemnifying parties, then such Indemnified Party may employ separate counsel reasonably acceptable to the indemnifying party to represent or defend such Indemnified Party in such action, it being understood, however, that the indemnifying party shall not be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all such indemnified parties (and not more than one separate firm of local counsel at any time for all such indemnified parties) in such action. No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to the indemnified parties of a release from all liability in respect of such claim or litigation. An indemnifying party shall not be liable for any settlement of any action, proceeding or claim effected without its prior written consent, which shall not be unreasonably withheld. (d) Other Indemnification. Indemnification similar to that specified in this Section 3.4 (with appropriate modifications) shall be given by the Company and each Stockholder with respect to any required registration or other qualification of securities under any federal or state law or regulation or governmental authority other than the Securities Act. (e) Contribution. If recovery is not available under the foregoing indemnification provisions of this Section 3.4 for any reason other than as expressly specified therein, the parties entitled to indemnification by the terms thereof shall be entitled to contribution to liabilities and expenses except to the extent that contribution is not permitted under Section 11(f) of the Securities Act. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the relative benefits received by each party from the offering (taking into account the portion of the proceeds realized by each), the parties' relative fault in connection with the statements or omissions which resulted in losses, claims, damages or liabilities, including the parties' knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any misstatement or omission and any other equitable considerations appropriate under the circumstances. (f) Non-Exclusivity. The obligations of the parties under this Section 3.4 shall be in addition to any liability which any party may otherwise have to any other party. If the underwriting agreement relating to any offering covered by this Section 3.4 provides for indemnification and contribution of the type described in this Section 3.4, then such provisions shall supersede and replace this Section 3.4 (other than this subsection 3.4(f)) insofar as it relates to such offering. SECTION 4. OTHER AGREEMENTS 4.1 Affiliate Transactions. The Company shall not, and shall cause its Subsidiaries not to, enter into any transaction with Blackstone or any of its Affiliates unless such transaction (i) is contemplated under this Agreement or the Recapitalization Agreement or any other documents delivered in connection herewith or therewith or (ii) is reasonable and customary in light of industry practice with regard to portfolio companies owned by Persons such as Blackstone and its Affiliates. Without limiting the foregoing, it is hereby acknowledged that the Company and its Subsidiaries have paid and will continue to pay a monitoring fee of $1 million per year to an Affiliate of Blackstone and that such payment is reasonable and customary in light of industry practice with regard to portfolio companies owned by Persons such as Blackstone and its Affiliates. 4.2 Voting Agreement. So long as Chemical owns any of the shares of Common Stock owned by it on the date hereof, Chemical and its transferees agree to permit Blackstone Capital Partners II Merchant Banking Fund L.P. to vote all of the shares of Common Stock held by Chemical and its transferees at any time and from time to time. Chemical has previously executed an irrevocable proxy in favor of Blackstone Capital Partners II Merchant Banking Fund L.P. and its successors and assigns with respect to all of the shares of Common Stock held by it, which proxy remains in full force and effect. To the extent that such irrevocable proxy ceases to be in full force and effect, Chemical and its transferees agree to vote all of their shares of Common Stock in the manner that Blackstone votes its shares of Common Stock from time to time on all matters presented to stockholders of the Company for vote; provided, that Blackstone notifies Chemical regarding how it will vote its shares of Common Stock. 4.3 Board Observer. The Company agrees that Chemical has the right, which right shall continue as long as this Agreement is in effect, to designate in a writing delivered to the Company one individual who is a representative of Chemical to be an observer (an "Observer") at meetings of the Board. Each such designation will contain the address of the Observer. The Observer will have the right to receive notice of and attend and participate in discussions at each regular and special meeting of the Board and will be entitled to receive at the same time they are provided to the directors of the Company copies of any information concerning the Company that is provided to each of the directors with respect to such meetings, provided that such Observer acknowledges and agrees that he will be bound to satisfy the same duties and obligations of loyalty and confidentiality with respect to such information that the directors must satisfy. The Observer will be reimbursed for out-of-pocket expenses under the same terms and in the same amounts as provided to the directors. The Observer will have no voting rights with respect to the Board or any other rights relating thereto not expressly set forth above. Notwithstanding anything else to the contrary contained herein, the rights pursuant to this Section 4.3 shall inure solely to the benefit of Chemical (and not any Transferees with respect to any of its shares of Common Stock). Upon the Transfer by Chemical to any Transferee of a majority of the shares of Common Stock it acquired at the time of the Recapitalization Closing, the rights pursuant to this Section 4.3 and Section 4.4 shall automatically terminate. 4.4 Financial Information. The Company shall provide customary financial information to Chemical on a periodic basis, including quarterly financial statements and annual budgets. 4.5 Chemical Participation Rights. So long as this Agreement shall remain in effect, Chemical has the right, upon any issuance by the Company (an "Issuance") of additional shares of Common Stock to Blackstone, to receive prior to such Issuance to Blackstone notification in writing of the proposed Issuance to Blackstone and has the right (the "Participation Right") to subscribe for and purchase additional shares of Common Stock at the same price and upon the same terms and conditions as those to be issued in the Issuance to Blackstone such that, immediately after giving effect to the Issuance to Blackstone and exercise of the Participation Right, the shares of Common Stock owned by Chemical and its Affiliates (rounded to the nearest whole share) shall represent the same percentage of the aggregate number of shares of Common Stock outstanding on a fully diluted basis as was owned by Chemical and its Affiliates immediately prior to the Issuance to Blackstone. (b) The Participation Right may be exercised by Chemical at any time by written notice to the Company within 15 days after the date on which Chemical receives notice from the Company of the proposed Issuance to Blackstone, and the closing of the purchase and sale pursuant to the exercise of the Participation Right shall occur at least 30 days after the Company receives notice of the exercise of the Participation Right and prior to or concurrently with the closing of the Issuance to Blackstone. Notwithstanding the foregoing, the Participation Right shall not apply to (1) any Issuance to all holders of shares of Common Stock on a pro rata basis or (2) any Issuance pursuant to a Public Offering. SECTION 5. MISCELLANEOUS 5.1 Additional Securities Subject to Agreement. Each Stockholder agrees that any other shares of Common Stock which it shall have acquired during the period from the Recapitalization Closing to the date hereof, and which it shall hereafter acquire, by means of a stock split, stock dividend, distribution or otherwise (other than pursuant to a Public Offering) shall be subject to the provisions of this Agreement to the same extent as if held on the date hereof. If any Stockholder is issued any warrants, rights, calls, options or other securities exchangeable or exercisable for or convertible into Common Stock, the parties agree to amend this Agreement to the extent necessary to reflect such issuance in a manner consistent with the terms and conditions hereof. 5.2 Termination. All rights and obligations of Blackstone contained in this Agreement (other than Sections 2.1 through 2.4 and except to the extent set forth in Section 2.5 and Section 4.2) shall terminate, and thereby become null and void, on the earliest date on which Blackstone and its Affiliates do not collectively own in the aggregate a number of shares of Common Stock equal to one third of the shares of Common Stock outstanding immediately following the Recapitalization Closing (in each case, as adjusted for stock splits); provided, that the rights and obligations of Blackstone contained in Section 3 shall survive until such time as neither Blackstone nor its respective Affiliates own any of the shares of Common Stock owned by them on the date hereof; and provided further, that the rights of Blackstone pursuant to Section 3.1 may not be exercised if the shares of Common Stock to be sold by Blackstone and its Affiliates pursuant to Section 3.1 have a market value (based on the most recent closing share price of Common Stock available as of such time) of less than $10,000,000. All rights and obligations of Chemical contained in Sections 2.5 and 3 shall terminate simultaneously with the termination of Blackstone's rights and obligations thereunder and all other rights and obligations of Chemical shall remain in full force and effect until Chemical or its transferees cease to own any of the shares of Common Stock owned by it on the date hereof, notwithstanding any prior termination of the rights and obligations of Blackstone hereunder. 5.3 Injunctive Relief. Each party acknowledges and agrees that a violation of any of the terms of this Agreement will cause another party irreparable injury for which adequate remedy at law is not available. Accordingly, it is agreed that each party shall be entitled to an injunction, restraining order or other equitable relief to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction in the United States or any state thereof, in addition to any other remedy to which it may be entitled at law or equity. 5.4 Other Stockholders' Agreements. No Stockholder shall enter into any stockholder agreement or other arrangement of any kind with any Person with respect to shares of Common Stock, and no Stockholder has previously entered into such an agreement that remains in full force and effect as of the date hereof, which is inconsistent with the provisions of this Agreement or which may impair its ability to comply with this Agreement. 5.5 Replacement of Chemical Subscription Agreement. This Agreement replaces the Chemical Subscription Agreement, except that the representations and warranties of Chemical and the Company contained in Section 3 thereof shall remain in full force and effect and shall be incorporated herein by reference. 5.6 Amendments. This Agreement may be amended only by a written instrument signed by each of Blackstone and Chemical so long as each (or any of its respective Affiliates and transferees) owns Common Stock covered by this Agreement and provided that any amendment which adversely affects the Company or imposes an additional obligation on the Company must be approved in writing by the Company. 5.7 Successors, Assigns and Transferees. The provisions of this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and transferees (except for Transfers in connection with a Public Offering or Transfer pursuant to Rule 144 under the Securities act and subject to the provisions set forth elsewhere herein). Such assigns and transferees shall have full rights to enforce and seek legal and other remedies in respect of breaches of this Agreement as if a party so long as they first agree in writing to become a party and be bound to the same extent hereby as their transferor; provided, that if Blackstone transfers a portion of its Common Stock to a transferee which is entitled to rights of the transferor hereunder, then such transferee shall exercise such rights as a single group with that transferor and its Affiliates. 5.8 Notices. All notices, requests and demands to or upon the respective parties must be in writing (including by telecopy) to be effective and, unless otherwise expressly provided herein, if in writing, shall be deemed to have been duly given or made when delivered by hand, or two days after being delivered to a recognized courier (whose stated terms of delivery are three days or less to the destination of such notice) or, in the case of telecopy notice, when received, addressed as follows or to such other address as may hereafter be provided in writing to all of the parties: When the Company is the intended recipient: UCAR International Inc. 39 Old Ridgebury Road Danbury, Connecticut 06817 Attention: President Telecopy No: (203) 207-7785 When Blackstone is the intended recipient: Blackstone Capital Partners II Merchant Banking Fund L.P. Blackstone Offshore Capital Partners II L.P. Blackstone Family Investment Partnership II L.P. c/o Blackstone Management Associates II L.L.C. 345 Park Avenue New York, NY 10154 Attention: David Stockman Telecopy: (212) 754-8704 When Chemical is the intended recipient: To the address or telecopy as shown on the stock register of the Company. 5.9 Integration. This Agreement and the documents referred to herein, or delivered pursuant hereto, contain the entire understanding of the parties with respect to the subject matter hereof. There are no agreements, representations, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein. This Agreement supersedes all other prior agreements and understandings between the parties with respect to such subject matter. 5.10 Severability. If one or more of the provisions, paragraphs, words, clauses, phrases or sentences contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision, paragraph, word, clause, phrase or sentence in every other respect and of the remaining provisions, paragraphs, words, clauses, phrases or sentences hereof shall not be in any way impaired, it being intended that all rights, powers and privileges of the parties shall be enforceable to the fullest extent permitted by law. 5.11 Counterparts. This Agreement may be executed in two or more counterparts, and by different parties on separate counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 5.12 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to the conflicts of law principles thereof. The parties executing this Agreement hereby agree to submit to the non-exclusive jurisdiction of the federal and state courts located in the State of New York in any action or proceeding arising out of or relating to this Agreement. 3 IN WITNESS WHEREOF, each of the undersigned has executed this Amended and Restated Stockholders' Agreement or caused this Amended and Restated Stockholders' Agreement to be executed on its behalf as of the date first written above. BLACKSTONE CAPITAL PARTNERS II MERCHANT BANKING FUND L.P. BLACKSTONE OFFSHORE CAPITAL PARTNERS II L.P. BLACKSTONE FAMILY INVESTMENT PARTNERSHIP II L.P. By: Blackstone Management Associates II L.L.C., general partner By:/s/ Howard A. Lipson Name: Howard A. Lipson Title: Member CHEMICAL EQUITY ASSOCIATES, a California Limited Partnership By: Chemical Venture Partners By:/s/ Brian J. Richmand Name: Brian J. Richmand Title: General Partner UCAR INTERNATIONAL INC. By:/s/ Peter B. Mancino Name: Peter B. Mancino Title: Vice President 4 EX-2.5 3 AMENDMENT, WAIVER AND RELEASE IN CONNECTION WITH SUCH MANAGEMENT COMMON STOCK SUBSCRIPTION AGREEMENTS, MANAGEMENT PLEDGE AND SECURITY AGREEMENTS AND PROMISSORY NOTES. EXHIBIT 2.5 AMENDMENT, WAIVER AND RELEASE Amendment, Waiver and Release, dated as of February 6, 1996 (the "Agreement"), by UCAR INTERNATIONAL INC. (the "Company") and UCAR GLOBAL ENTERPRISES INC. ("UCAR Global") in favor of the persons named on Schedule 1 attached hereto (collectively, the "Purchasers" and, individually, the "Purchaser"). Reference is made respectively to (i) the Management Common Stock Subscription Agreement (for Purchased Shares and Matched Shares), dated as of January 26, 1995, and the Form of Management Subscription Agreement (for Option Shares) substantially in the form set forth as Exhibit B to the UCAR International Inc. Management Stock Option Plan (the "Plan"), each entered into or which may be entered into, respectively, by and between the Company and the Purchaser named or to be named, respectively, therein (collectively, "Subscription Agreement"), (ii) the Investor Note, dated January 26, 1995, made by the Purchaser named therein in favor of UCAR Global (the "Investor Note") and (iii) the Pledge and Security Agreement, dated as of January 26, 1995 (the "Pledge Agreement"), made by and between the Purchaser named therein and UCAR Global. Capitalized terms used herein which are not defined herein shall have the meanings set forth in the Subscription Agreement unless the context otherwise requires. W I T N E S S E T H : WHEREAS, the Company has filed a registration statement (File No. 333-1090) under the Securities Act (the "Registration Statement") in connection with the proposed offer and sale of Common Stock (the "Offering") by Blackstone and certain other selling stockholders (collectively, the "Selling Stockholders"), including certain of the Purchasers and an entity related to one of such Purchasers (collectively, "Management Selling Stockholders"); and WHEREAS, the Board of Directors of the Company has waived certain provisions of the Subscription Agreement, the Investor Note and Pledge Agreement in connection with its approval of the Offering. NOW, THEREFORE, in order to set forth the specific terms of such waiver, the Company and UCAR Global hereby irrevocably agree as follows: 1. Amendment and Waiver of Each Subscription Agreement. (a) Amendment to Subsection 3.6. Subsection 3.6 of each Subscription Agreement is hereby amended by deleting the number "180" where it appears therein and substituting in lieu thereof the number "90", provided that this amendment shall not apply to the Subscription Agreements of the Senior Executives (but will apply insofar as those Agreements relate to family members described in paragraph 3(3) of this Agreement). (b) Amendment to Subsection 3.10. Subsection 3.10 of each Subscription Agreement is hereby amended by inserting at the end of such subsection the following sentence: "In the event that the Purchaser sells shares in accordance with this Agreement, the proxy relating to such shares granted by the Purchaser to Blackstone shall, without any further action by any party, automatically cease to apply immediately upon the sale of such shares; provided that the voting agreement and proxy relating to any shares subject to this Agreement that continue to be owned by the Purchaser shall remain in full force and effect." (c) Amendment in Subsection 4.3. Subsection 4.3 of the Subscription Agreement is hereby amended by inserting the words and punctuation ", to the extent required by the promissory note evidencing such Employee Loan, as such promissory note may be amended, supplemented or modified from time to time," between the words "shall" and "first" where they appear on the fourth line thereof. (d) Waiver. The Company hereby waives (i) the requirement that the Management Selling Stockholders execute and deliver a Subscription Agreement in connection with the exercise of options granted under the Plan in connection with the sale of the underlying shares in the Offering as contemplated by the Registration Statement and (ii) subsection 4.3 of the Subscription Agreement of each of the Management Selling Stockholders to the extent such subsection would require the Management Selling Stockholders to apply any portion of the Net Proceeds realized from the sale of Shares in connection with the Offering and hereby agrees that the Management Selling Stockholders' exercise of such options may be conditioned upon the consummation of the Offering. 2. Amendment, Endorsement and Waiver of each Investor Note. (a) Amendment to each Investor Note. Section 1.1 of each Investor Note is hereby amended by (i) inserting immediately following the word "apply" in the second line thereof the words "an amount equal to 20% of the" and (ii) deleting the words "gross proceeds" where they appear in the sixth line thereof and substituting therefor the phrase "20% of such Net Proceeds." (b) Endorsement to each Investor Note. UCAR Global agrees to permanently affix to each Investor Note, as of the date hereof and in any event prior to any transfer of such Investor Note, an endorsement substantially in the form attached hereto as Annex A. (c) Waiver of Repayment under certain Investor Notes. UCAR Global hereby waives subsection 1.1 of the Investor Note of each Management Selling Stockholder, as amended, to the extent such subsection would require any repayment as a result of the sale of the Shares by the Management Selling Stockholders in connection with the Offering. 3. Amendment of Pledge Agreement. Section 14 of the Pledge Agreement is hereby amended by: (1) adding the indicator "(a)" immediately prior to the first sentence thereof; (2) adding a new clause (b) at the end thereof as follows: "(b) Notwithstanding anything to the contrary contained herein, in connection with any sale, transfer or disposition of Collateral permitted by, and made pursuant to, the Subscription Agreement, any such Collateral shall, without any further action by any party, be automatically released upon the sale, transfer or disposition thereof, and the Secured Party shall execute and deliver all documents and instruments required for such release."; and (3) in the case of the Pledge Agreement of each of Messrs. Hart and Krass, inserting the following sentence at the end thereof: "Notwithstanding anything to the contrary contained herein or in the Subscription Agreement, the shares of Common Stock owned by Mr. Krass' family members, the Krass Family Limited Partnership or Mr. Hart's family members on February 6, 1996 shall no longer be Collateral for the purpose of this Agreement or the Investor Note." 4. Release of Collateral. Upon the sale of Shares by the Management Selling Stockholders in connection with the Offering, UCAR Global shall release the first priority security interest in such Shares and shall deliver to the Management Selling Stockholders all documents reasonably necessary or desirable for such release. Pursuant to subsection 4.4 of the Pledge Agreement, UCAR Global, as Secured Party thereunder, hereby consents to the sale of such Shares. 5. Continuing Effect; No Other Amendments or Waivers. Except as expressly amended, modified, waived and supplemented hereby, the provisions of each of the Subscription Agreement, the Pledge Agreement and the Investor Note are and shall remain in full force and effect. 6. Counterparts. This Agreement may be executed in one or more counterparts, and by different parties on separate counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 7. Third Party Beneficiaries. The parties hereto hereby agree that each Purchaser and its respective successors and assigns shall be a third party beneficiary of the agreements of the parties hereto in favor of such Purchasers. 8. Governing Law. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York, without regard to conflicts of laws principles. 1 IN WITNESS WHEREOF, the undersigned have executed this Amendment, Waiver and Release as of the date first above written. UCAR INTERNATIONAL INC. By:/s/ Peter B. Mancino Name: Peter B. Mancino Title: Vice President UCAR GLOBAL ENTERPRISES INC. By:/s/ Peter B. Mancino Name: Peter B. Mancino Title: Vice President Agreed and Acknowledged as to Section 1(b) only: BLACKSTONE CAPITAL PARTNERS II MERCHANT BANKING FUND L.P. By: Blackstone Management Associates II L.P. By:/s/ Howard A. Lipson Name: Howard A. Lipson Title: Member 2 Schedule 1 Purchasers - ---------- Arnold, John C. Bailine, Frederick G. Carter, Donald Casiello, Gerald L. Cassilly, Thomas C. Cate, William D. Dowdle, Douglas C. Flowers, Roger M. Hamm, George A. Hart, Robert J. Krass, Robert P. Mancino, Peter B. Nakayama, Mac Ross, Robert M. Wiemels, William P. Wolf, Fred C. Twigg, Geoffrey Barnard, Peter Marcellin, Maurice Pelletier, Raymond Iglesias, Miguel Magnani, Piero Beling, Luiz R. Echevarria, Estella H. Schwegler, George 3 ACCEPTANCE AND ENDORSEMENT Reference is made to the Investor Note dated January 26, 1995 (the "Note") made by the undersigned maker (the "Maker") in favor of UCAR GLOBAL ENTERPRISES INC. ("UCAR Global") to which this endorsement is attached and the Amendment, Waiver and Release, dated as of February 6, 1996, by UCAR Global and UCAR International Inc. (the "Company") in favor of the Maker (the "Waiver"). The Maker hereby accepts and agrees to be bound by the Waiver. Without limiting the force or effect of the Waiver, the Maker and UCAR Global hereby agree that the Note is hereby amended by (i) inserting the words "an amount equal to 20% of the" immediately following the word "apply" where it appears in the second line of subsection 1.1 and (ii) deleting the words "gross proceeds" where they appear in the sixth line of subsection 1.1 and substituting therefor the phrase "20% of such Net Proceeds." Notwithstanding anything to the contrary contained herein or in the Waiver, the indebtedness evidenced by the Note is not hereby or thereby paid, satisfied or discharged but continues outstanding and in full force and effect. MAKER /s/ Robert P. Krass Name: Robert P. Krass UCAR GLOBAL ENTERPRISES INC. By:/s/ Peter B. Mancino Name: Peter B. Mancino Title: Vice President 4 EX-10.28 4 SECOND AMENDMENT TO SUCH COMPENSATION DEFERRAL PROGRAM EFFECTIVE AS OF JANUARY 1, 1995 EXHIBIT 10.28 SECOND AMENDMENT TO THE UCAR INTERNATIONAL INC. COMPENSATION DEFERRAL PROGRAM ----------------------------- The UCAR International Inc. Compensation Deferral Program (the "Plan") is hereby amended as follows: 1. Section 1.1 of the Plan is amended in its entirety to read as follows: "1.1 The purpose of this Program is to (i) allow Eligible Employees under the Variable Compensation Plans to defer up to 85% of their Variable Compensation, (ii) allow Eligible Employees to defer up to 50% of their base salary, (iii) allow Eligible Employees to defer a portion or all of their lump sum payments otherwise payable from the SRIP and/or Equalization Plan, (iv) restore to Eligible Employees a portion of their matching contribution under the Savings Plan which is limited by restrictions imposed under Section 401(a)(17) of the Code and (v) allow Eligible Employees to defer all or a portion of their lump sum payment otherwise payable from the Long Term Plan." 2. Section 5.3(a) of the Plan is amended in its entirety to read as follows: "5.3(a) On or before the date designated by the Administrative Committee and otherwise in accordance with such procedures as may be established, a Participant may elect voluntarily to defer (i) up to 85% of the Participant's award under the Variable Compensation Plans (in 1% increments), (ii) up to 50% of his or her base salary (in 1% increments) and/or (iii) up to 100% of his or her lump sum payment from the SRIP, Equalization Plan or Long Term Plan (in 1% increments)." 3. The provisions of this Second Amendment shall be effective as of March 15, 1996. UCAR INTERNATIONAL INC. By: /s/ John C. Arnold ------------------ John C. Arnold EX-13.1 5 UCAR INTERNATIONAL INC. ANNUAL REPORT TO STOCKHOLDERS FOR 1995 EXHIBIT 13.1 [LOGO] UCAR Continuing a Tradition of Global Leadership 1995 ANNUAL REPORT [cover page] ON THE COVER: A view of the interior of an electric arc furnace as scrap metal is converted to molten steel at 3,000 degrees Fahrenheit. ABOUT UCAR: Formerly the Carbon Products Division of Union Carbide Corporation, UCAR International completed an initial public offering of common stock in August, 1995. For over a century, UCAR has been one of the world's leading producers of carbon and graphite products for industrial applications in a diverse array of industries - metal production, electronics, chemical, aerospace and transportation, among others. Our products, which are manufactured on four continents and sold in over 70 countries, continue to be of the highest quality available in the world. TABLE OF CONTENTS: 1 Financial and Operating Highlights 2 Letter to Stockholders 6 Business Overview 10 Continuing a Tradition of Global Leadership 21 Five Year Financial Summary 22 Management's Discussion and Analysis 29 Financial Statements 33 Notes to the Financial Statements 51 Report of Independent Auditors 52 Directors and Officers IBC Corporate and Investor Information [back of cover page]
FINANCIAL AND OPERATING HIGHLIGHTS ________________________________________________________________________ (dollars in millions, except per share data) 1995 1994 - ------------------------------------------------------------------------ Net sales $ 901 $ 758 Gross profit 345 243 Operating profit 189 162 Pro forma operating profit(1) 214 158 Net income (loss) (12) 100 Pro forma net income(1) 91 60 Pro forma net income per share(1) $ 1.87 $ 1.23 Weighted average shares outstanding (in 000's) 48,763 48,658 - ------------------------------------------------------------------------ Cash and cash equivalents $ 53 $ 60 Total assets 864 778 Long-term debt, less current portion 636 223 Stockholders' equity (deficit) (167) 192 - ------------------------------------------------------------------------ EBITDA(2) $ 249 $ 201 Depreciation 38 39 Capital expenditures 65 34 Total interest expense 93 19 - ------------------------------------------------------------------------ Shipments of graphite electrodes (000's of metric tons) 217 196 Number of employees (beginning of period) 4,114 4,361 ________________________________________________________________________
(1) Operating profit and net income have been adjusted as if the Recapitalization, the Offering, the Redemption and the Refinancing occured as of January 1, 1994 and exclude the extraordinary charge and non-recurring effects of the Recapitalization and the Offering. (For definitions see Management Discussion and Analysis of Financial Condition and Results of Operations). (2) EBDITA, for this purpose, means operating profit plus depreciation, amortization and the portion of restructuring charges applicable to fixed asset write-offs. (See note (J) to the Selected Historical Consolidated Financial and Operating Information). ________________________________________________________________________________ [BAR GRAPH]: NET SALES ($ millions) PLOT POINTS: 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- Net Sales $648 $659 $740 $758 $901 ---------------------------------------- ________________________________________ [BAR GRAPH]: GROSS PROFIT ($ millions) PLOT POINTS: 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- Gross Profit $94 $104 $203 $243 $345 ---------------------------------------- ______________________________________________ [BAR GRAPH]: OPERATING PROFIT * ($ millions) PLOT POINTS: 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- Operating Profit $(22) $(1) $80 $162 $189 ---------------------------------------------- * Pro-forma (1) ________________________________________________________________________________ 1 DEAR FELLOW STOCKHOLDERS: Nineteen hundred ninety-five was a terrific year for our company. Through teamwork, over 4,000 employees worldwide were responsible for UCAR's most successful year in over a decade. We delivered strong gains in sales, unit volumes, and profit margins. Our accomplishments in 1995 were preceded by a decade of dramatic change. Since 1984, we have significantly increased efficiency and profitability by focusing on value added activities, consolidating operations and exiting unprofitable lines of business. We have also directed our talents and skills into what is best described as a reinvention of virtually every aspect of our business. Today, UCAR is the largest and, we believe, the lowest cost producer of graphite electrodes in the world. Not content to rest on our laurels, we seek ways to continuously improve profitability and to enhance our strong competitive position. ________________________________________________________________________________ [PHOTOGRAPH]: ROBERT P. KRASS, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER ________________________________________________________________________________ FISCAL 1995 HIGHLIGHTS With continued improvement in our core graphite electrode business and solid performances in our other businesses, UCAR's operating results excluding non-recurring charges and expenses - were exceptional. Net sales rose 19% to $901 million while pro forma operating profit increased 35% to $214 million. Volume and price increases, coupled with cost reductions, in all product lines contributed to improved gross profit margins. At the same time, our ownership changed not once, but twice. With considerable investment and the involvement of The Blackstone Group, we successfully piloted the company through a leveraged recapital- 2 ization taking on $965 million in debt to buy 75% of the company from our corporate owners, Mitsubishi and Union Carbide. Representing a significant turning point in our history, 41% of the company was sold to the public in an initial public offering later in the year. For the first time in nearly 100 years, UCAR stands as an independent entity fully in control of its destiny. UCAR's substantial cash resources were deployed in ways that will assure a strong foundation for the future. Placing the company on a sounder financial footing, total debt was reduced by $304 million over the course of the year. The reduction in debt, coupled with the refinancing of our bank credit facilities, will generate $34 million in annual savings in interest and related expenses based on debt levels at the time of the refinancing. To maintain our leading position in the industry, we also reinvested in our business. Our purchase of the minority shares in our Brazilian subsidiary, the North ________________________________________________________________________________ "UCAR's operating results were exceptional. Sales rose 19% to $901 million while pro forma operating profit increased 35% to $214 million." ________________________________________________________________________________ American Rationalization Project, and various other technology improvement efforts are all examples of our dedication to maximizing the value of our assets to ensure efficient, low cost production. Our cost reduction projects have an average payback period of less than two years. We demand, and get, quick return from our investments. Our Board of Directors was made even stronger with the addition of two, well regarded executives independent of the company or its largest shareholder. The appointment of John R. Hall, Chairman and Chief Executive Officer of Ashland Inc., last November was followed by that of R. Eugene Cartledge, former Chairman and Chief Executive Officer of Union Camp Corporation, in February of this year. Their extensive experience in the management of large, multinational corporations will be of great value as we move forward. GUIDED BY A COMMON VISION The commitment of UCAR's employees around the world has been central to our success. Though our roots can be traced 3 back to 1886, it has only been in the last decade that we have created the seamless global organization that UCAR is today. United by a common vision, we work toward common goals. Every individual is dedicated to the success of the business in an environment that encourages each of us to make his or her maximum contribution to the business. We have pride of ownership in our jobs enabling full participation in the decisions that shape our future. Adaptability and innovation will continue to be vital components of our success. At UCAR, we continuously improve the quality of our products and processes in order to provide the best value to our customers. We set the standards that others attempt to meet. In all that we do, meeting our obligations to our communities and employees in all matters of health, safety and the environment is of chief concern. Our goal is to produce superior results in profitability and cash flow by aggressively managing our assets to generate the highest return at the lowest cost. We are always ________________________________________________________________________________ "We have pride of ownership in our jobs enabling full participation in the decisions that shape our future. Adaptability and innovation will continue to be vital components of our success." ________________________________________________________________________________ evaluating ways to redeploy cash flow to increase UCAR's value over the long-term. With a significant ownership position in the company, our interests are aligned with those of stockholders. Members of management currently hold in excess of 11% of UCAR's common shares, either directly or through stock options, and employee ownership is widespread. Equally as important, incentive compensation is directly related to the company's operating performance. Our personal stake in the company's future success ensures that the creation of stockholder value remains a high priority. For our stockholders, the most important measure of our performance remains our stock price. By the end of 1995, UCAR's stock price had increased 42% over the initial public offering price. COMMITTED TO STEADY, PROFITABLE GROWTH The outlook for our industry is positive. Electric arc furnace (EAF) capacity increased by 20 million metric tons in 1995 4 and, based on current patterns, we expect growth to continue above the trend line rate of 4% through 1998. EAF capacity additions in 1995 and announced additions total over 90 million metric tons through 1998, a 41% increase over 1994's production level. Growth is projected in all areas of the world. The conversion of several integrated producers to the more economical electric arc furnace method of steel making is especially encouraging. We see opportunities for further growth in the Asia Pacific region, Eastern Europe and the Middle East. Fewer players and limited availability of excess capacity in the graphite electrode industry should continue to foster favorable trends in pricing. As the only manufacturer with significant excess capacity and the ability to quickly expand capacity, incrementally, on a cost-efficient basis - UCAR stands ready to benefit from the anticipated increase in demand for graphite electrodes. Based on our current outlook, annual sales could break through the $1 billion mark in the not too distant future. ________________________________________________________________________________ "Our goal is to produce superior results in profitability and cash flow by aggressively managing our assets to generate the highest return at the lowest cost." ________________________________________________________________________________ Our strategy is clear. We intend to remain fully focused on maintaining UCAR's leadership in the electrode business. At the same time, we will leverage our strength in carbon and graphite technology by expanding selected, high return businesses such as superfine grain graphite products and GRAFOIL (Registered). Our efforts to reduce costs and improve productivity are ongoing. On the financial front, further debt reduction remains a top priority. Overall, we will continue to manage our business with a focus on maximizing profitability, not market share. In closing, we thank our Board of Directors, our suppliers and customers, and our stockholders for their support. We also wish to extend our deepest gratitude to our fellow employees. Their contributions made our achievements possible. /s/ Robert P. Krass - ------------------- Robert P. Krass Chairman of the Board, President and Chief Executive Officer March 8, 1996 5 BUSINESS OVERVIEW It's tough to be the best. It takes ingenuity, perseverance and hard work. At UCAR, that's what we've done every day for over 100 years. The coal used in power generation, the 'lead' in pencils, the diamonds in fine jewelry, and the shared element in over one million organic compounds - from human brain cells to gasoline ... they all have one thing in common: carbon. Though not the most abundant element on earth, carbon is part of our very essence and touches our lives in countless ways every day. Because of their unique chemical ________________________________________________________________________________ [PHOTOGRAPH]: AN ELECTRIC ARC FURNACE BEING CHARGED WITH SCRAP METAL. ________________________________________________________________________________ and physical properties, products manufactured from carbon and graphite are essential to modern manufacturing in industries as diverse as printing and metal production. Where metals, ceramics and polymers were once used, engineers have learned that carbon or graphite materials can often be substituted to provide superior performance - at a lower cost. Thermally stable and slow to combine with other elements, they are especially well suited to high temperature applications. The natural supply of elemental carbon is simply ________________________________________________________________________________ [PIE CHART]: NET SALES BY PRODUCT -------------------- 75% Graphite Electrodes 9% Carbon Products 12% Graphite Specialties 4% Grafoil ________________________________________________________________________________ not great enough to meet its commercial demand, so it is produced synthetically. From our founding as the National Carbon Company in 1886, we have been the world's foremost producer of carbon and graphite products for industrial applications. A commitment to technological innovation and the highest levels of product quality and service has allowed us to remain the industry's leader. During 1995, gains were registered in each of our product lines: Graphite Electrodes, Graphite Specialty Products, Carbon Products and GRAFOIL (Registered). ________________________________________________________________________________ [DIAGRAM]: DEPICTION OF GRAPHITE ELECTRODE PRODUCTION ________________________________________________________________________________ 6 GRAPHITE ELECTRODES Representing 75% of sales, Graphite Electrodes continued to be our single largest product area. Fueled by increases in both volume and price, sales of Graphite Electrodes rose 19% to $676 million in 1995. Sales of Graphite Electrodes continued to benefit from growth in the volume of steel produced in electric arc furnaces which has more than doubled over the past two decades. As a result of their cost and operating efficiencies, derived in part from their smaller size, the so-called 'mini-mills' have seen their share of total steel production rise from ________________________________________________________________________________ "Fueled by increases in both volume and price, sales of Graphite Electrodes rose 19% to $676 million in 1995." [PHOTOGRAPH]: FINISHED GRAPHITE ELECTRODES BEING PREPARED FOR SHIPMENT. ________________________________________________________________________________ under 15% in the early-1970's to approximately 33% in 1995. Standing up to nine feet tall and weighing over two tons, Graphite Electrodes conduct electricity into the furnace generating heat sufficient to melt the raw materials used to make steel. Graphite Electrodes are the only products available that can withstand the high temperatures, up to 5,000 degrees Fahrenheit, reached during production. The electrodes are consumed during the production process, at an average rate of one electrode every eight to ten operating hours, creating ______________________________________________________________________________________________________________________________ [AREA GRAPH]: EAF STEEL PRODUCTION -------------------- (millions of metric tons) PLOT POINTS:
YEARS 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 - ----- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- EAF STEEL PRODUCTION 86 87 86 111 123 113 125 132 149 160 162 161 153 163 178 183 184 197 210 214 218 213 215 228 230 243 - ------------------------------------------------------------------------------------------------------------------------------ ______________________________________________________________________________________________________________________________
a renewable source of demand. The world's largest producer of Graphite Electrodes, UCAR holds an estimated 31% share of the free world market and a 42% share of the markets where we have manufacturing facilities. While technological advances and gains in operating efficiency have resulted in a decline in the consumption of Graphite Electrodes per ton of steel produced, the increase in EAF production continues to generate increased demand for Graphite Electrodes. As the growth sector of the steel industry, EAF capacity increased by an estimated 20 ________________________________________________________________________________ [DIAGRAM]:(Continued) --------------------- DEPICTION OF GRAPHITE ELECTRODE PRODUCTION 1 Coke silo 2 Rotary dryer 3 Rolling mill crusher 4 Screen 5 Four rolling mill 6 Weighing 7 Pitch 8 Mixer 9 Extrusion press 10 Cooling tank ________________________________________________________________________________ 7 million metric tons in 1995. Announced capacity additions could add another 75 million metric tons over the next three years. Technological advances continue to expand the types of steel produced in electric arc furnaces contributing to the sector's growth. GRAPHITE SPECIALTY PRODUCTS Graphite Specialty Products take many shapes and forms including: refractories, vessels, molds, pumps, pipes, valves, and fuel cells. These products can be made in virtually any size or shape and can be machined to very precise specifications. As just one example of the end ________________________________________________________________________________ [PHOTOGRAPH]: A CARBON REFRACTORY, FOR USE IN A BLAST FURNACE, DURING THE COURSE OF PRODUCTION. ________________________________________________________________________________ uses of these products, graphite molds are used to cast the metal wheels for rail cars. With a customer base that includes manufacturers in the metals, chemicals, transportation, energy, electronics and aerospace industries, Graphite Specialty Products were in strong demand with sales rising to $111 million, 32% over 1994's level. Limited worldwide capacity and growing demand for superfine grain graphite products prompted the decision to expand manufacturing capacity over the next two years by installing a ________________________________________________________________________________ "Graphite Specialty Products were in strong demand with sales rising to $111 million, 32% over 1994's level." ________________________________________________________________________________ 'focused factory' within our Clarksburg, West Virginia facility. Used in the semi-conductor industry as well as in continuous casting and electrical discharge machining applications, the market for superfine graphite products is estimated at $400 million annually and is projected to grow at a faster pace than our core electrode markets. CARBON PRODUCTS Used to manufacture silicon metal, elemental phos-phorus and ferro-nickel, carbon electrodes represent the majority of Carbon Products sales. Other Carbon Products include cathodes for the ________________________________________________________________________________ [DIAGRAM]:(Continued) --------------------- DEPICTION OF GRAPHITE ELECTRODE PRODUCTION ________________________________________________________________________________ 8 primary production of aluminum and refractory materials used to line blast and cupola furnaces for iron production. Sales of Carbon Products rose 14% to $80 million in 1995. With an estimated 42% of the free world market, UCAR is the world's largest manufacturer of carbon electrodes and the only one of its kind in all of North and South America. Free world demand for carbon electrodes has been relatively stable over the past ten years at approximately 75,000 metric tons annually. While the market for carbon electrodes is expected to remain flat or ________________________________________________________________________________ [PHOTOGRAPH]: CARBON ELECTRODES, WHICH ARE USED IN PRIMARILY IN THE PRODUCTION OF SILICON METAL. "With an estimated 42% of the free world market, UCAR is world's largest manufacturer of carbon electrodes." ________________________________________________________________________________ decline slightly over the next several years, UCAR's strong competitive position is expected to remain intact. GRAFOIL(Registered) Developed by UCAR, GRAFOIL(Registered) is a flexible graphite product made in thin sheets that can be fashioned according to its ultimate use. When pressed against a surface, GRAFOIL(Registered) bends and conforms to the surface forming a tight, chemical resistant bond. GRAFOIL(Registered)'s heat resistance and chemical stability make it a popular facing material for gaskets and seals in the automotive, power, petrochemical and oil refining ________________________________________________________________________________ "Though just 4% of total sales, GRAFOIL (Registered) is a highly profitable, niche business with unique applications" ________________________________________________________________________________ industries. Particularly in the United States, where older, asbestos-type gaskets and seals have been largely phased out, GRAFOIL(Registered) flexible graphite has become the material of choice for many applications. UCAR holds approximately 60% of the U.S. market for flexible graphite. Though just 4% of total sales, GRAFOIL(Registered) is a highly profitable, niche business with unique applications. Sales of GRAFOIL(Registered) have grown at an average annual rate of 14% over the past ten years and we continue to evaluate opportunities to further expand this business. ________________________________________________________________________________ [DIAGRAM]:(Continued) --------------------- DEPICTION OF GRAPHITE ELECTRODE PRODUCTION 11 Baking furnace 12 Pitch impregnation 13 Graphitizing furnace 14 Machining 15 Shipping ________________________________________________________________________________ 9 Lean and efficient, UCAR is well situated to continue its tradition of global leadership. Here are just a few of the reasons why. OUR SALES AND MANUFACTURING NETWORK SPAN THE GLOBE UCAR's operations around the world were developed long before 'going global' entered the business strategist's lexicon. Ever the innovator, we have taken the management of multi-national operations a step further. Over the past decade, we have worked to erase the boundaries between nations to create a SEAMLESS, WORLDWIDE ENTERPRISE. Though our workforce of over 4,000 employees represents a diversity of nationalities and cultures, we are all dedicated to maintaining low cost production and to providing our customers, wherever they may be, with the highest quality products and service. And, with sales in over 70 countries, OUR CUSTOMERS ARE LOCATED IN EVERY CORNER OF THE WORLD. To serve the global needs of our markets, UCAR operates manufacturing facilities in nine countries on four continents - North America, South America, Europe and Africa. A total of 18 sales offices in 12 countries serve as THE VITAL LINK between our customers and [text continue in page 13] ________________________________________________________________________________ [PIE CHART]: GRAPHITE ELECTRODE SALES BY GEOGRAPHIC AREA ------------------------------------------- 27% USA & Canada 9% South America 9% Mexico 22% Western Europe 6% Eastern Europe 10% Asia Pacific 17% Africa/Middle East [PHOTOGRAPH]: RAW MATERIALS ARE PREPARED, BLENDED WITH COAL TAR PITCH, EXTRUDED THROUGH A FORMING PRESS, AND THEN CUT TO FORM GREEN ELECTRODES. ________________________________________________________________________________ 10 ================================================================ MAXIMIZING PROFITABILITY THROUGH GLOBAL ASSET MANAGEMENT -------------------------------------------------------- In a capital intensive business such as ours, maximizing the productivity of assets is crucial to our overall profitability. We maintain our competitive position by continually seeking opportunities to deploy UCAR's SUBSTANTIAL CASH FLOW in ways that leverage our strengths and favorably impact the bottom line. During 1995, we acquired virtually all of the minority shares of our Brazilian subsidiary for approximately $55 million. The full integration of this lower-cost facility into our worldwide manufacturing operations will enable IMPROVED PRODUCTION EFFICIENCIES, ultimately resulting in a higher, overall gross margin for UCAR. Majority ownership also provides for more FLEXIBILITY in global sourcing alternatives and better management of cash flow. ================================================================ 11 ================================================================ REDUCING COSTS THROUGH RE-ENGINEERING ------------------------------------- Initiated in 1995, the North American Rationalization Project is another example of UCAR's commitment to maintaining LOW-COST, EFFICIENT OPERATIONS. At a total cost of $31 million, including $27 million in capital expenditures, the graphite electrode capacity in our Columbia, Tennessee plant will be shut down while capacity in our lower cost plants in Clarksville, Tennessee and Monterrey, Mexico will be incrementally expanded. The Project will ultimately result in $23 MILLION IN ANNUALIZED COST SAVINGS upon its completion in mid-1996. Of this, $8 million was achieved in 1995 and an additional $12 million in savings is anticipated in 1996. With a relatively SHORT PAYBACK PERIOD, this project is indicative of our approach to capital investments. ================================================================ 12 ________________________________________________________________________________ [PHOTOGRAPH]: GREEN ELECTRODES ABOUT TO ENTER A FURNACE WHERE THEY WILL BE BAKED AT 1,400 DEGREES FAHRENHEIT TO FURTHER CARBONIZE THE PITCH. ________________________________________________________________________________ [text continued from page 10] UCAR's manufacturing, research and technical service operations. This integrated network, the broadest in our industry, guarantees our customers timely delivery and technical support virtually anywhere. UCAR's strategic global presence allows us to take full advantage of many international sourcing and supply channels, trading partnerships and business opportunities no matter where they are. In 1995, two-thirds of total sales were generated outside the United States. In our core graphite electrode business, other than the United States where 25% of our graphite electrodes were sold, no more than 10% of sales came from any one country. Though we are not immune to economic cycles, the diversity of our sales base provides a measure of protection against an economic downturn in any particular region. WE ARE A LOW COST PRODUCER Faced with an industry-wide glut of capacity and declining profitability in the early 1980's, drastic action was necessary. We closed plants, consolidated operations, shifted production to lower cost facilities, and rethought every aspect of our business. In all, over 40% of our capacity was eliminated and VIRTUALLY EVERY PROCESS WAS REDESIGNED. Central to our success in this far-reaching endeavor was the involvement and cooperation of our employees. Working in teams, 13 EMPLOYEES WERE EMPOWERED to make day-to-day operating decisions stimulating the leadership qualities, personal initiative, and fresh thinking required to reinvent UCAR. THE RESULTS ARE IMPRESSIVE. Since 1990, we have reduced the number of employees by nearly 40%, inventories are down by 20% and over $100 million in permanent, annual cost savings have been achieved. At the same time, our average production cycle was halved and sales per employee more than doubled. Today, we believe UCAR is the industry's LOWEST COST PRODUCER. More importantly, we have built a cost structure that is highly flexible raw materials and labor are 70% of our operating costs and our production facilities are largely modular. With the ability to adjust to changes in demand with ease, capacity can be incrementally expanded to meet increased demand while profit margins are more stable during downturns. Ours is a mature and competitive industry and, if we are to remain its leader, maintaining our position as a low cost producer is critical. Being a low cost producer does not mean cutting corners or taking shortcuts. It does mean constantly improving production methods, eliminating redundancy and implementing the latest technologies. At UCAR, we STRIVE TO CONTINUOUSLY IMPROVE everything we do in order to take costs out of the system, without compromising quality. ________________________________________________________________________________ [BAR GRAPH]: SALES PER EMPLOYEE ($ thousands) PLOT POINTS: 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- Sales per employee $104 $121 $163 $174 $216 ---------------------------------------------- ________________________________________________________________________________ 14 ________________________________________________________________________________ [PHOTOGRAPH]: ELECTRODES LEAVING SPECIALLY DESIGNED FURNACES WHERE THEY HAVE BEEN HEATED TO 5,000 DEGREES FAHRENHEIT TO CONVERT CARBON TO GRAPHITE. ________________________________________________________________________________ WE ARE COMMITTED TO THE HIGHEST LEVELS OF QUALITY As a global force in a competitive industry, our success hinges on our reputation for quality. We were among the first in the industry to adopt Statistical Process Control manufacturing methods and to embrace a of Total Quality. Extending throughout our worldwide operations, our COMMITMENT TO QUALITY GUIDES EVERYTHING WE DO. Total Quality begins with a commitment to technological innovation. What was considered a high quality electrode five years ago can no longer meet the exacting standards of today's modern electric arc furnaces. At our Technical Center in Parma, Ohio - widely recognized as the finest of its kind in the world - - scientists and engineers are continually working to develop THE NEXT GENERATION OF CARBON AND GRAPHITE TECHNOLOGY. By providing valuable design assistance, technical information and educational programs, they also ensure that our customers gain the maximum benefit from our products. To ensure world class performance, UCAR has also adopted INNOVATIVE MANAGEMENT TECHNIQUES. Using empowered teams, employees have been given the responsibility to produce results. Fewer layers of management mean 15 streamlined reporting, enabling decision making at the lowest levels. Across the organization, TEAMS CONTINUE TO INITIATE and lead efforts to improve our products and customer service. Our Partners-in-Quality program is vital to our pursuit of excellence. By encouraging our suppliers to live up to the same high standards our customers expect from us, we have established productive working relationships that have led to improved product quality, more satisfied customers, and LOWER COSTS for all involved. The recipient of numerous quality, material conservation, employee safety and preferred supplier awards, UCAR is internationally recognized as a pace setter in quality improvement programs. This CONSTANT QUEST FOR QUALITY will assure our continuing success as the world leader in our industry. OUR CUSTOMERS ARE THE KEYS TO OUR SUCCESS From the beginning, we have worked in close partnership with our customers to ensure the optimal performance of our products. The mutual benefits of these partnerships are most evident among our customers in the EAF segment of the steel industry. By FOCUSING ON THEIR NEEDS, UCAR has earned a reputation for providing practical solutions to everyday problems. [text continue in page 19] ________________________________________________________________________________ [PHOTOGRAPH]: ELECTRODES BEING MACHINED TO COMPLY WITH INTERNATIONAL STANDARDS GOVERNING OUTSIDE DIAMETER, OVERALL LENGTH AND JOINT SPECIFICATIONS. ________________________________________________________________________________ 16 ================================================================ MAINTAINING LEADERSHIP THROUGH TECHNOLOGICAL INNOVATION ------------------------------------------------------- The on-going trend toward HIGH PERFORMANCE engines in the automotive industry has resulted in increasingly lighter, more compact vehicles creating a more stressful environment for the engine and its components. Add to the equation more electronic controls and a desire for greater fuel efficiency and reduced emissions and you have A NEED FOR IMPROVED GASKETS and sealing devices. Many higher cost substitutes for asbestos, historically the material of choice, have been introduced. Until GRAFOIL (Registered), none offered the same breadth of performance. Without the health or environmental concerns of asbestos, GRAFOIL (Registered) is even MORE EFFECTIVE at sealing irregular surfaces and its cost is lower than the available alternatives. ================================================================ 17 ================================================================ INCREASING EFFECTIVENESS THROUGH TEAM WORK ------------------------------------------ It was A NORMAL DAY in our Welland, Ontario plant. The team in Shipping was scheduling the month's work. Faced with a new record for shipments, the team needed to make DECISIONS and they needed help. Shipping increased the length of the work day. The folks in Sales and Marketing handled paperwork and arranged carriers. Team members in Forming, Baking, and Graphitizing shut down a portion of their areas to load carriers with product. The guards at gate Number Two weighed each load. By the end of the month, all scheduled deliveries had been made and the old record had been beaten by 11%. That's TEAMWORK. ================================================================ 18 ________________________________________________________________________________ [PHOTOGRAPH]: CONNECTING PINS USED TO JOIN ELECTRODES TO FORM A CONTINUOUS COLUMN THAT IS FED INTO A FURNACE. ________________________________________________________________________________ [text continued from page 16] In turn, we have gained a base of knowledge and technical expertise that has been translated into new technologies and improved products and processes. With over a century of experience to draw on, our engineers and technicians are on the shop floor analyzing critical performance indicators. WORKING SIDE BY SIDE with our customers, we seek to optimize power input, reduce process variation and increase productivity. All of our efforts have one goal: IMPROVING THE BOTTOM LINE PERFORMANCE of our customers. Increased efficiency, higher product quality and lower costs continue to fuel the growth in EAF production. As the EAF sector grows, so will demand for UCAR's graphite electrodes. Our commitment to quality and service has earned us accolades from the people who count most - our customers. USX, Ford Motor, Inland Steel, Dow Chemical, Caterpillar and Texas Instruments - to name just a few have all recognized our commitment to quality and service by designating UCAR a preferred supplier. We've worked hard to earn their TRUST and we aim to keep it. 19 ________________________________________________________________________________ [PHOTOGRAPH]: CORPORATE OFFICERS LEFT TO RIGHT: Peter B. Mancino Robert J. Hart Fred C. Wolf Robert P. Krass William P. Wiemels Maurice Marcellin ________________________________________________________________________________ 20 UCAR INTERNATIONAL INC. AND SUBSIDIARIES SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION _______________________________________________________________________________
(dollars in millions, except per share amounts) - ----------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 1994 1993 1992 1991(a) - ----------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Net sales $ 901 $ 758 $ 740 $ 659 $ 648 Gross profit 345 243 203 104(b) 94(b) Selling, administrative and other expenses 115 79 73 78 77 Restructuring costs(c) 30 - 33 9 33 Operating profit (loss)(d) 189 162 80 (1)(b) (22)(b) Total interest expense 93 19 21 22 24 Income (loss) before extraordinary charge and cumulative effect of changes in accounting principles(d) 25 100 50 (30)(b) (45)(b) Extraordinary charge, net of tax(e) 37 - - - - Cumulative effect of changes in accounting principles - - (20) (55) - Net income (loss) (12) 100 30 (85)(b) (45)(b) Pro forma net income per share(f) $ 1.87 $ 1.23 Pro forma weighted average shares outstanding (in thousands)(g) 48,763 48,658 BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents $ 53 $ 60 $ 54 $ 28 $ 15 Total assets 864 778 831 784 842 Total debt 668 247 268 269 254 Stockholders' equity (deficit) (167) 192 188 198 305 OTHER DATA: Gross profit margin 38.3% 32.1% 27.4% 15.8% 14.5% Depreciation $ 38 $ 39 $ 39 $ 44 $ 45 Capital expenditures 65 34 26 19 27 Quantity of graphite electrodes sold (thousands of metric tons)(h) 217(i) 196(i) 217(i) 205 197 Number of employees worldwide at beginning of period(h) 4,114 4,361 4,538 5,464 6,213 EBITDA(j) $ 249 $ 201 $ 147 $ 43 $ 26 Cash flow from operations 130 174 64 52 72 Cash flow from investing (116) (56) (25) (13) (25) Cash flow from financing (18) (105) (13) (26) (49) Ratio of earnings to fixed charges(k) 2.1x 8.4x 3.9x - -
_______________________________________________________________________________ Recapitalization, Offering, Redemption, Refinancing and Company are defined in the Management Discussion and Analysis of Financial Conditions and Results of Operation (a) Prior to February 25, 1991, the Company was wholly owned by Union Carbide. Certain of the Company's expenses, debt and other financial statement items for periods and at dates prior to such date include an allocation of certain of Union Carbide's expenses, debt and other financial statement items. Management believes that the allocation methods were reasonable. (b) Reduction of domestic inventory quantities in 1992 and 1991 resulted in liquidation of certain inventories carried on a "last in, first out" basis acquired at lower cost in prior years. These liquidations increased gross profit by $5 million and $9 million in 1992 and 1991, respectively, and reduced net loss by $3 million and $6 million in 1992 and 1991, respectively. (c) Represents costs recorded in connection with closing or downsizing operations at certain locations as part of the Company's restructuring and re-engineering projects. These costs consisted primarily of employee severance and relocation costs, write-offs of fixed assets and other shut down costs. (d) Includes, in 1995, non-recurring charges related to the Recapitalization of $8 million related to payments for senior subordinated credit facility and payments under the long-term incentive compensation plan and non-recurring expenses related to the Offering of $18 million for compensation expense related to accelerated vesting of performance stock options and matching restricted stock. (e) Resulted from early extinguishment of debt. (f) For unaudited pro forma net income per share, historical net income (loss) has been adjusted assuming that the Recapitalization, Offering, Redemption and Refinancing had occurred as of January 1, 1994. Historical net income (loss) per share has been omitted as the historical capitalization of the Company is not indicative of the Company's current capital structure. (g) Reflects common stock and common stock equivalents outstanding at December 31, 1995, including common stock equivalents calculated in accordance with the "treasury method," wherein the net proceeds from the exercise of common stock equivalents are assumed to repurchase shares of common stock at $25.74 (the average price for the twelve months ended December 31, 1995). (h) Excludes graphite electrodes sold by EMSA (Pty.) Ltd. the Company's 50% owned affiliate carried at equity ("EMSA"). Excludes employees of EMSA. (i) The quantity of graphite electrodes sold in the first quarter of 1994 was impacted by customer buy-ins during the fourth quarter of 1993 in advance of price increases effective in January 1994, and the quantity of graphite electrodes sold in the first quarter of 1995 was impacted by customer buy-ins in advance of price increases effective in April 1995. (j) EBITDA, for this purpose, means operating profit (loss) plus depreciation, amortization and the portion of restructuring charges applicable to fixed asset write-offs. The amount of restructuring costs applicable to fixed asset write-offs for the years ended December 31, 1993 and 1995 were $28 million and $22 million, respectively. Management believes that EBITDA is generally accepted as providing useful information regarding at company's ability to service and/or incur debt. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from continuing operations or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (k) Earnings used in computing the ratio of earnings to fixed charges consist of earnings before income taxes, cumulative effect of change in accounting principles, extraordinary charges and minority interest, plus the Company's share of earnings from EMSA and fixed charges. Fixed charges consist of interest expense, amortization of debt issuance costs, the portion of operating lease rental expense that is representative of the interest factor and the Company's share of interest expense of EMSA. For the years ended December 31, 1991 and 1992, earnings were insufficient to cover fixed charges by $41 million and $17 million, respectively. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ________________________________________________________________________________ GENERAL On January 26, 1995, UCAR International Inc. ("UCAR") consummated a leveraged recapitalization (the "Recapitalization") pursuant to the Recapitalization and Stock Purchase and Sale Agreement dated as of November 14, 1994 among Union Carbide Corporation ("Union Carbide"), Mitsubishi Corporation ("Mitsubishi"), UCAR and a Delaware corporation owned by Blackstone Capital Partners II Merchant Banking Fund L.P. and its affiliates (collectively, "Blackstone"). As used herein, references to the "Company" mean UCAR and its wholly and majority owned subsidiaries, including UCAR Global Enterprises Inc. ("Global"), collectively. Prior to the Recapitalization, the Company was owned equally by Union Carbide and Mitsubishi. On August 15, 1995, UCAR completed its initial public offering of common stock (the "Offering"). In connection with the Offering, UCAR sold common stock representing 22% of the common stock outstanding immediately after the Offering and Union Carbide sold all of the common stock then owned by it. As a result of the Recapitalization and the Offering, UCAR was owned 59% by Blackstone, Chemical Equity Associates and management (without giving effect to the exercise of outstanding stock options) and 41% by public stockholders at December 31, 1995. With proceeds from the Offering, the Company redeemed $175 million principal amount of its 12% Senior Subordinated Notes due 2005 (the "Subordinated Notes") at a redemption price of 110% of the principal amount thereof (the "Redemption"). On October 19, 1995, the Company refinanced its senior secured bank credit facilities established in connection with the Recapitalization (the "Recapitalization Bank Facilities") with new senior secured bank facilities (the "Senior Bank Facilities") at more favorable interest rates and with more favorable covenants (the "Refinancing"). The Redemption and the Refinancing will reduce the Company's interest expense by approximately $34 million annually (based on the principal amounts outstanding at the time of the Redemption and the Refinancing) COST REDUCTION INITIATIVES Beginning in the mid-1980s, the Company initiated a project to remove excess high cost capacity. This project was designed to close the older, highest cost facilities and increase the operating efficiencies of the remaining facilities. Five locations were closed as a result of this project (i.e., three separate manufacturing facilities in the Niagara Falls, New York area, a manufacturing facility in Sweden and a manufacturing facility in Puerto Rico). As a result of this project, the Company recorded fixed asset write-offs and severance costs in 1985 and 1987 through 1989. A second project was initiated in 1991 and continued through 1992 to re-engineer work processes in the manufacturing facilities and offices and to downsize the global work force. The Company, working with consultants, redesigned work processes to improve the productivity of the work force and eliminate unnecessary or redundant activities. The Company recorded severance costs associated with this project of $28 million and $8 million in 1991 and 1992, respectively. As a result of these projects, the Company developed a strategy to be the low cost producer in the industry. With the improved productivity and efficiencies that had been achieved in the manufacturing facilities, the Company identified another project, which was approved by UCAR's Board of Directors in 1993, to close the Company's highest cost and oldest graphite manufacturing facilities at that time, which were located in Sheffield, England and Forno Allione, Italy, and to increase production at lower cost manufacturing facilities in Europe and North America. The closing of these facilities resulted in fixed asset write-offs of $28 million and related shut down costs of $5 million. As a result of the projects described in the three preceding paragraphs, the Company has reduced its work force by approximately 2,100 employees, reduced the average manufacturing cycle time for graphite electrodes production by approximately 50% and achieved a one-third reduction in inventory levels. By the end of 1994, the Company had achieved annual cost savings of approximately $101 million (as compared to 1990). The Company expects to achieve additional annual cost savings from these projects aggregating $15 million by the end of 1996 (as compared to 1994). In 1995, as part of its low cost producer strategy, the Company commenced a project to close certain high cost manufacturing operations and to add modern lower cost manufacturing operations at its North American graphite electrode plants (the "Rationalization Project"). The Rationalization Project is expected to yield approximately $23 million in annual cost savings, with approximately $8 million in savings having been realized in 1995, $20 million expected to be realized in 1996 and the full $23 million expected to be realized in 1997 (in each case, as compared to 1994). The estimated capital expenditures of $27 million to build the new facilities and $4 million to shut down the old facilities were pre-funded as part of the Recapitalization. The Company has written-off fixed assets of approximately $22 million and recorded $8 million of shut down costs as restructuring costs in 1995 in connection with the Rationalization Project. Other smaller projects to improve raw materials technology, enhance equipment technology and upgrade certain production facilities (collectively, the "Technology Improvement Projects") are expected to yield approximately $5 million of additional annual cost savings by the end of 1997 (as compared to 1994). ACQUISITION OF MINORITY INTEREST In May and July 1994, the Company increased its ownership of its Mexican business from 79% to substantially 100% (at a net cost of $23 million). These transactions were accounted for as a purchase. In addition, in 1995, pursuant to a tender offer, the Company acquired a substantial percentage of the shares of its Brazilian subsidiary that had been owned by public shareholders in Brazil. As a result of these purchases the shares of the Brazilian subsidiary have been delisted from the Brazilian stock exchange. The acquisition was funded primarily from internally generated funds. The transaction was accounted for as a purchase and the aggregate purchase price through December 31, 1995 was $52 million, plus expenses of $3 million. CURRENCY MATTERS The Company sells its products in multiple currencies. The Company seeks to price its products based on dollar equivalent target prices for each of its subsidiaries. These target prices are based on an evaluation of the relevant exchange rates, the relationship between all of the target prices and other factors, if any, 22 which the Company may deem appropriate. Each subsidiary then seeks to institute price increases to achieve its target price when, as and if local conditions permit. A subsidiary may rescind a price increase or grant price discounts if required by local conditions. The impact on net sales of any price increase in foreign countries can be mitigated or exaggerated by changes in exchange rates. The Company has entered into hedging transactions to reduce its exposure to changes in exchange rates. While the Company focuses its sales on markets where local currencies are readily convertible into dollars, the Company from time to time makes sales to customers in other markets, particularly countries in the former Soviet Union and Eastern European and Middle Eastern countries. The terms of sale with respect to virtually all sales to customers in these markets require payment in dollars or deutsche marks and may additionally require prepayment or delivery of a bank letter of credit or equivalent security for payment. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Consolidated Statement of Operations and the increase or decrease (expressed as a percentage of such item in the comparable prior period) of such items. Percentage Increase (Dollars in millions) (Decrease) - ------------------------------------------------------------------------------- 1994 to 1993 to For the year ended December 31, 1995 1994 1993 1995 1994 - ------------------------------------------------------------------------------- Net sales $901 $758 $740 18.9% 2.4% Cost of sales 556 515 537 8.0 (4.1) --------------------------------------------- Gross profit 345 243 203 42.0 19.7 Selling, administrative and other expenses 115 79 73 45.6 8.2 Restructuring costs 30 - 33 N/M N/M Operating profit 189 162 80 16.7 102.5 _______________________________________________________________________________ N/M: Not meaningful. The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in the Consolidated Statement of Operations. For the year ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 61.7 67.9 72.6 -------------------------- Gross profit 38.3 32.1 27.4 Selling, administrative and other expenses 12.8 10.4 9.9 Restructuring costs 3.3 - 4.5 Operating profit 21.0 21.4 10.8 ____________________________________________________________________________ 1995 COMPARED TO 1994 Net sales for 1995 were $901 million, an increase of $143 million, or 19%, from net sales of $758 million in 1994. This increase was largely the result of the improved performance of the Company's graphite electrode business. This increase was driven primarily by increases in the volume and price of graphite electrodes sold. An 11% increase in the volume of graphite electrodes sold brought volume to 217,000 metric tons in 1995 from 196,000 metric tons in 1994. Substantially all of the volume increase resulted from increased sales in Eastern Europe, the Asia Pacific region and the Middle East. This volume increase also reflected the negative impact on volume in 1994 from customer orders placed in late 1993 in anticipation of announced price increases which became effective on January 1, 1994. The average selling price per metric ton (in dollars and net of changes in currency exchange rates) of graphite electrodes sold increased 9% in 1995 as compared to 1994. Net sales of the Company's other products were $224 million, an increase of $36 million, or 19%, from net sales of $188 million in 1994. This increase was a result of higher demand and increased prices for these products. Net sales for the Company's products outside of the United States amounted to $615 million, or 68% of total net sales, in 1995. Gross profit for 1995 was $345 million, an increase of $102 million, or 42%, from gross profit of $243 million for 1994. Price and volume increases of graphite electrodes sold, as well as continued improvement in manufacturing efficiency, helped to in-crease gross margin for 1995 to 38% as compared to 32% for 1994. Operating profit for 1995 was $189 million (21% of net sales), an increase of $27 million, or 17%, from operating profit of $162 million (21% of net sales) for 1994. On a pro forma basis, as if the Recapitalization, Offering, Redemption and Refinancing had occurred on January 1, 1994 operating profit for 1995 would have been $214 million (24% of net sales and a 35% increase from 1994 pro forma operating profit of $158 million), excluding $18 million of non-recurring compensation expense due to the accelerated vesting of performance options and matching restricted stock in connection with the Offering and $8 million of non-recurring costs related to the Recapitalization. Selling, administrative and other expenses increased 46% to $115 million in 1995 from $79 million in 1994. This increase was due primarily to (i) $18 million in executive compensation expenses associated with the accelerated vesting of performance stock options and matching restricted stock in connection with the Offering and $4 million scheduled vesting of performance stock options, (ii) $4 million increase in other variable compensation plans and (iii) $4 million increase of variable costs resulting from higher sales. 23 Restructuring costs were $30 million in 1995 as compared to none in 1994. The restructuring costs included fixed asset write-offs of $22 million and $8 million of related shutdown costs in connection with the Rationalization Project. Other (income) expense (net) was expense of $3 million in 1995 as compared to income of $5 million in 1994. The change was principally the result of a $6 million expense associated with a senior subordinated credit facility provided, but not used, in connection with the Recapitalization and a $4 million translation loss on dollar-denominated debt of the Company's foreign subsidiaries. Interest expense increased to $93 million in 1995 from $19 million in 1994. In 1995, the average outstanding total debt balance was $820 million and the average annual interest rate was 11.5% as compared to an average outstanding total debt balance of $254 million and an average annual interest rate of 7.4% in 1994. The increases were primarily the result of the Recapitalization. Provision for income taxes was $74 million in 1995 as compared to $37 million in 1994. The increase in income tax expense was primarily due to non-recurring taxes of approximately $37 million associated with the Recapitalization as a result of the repatriation to the United States of funds borrowed by foreign subsidiaries, partially offset by the effect of lower pre-tax income. Minority stockholders' share of income of the Company's Brazilian and Mexican subsidiaries decreased to $4 million in 1995 from $10 million in 1994 due to an increase in the Company's ownership of those subsidiaries. The minority interest of the Mexican subsidiary was purchased by the Company in May and July 1994 and substantially all of the minority interest of the Brazilian subsidiary was purchased by the Company in September 1995. The Company's share of net income of EMSA increased to $7 million in 1995 from $4 million in 1994 due to an increase in EMSA's earnings. The Company recorded an extraordinary charge of $37 million related to early extinguishment of debt (net of tax benefit of $20 million) resulting from the prepayment in connection with the Recapitalization of $175 million of senior notes issued by UCAR in 1994, the Redemption and the Refinancing. The extraordinary charge consisted of a premium of $18 million paid on the redemption of the Subordinated Notes and the write-off of deferred debt issuance costs of $39 million. Net loss for 1995 totaled $12 million as compared with net income of $100 million in 1994. On a pro forma basis, as if the Recapitalization, Offering, Redemption and Refinancing had occurred on January 1, 1994, net income for 1995 would have been $91 million (after giving effect to $20 million in after tax restructuring costs relating to the Rationalization Project), an increase of 52% from $60 million in 1994. The following table sets forth a summary of the results of operations for 1995, as adjusted for certain non-recurring expenses and costs: (dollars in millions) - ------------------------------------------------------------------------------- Operating Net Year Ended December 31, 1995 Profit Income - ------------------------------------------------------------------------------- As reported in the Consolidated Financial Statements $189 $(12) Non-recurring expenses, taxes and costs: Compensation expense due to accelerated vesting of performance stock options and matching restricted stock in connection with the Offering 18 12 Senior subordinated credit facility expense and long-term incentive compensation plan payments in connection with the Recapitalization 8 5 Extraordinary charge for early extinguishment of debt - 37 Taxes associated with the Recapitalization - 37 Pro forma interest adjustment to give effect to the Recapitalization, Offering, Redemption and Refinancing as if they occurred on January 1, 1995 (1) 12 - ------------------------------------------------------------------------------- Pro forma operating profit/net income $214 $ 91 - ------------------------------------------------------------------------------- Pro forma net income per share $1.87 _______________________________________________________________________________ 1994 COMPARED TO 1993 Net sales increased 2% to $758 million in 1994 from $740 million in 1993. This increase was attributable, in part, to increases in prices of graphite electrodes which took effect in both the first and third quarters of 1994 and the second half of 1993. The average selling price (in dollars and net of changes in currency exchange rates) was 12% higher in 1994 than 1993. The impact of the price increases was offset, in large part, by a 10% decrease in the quantity of graphite electrodes sold in 1994 as compared to 1993, primarily due to the effect of customer buy-ins in the last quarter of 1993 in advance of the first quarter of 1994 price increase and a decline in sales to countries of the former Soviet Union where EAF steel production has declined due to the general slowdown in their economies. Net sales of flexible graphite increased by $4 million and graphite specialty products increased by $8 million in 1994 as compared to 1993 due to increases in demand for these products and increases in prices of certain graphite specialty products. Net sales of carbon electrodes decreased by $2 million due to lower sales volume. In general, net sales in 1994 benefited from the continuing improved economic conditions and level of demand for EAF steel in North and South America. Cost of sales decreased 4% to $515 million in 1994 from $537 million in 1993. This decrease was primarily due to the 24 10% decrease in the quantity of graphite electrodes sold in 1994 as compared to 1993, and to a reduction in the Company's work force by 247 employees during 1994. These decreases were offset, in part, by an increase in cost of sales attributable to the increase in the quantity of flexible graphite and graphite specialty products sold, an average 6% increase in the cost of petroleum coke (a principal raw material) and inflationary increases in labor costs. As a result of the changes described above, gross profit margin increased to 32.1% in 1994 from 27.4% in 1993. Selling, administrative and other expenses increased 8% to $79 million in 1994 from $73 million in 1993. The increase in 1994 was principally attributable to an increase of $5 million payable under the variable compensation plans maintained by the Company as a result of improved financial performance by the Company. There were no restructuring costs in 1994 as compared to $33 million in 1993. The restructuring costs in 1993 were principally fixed asset write-offs related to the closure of two manufacturing facilities. Other (income) expense (net) was income of $5 million in 1994 as compared to expense of $10 million in 1993. The Company's interest income net of foreign currency adjustments increased by $12 million in 1994 as compared to 1993. Interest expense decreased to $19 million in 1994 from $21 million in 1993. In 1994, the average outstanding total debt balance was $20 million lower than in 1993, which resulted in a decrease in interest expense of $1 million. The average interest rate in 1994 was 0.4% lower than in 1993, which resulted in a decrease in interest expense of $1 million. Provision for income taxes was $37 million in 1994 as compared to $8 million in 1993. This increase was primarily due to the increase in the Company's pre-tax income. Minority stockholders' share of income of the Company's Brazilian and Mexican subsidiaries increased to $10 million in 1994 from $5 million in 1993 due to an increase in the earnings of those subsidiaries. The minority interest of the Mexican subsidiary was purchased by the Company in May and July 1994. The Company's share of net income of EMSA was $4 million in 1994, the same level as 1993. EFFECTS OF INFLATION In general, the Company's cost of sales is affected by the inflation in each country in which it has a manufacturing facility. During the past three years, the effects of inflation in the United States and foreign countries (except for hyperinflationary countries) have been offset by a combination of improved operating efficiency, improved pricing and permanent, on-going cost savings and, accordingly, have not been material to the Company. The Company maintains operations in Brazil and Mexico, countries which historically have had hyperinflationary economies. Through December 31, 1993, the financial statements of these foreign entities have been remeasured as if the respective functional currencies of the Brazilian and Mexican economic environments were the United States dollar. Accordingly, translation gains and losses were included in the Consolidated Statements of Operations. Foreign currency gains on debt and prior period tax liabilities are included in interest expense and provision for income taxes, respectively. Effective January 1, 1994, because of significant declines in the rate of inflation in Mexico, the Company changed its functional currency in Mexico to the new Mexican peso. The reporting currency amounts at the date of the change were translated into the local currency at the current exchange rates, and those amounts became the new functional currency accounting basis. Hyperinflation has not had a material effect on the Company's results of operations, because the Company has been able to mitigate the effects of hyperinflation by increasing prices generally in line with inflation as well as through improved efficiency and cost savings. The cost of petroleum coke, a principal raw material used by the Company, and natural gas, which is used by the Company in its electrode and graphite specialty products baking operations, may fluctuate widely for various reasons, including fuel shortages and cold weather. Changes in such costs have not been material to the Company during the past three years. EFFECTS OF CHANGES IN EXCHANGE RATES The company produces and sells its products in multiple currencies. In general, the Company's results of operations are affected by changes in currency exchange rates. However, the Company attempts to mitigate the effects of these rate changes by adjusting sales prices, in local currency, (to the extent permitted by local market conditions) to maintain a dollar equivalent target price. In addition, the Company engages in hedging activities aimed at limiting, in part, the impact of currency fluctuations. In connection with the Recapitalization, certain of the Company's foreign subsidiaries borrowed $343 million of dollar-denominated debt. In November 1995, the Company repatriated dollar-denominated debt of its Mexican subsidiary by replacing it with debt of Global. As a result of such repatriation and other principal payments, $217 million of dollar-denominated debt of the Company's foreign subsidiaries was outstanding at December 31, 1995. Fluctuations in the exchange rates between the dollar and the currencies in the countries in which these subsidiaries are located result in foreign currency gains and losses that are reported in other (income) expense (net) in the Consolidated Statements of Operations. Such currency gains and losses could, in the future, materially affect the Company's results of operations. However, the Company uses various off-balance sheet financial instruments to manage exposure to general economic and specific financial market risks caused by currency fluctuations. The amount of forward exchange contracts used by the Company to minimize foreign currency exposure was $269 million at December 31, 1995 ($80 million at December 31, 1994 and $3 million at December 31, 1993). In November 1995, the Company's foreign subsidiaries with dollar-denominated debt entered into forward foreign currency contracts to protect against future currency fluctuations. Premiums on the contracts are amortized over the life of the contracts, resulting in $4 million in charges which have been and will be amortized to other (income) expense (net) in 1995 and 1996. The Company believes that the repatriation of the dollar-denominated debt from its Mexican subsidiary and such forward currency contracts substantially mitigate the Company's exposure to currency fluctuations. 25 During December 1994 and in 1995, the Mexican peso devalued substantially against the dollar. As a result of this devaluation, the stockholders' equity of the Company's Mexican subsidiary was reduced by $14 million and $5 million during December 1994 and in 1995, respectively. This reduction had no impact on the Company's earnings, because translation gains and losses are reported in the cumulative foreign currency translation adjustment component of stockholders' equity. The selling price of graphite electrodes sold in Mexican pesos increased by 215% from December 1994 through December 1995, offsetting the significant devaluation of the peso against the dollar. Approximately 39% of the Mexican subsidiary's sales are made outside Mexico in dollars. The Company's dollar earnings from such sales benefit to the extent that local costs become lower in dollar terms. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of funds have consisted principally of invested capital, operating cash flow and debt financing from affiliates, banks and institutional investors. The Company's uses of those funds (other than for operations) have consisted principally of debt reduction, capital expenditures, distributions to stockholders (including the redemption of stock) and acquisition of minority stockholders' shares of consolidated subsidiaries. DEBT FINANCING AND DEBT REDUCTION Upon consummation of the Recapitalization, the Company, through Global and its subsidiaries, established the Recapitalization Bank Facilities which provided for borrowings of up to $685 million, of which $585 million was used in connection with the Recapitalization and $100 million was available on a revolving credit basis for general corporate purposes. In connection with the Recapitalization Bank Facilities, the Company entered into interest rate protection agreements. The cost of such agreements was approximately $3 million and is being amortized over the term of such agreements. From the time of the Recapitalization through October 18, 1995, the Company voluntarily repaid an aggregate of $75 million of indebtedness under the Recapitalization Bank Facilities, which repayment was funded from available cash and cash flow from operations. On October 19, 1995, the Company, through Global and its subsidiaries, refinanced the Recapitalization Bank Facilities with the Senior Bank Facilities at more favorable interest rates and with less restrictive covenants. The Senior Bank Facilities provide for borrowings of up to $620 million, of which $520 million was used in connection with the Refinancing and $100 million is available on a revolving credit basis for general corporate purposes. The Refinancing will reduce the Company's interest expense by approximately $13 million annually (based on the principal amount outstanding at the time of the Refinancing). The Senior Bank Facilities contain a number of significant covenants that among other things, limit the ability of the Company to dispose of assets, incur additional indebtedness, repay or refinance other indebtedness, amend other debt instruments, create liens on assets, enter into leases, make investments or acquisitions, engage in mergers or consolidations, make capital expenditures or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. In addition, under the Senior Bank Facilities, the Company is required to comply with specified financial ratios and tests, including minimum interest coverage and maximum leverage ratios. From October 19, 1995 through December 31, 1995, the Company voluntarily repaid an aggregate of $86 million of the term loans under the Senior Bank Facilities, which repayments were funded from available cash and cash flow from operations. In connection with the Recapitalization, the Company, through Global, issued $375 million aggregate principal amount of Subordinated Notes, of which $175 million aggregate principal amount were redeemed as described below. Interest is payable semi-annually on the Subordinated Notes at the rate of 12% per annum. Except as described below, the Company may not redeem the remaining Subordinated Notes prior to January 15, 2000. The Company may redeem the Subordinated Notes, in whole or in part, at specified redemption prices beginning at 104.5% of the principal amount of the Subordinated Notes redeemed for the year commencing January 15, 2000 and reducing to 100% of such principal amount for the years 2003 and thereafter, in each case with accrued and unpaid interest thereon. Upon a change of control, the Company has certain optional redemption rights and repurchase obligations. On August 15, 1995, UCAR completed the Offering. In connection with the Offering, UCAR sold common stock for net proceeds of $227 million., UCAR used such net proceeds to contribute to Global an amount sufficient to redeem $175 million aggregate principal amount of Subordinated Notes (the maximum amount permitted to be redeemed under the relevant indenture) at a redemption price equal to 110% of the aggregate principal amount thereof, plus accrued interest thereon of $4 million. The Redemption will result in annual interest savings of $21 million. UCAR used the balance of the net proceeds for general corporate purposes and to reduce other outstanding indebtedness. At December 31, 1995, the Company had total debt of $668 million as compared to $247 million at December 31, 1994, and a stockholders' deficit of $167 million at December 31, 1995 as compared to stockholders' equity of $192 million at December 31, 1994. The Company believes that cash flow from operations combined with its $100 million revolving credit facility and existing cash balances will be adequate to meet the Company's debt service requirements, fund continued capital requirements, allow for growth opportunities and meet working capital and general corporate needs. INVENTORY LEVELS AND WORKING CAPITAL As a result of efficiencies achieved pursuant to the Company's restructuring and re-engineering projects, there has been a reduction in the inventory levels maintained by the Company with respect to finished products, work in process, raw materials and supplies. Inventories decreased from $180 million at January 1, 1991 to $136 million at December 31, 1995. Inventory levels at any specified date are affected by increases in inventories of raw materials to meet anticipated increases in sales of finished products, customer buy-ins in advance of announced price increases, changes in scheduled production by the Company to meet anticipated customer buy-ins and other factors. The Company's working capital decreased to $175 million 26 at December 31, 1995 from $195 million at December 31, 1994, as a result of capital expenditures, payment of taxes, repayment of indebtedness and the acquisition of the minority interest in the Company's Brazilian subsidiary. Cash and cash equivalents were $7 million lower at December 31, 1995 than at December 31, 1994. Cash and cash equivalents at December 31, 1995 included $7 million held in escrow for pre-funding of the Rationalization Project. Accrued income and other taxes increased by $30 million to $50 million in 1995 from $20 million at December 31, 1994. This increase primarily resulted from estimated tax liabilities of $37 million associated with the Recapitalization. Notes and accounts receivable increased 22%, or $32 million, from December 31, 1994 to December 31, 1995. This increase resulted primarily from the increase in net sales. CAPITAL EXPENDITURES Capital expenditures aggregated $65 million (including $26 million for the Rationalization Project) in 1995. The Company expects capital expenditures in 1996 to total approximately $55 to $60 million (including approximately $19 million for the Rationalization Project, the "focused factory" project and the Technology Improvement Projects). Capital expenditures aggregated $34 million and $26 million in 1994 and 1993, respectively. Except for the "focused factory" Project, most of the Company's capital expenditures have been, and are expected to be, made to maintain existing facilities and equipment, achieve cost savings and improve operating efficiency. The estimated capital expenditures for the Rationalization Project of $27 million to build new facilities and $4 million to pay costs to shut down old facilities were pre-funded under the Recapitalization Bank Facilities as part of the Recapitalization. During 1995, in connection with the Rationalization Project, the Company wrote-off fixed assets of $22 million and recorded $8 million of facility closing expenses and environmental clean-up costs. In December 1995, UCAR's Board of Directors approved the "focused factory" project at estimated cost of $16 million, consisting of $15 million of capital expenditures and $1 million of other expenses, which is expected to be completed by the end of 1998. Limited worldwide capacity and growing demand for superfine grain graphite products prompted the decision to expand manufacturing capacity over the next two years by installing a "focused factory" within our Clarksburg, West Virginia facility. Used in the semi-conductor industry as well as in continuous casting and electrical discharge machining applications, the market for superfine graphite products is estimated at $400 million annually and is projected to grow at a faster pace than our core electrode markets. Capital expenditures for environmental protection have not been and are not expected to be a significant factor with respect to the Company's capital expenditures as a whole. CASH DISTRIBUTIONS AND RESTRICTIONS ON DIVIDENDS OR DISTRIBUTIONS The Company made cash distributions to Union Carbide and Mitsubishi aggregating $21 million in 1993, $84 million on September 30, 1994 and $10 million on January 20, 1995. On January 26, 1995, in connection with the Recapitalization, the Company repurchased and cancelled all of the common equity then held by Mitsubishi for $406 million and paid to Union Carbide a dividend of $347 million. In March 1995, Union Carbide and Mitsubishi refunded approximately $7 million of the $10 million distributed on January 20, 1995 as required by the relevant agreements. Under the Senior Bank Facilities, Global and UCAR are generally permitted to pay dividends to their respective stockholders only in an annual amount up to the greater of $15 million or a specified percentage of adjusted consolidated net income. The indenture relating to the Subordinated Notes also limits the payment of dividends by Global to UCAR. CHANGES IN ACCOUNTING STANDARDS In November 1992, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 112, "Employers' Accounting for Postemployment Benefits," which requires that an employer's future obligation for the payment of postemployment benefits (consisting of benefits payable after employment but before retirement such as severance or salary continuation payments, disability payments, job retraining and outplacement assistance) to former or inactive employees be recognized on the accrual basis during the periods that employees render service to earn such benefits. This obligation is unfunded. The Company adopted SFAS 112 effective January 1, 1993 and recorded a charge of $20 million (after a tax benefit of $5 million) for the cumulative effect of the change on results of operations in prior years. In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation" which is effective for years beginning after December 15, 1995. SFAS 123 permits a fair value based method of accounting for employee stock compensation plans. It also allows a company to continue to use the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Companies electing to continue to use the accounting prescribed by APB 25 must make pro forma disclosures of net income and net income per share as if the fair value based method of accounting defined in SFAS 123 had been applied. The Company has not yet determined which method of accounting it will apply when it adopts SFAS 123 in 1996. COSTS RELATING TO PROTECTION OF THE ENVIRONMENT The Company has been and is subject to increasingly stringent environmental protection laws and regulations. In addition, the Company has an on-going commitment to rigorous internal environmental protection standards. Expenses relating to environmental protection were approximately $15 million, $10 million and $13 million in 1995, 1994 and 1993, respectively. Capital expenditures relating to environmental protection were approximately $6 million, $5 million and $3 million in 1995, 1994 and 1993, respectively. 27 UCAR International Inc. and Subsidiaries SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA _______________________________________________________________________________ The table below sets forth selected consolidated financial data for each quarter of 1995 and 1994:
1st 2nd 3rd 4th (Dollars in millions, except per share data) quarter quarter quarter quarter - -------------------------------------------------------------------------------------------- 1995 Net sales $ 210 $ 227 $ 220 $ 244 Gross profit 74 88 84 99 Income (loss) before extraordinary charge (46)(a) 27 13(c) 31 Net income (loss) (46) 25(b) (3)(b) 12(b) Pro forma net income (loss) per share(d) $(0.01) $0.67 $0.58 $0.65 - -------------------------------------------------------------------------------------------- 1994 Net sales $ 175 $ 189 $ 193 $ 201 Gross profit 51 60 64 68 Income before extraordinary charge 17 24 24 35 Net income 17 24 24 35
_______________________________________________________________________________ (a) Includes restructuring costs of $20 million after taxes, non-recurring charges related to the Recapitalization of $6 million after taxes and taxes associated with the Recapitalization of $37 million. (b) Includes extraordinary charges resulting from early extinguishment of debt of $2 million after taxes for the second quarter, $16 million after taxes for the third quarter and $19 million after taxes for the fourth quarter. (c) Includes compensation expense of $12 million after taxes resulting from the accelerated vesting of performance stock options and restricted matching stock in connection with the Offering. (d) For unaudited pro forma net income (loss) per share, historical net income (loss) has been adjusted assuming that the Recapitalization, the Offering, the Redemption and the Refinancing had occurred as of January 1, 1995. Historical net income (loss) per share has been omitted as the historical capitalization of the Company is not indicative of the Company's current capital structure. 28 UCAR International Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS _______________________________________________________________________________ (Dollars in millions except per share data) - ------------------------------------------------------------------------------- At December 31, 1995 1994 - ------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 53 $ 60 Notes and accounts receivable 180 148 Inventories: Raw materials and supplies 28 31 Work in process 78 66 Finished goods 30 25 - ------------------------------------------------------------------------------- 136 122 Prepaid expenses 34 32 - ------------------------------------------------------------------------------- Total current assets 403 362 - ------------------------------------------------------------------------------- Property, plant and equipment 1,013 970 Less: accumulated depreciation 635 595 - ------------------------------------------------------------------------------- Net fixed assets 378 375 - ------------------------------------------------------------------------------- Company carried at equity 18 16 Other assets 65 25 - ------------------------------------------------------------------------------- Total assets $ 864 $ 778 _______________________________________________________________________________ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 56 $ 48 Short-term debt 31 20 Payments due within one year on long-term debt 1 4 Accrued income and other taxes 50 20 Other accrued liabilities 90 75 - ------------------------------------------------------------------------------- Total current liabilities 228 167 - ------------------------------------------------------------------------------- Long-term debt 636 223 Other long-term obligations 137 108 Deferred income taxes 20 34 Minority stockholders' equity in consolidated entities 5 54 Common stock subject to "puts" 8 - Less: related loans to management (3) - - ------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock - par value $.01; authorized - 10,000,000 shares; issued - none - - Common stock - par value $.01; authorized - 100,000,000 shares; issued - 45,961,718 shares - - Additional paid-in capital 485 139 Cumulative foreign currency translation adjustment (116) (109) Retained earnings (deficit) (536) 162 - ------------------------------------------------------------------------------- Total stockholders' equity (deficit) (167) 192 - ------------------------------------------------------------------------------- Total liabilities and stockholders' equity (deficit) $ 864 $ 778 _______________________________________________________________________________ See accompanying Notes to Consolidated Financial Statements 29 UCAR International Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS _______________________________________________________________________________ (Dollars in millions except per share data) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Net sales $ 901 $758 $740 Cost of sales 556 515 537 - ------------------------------------------------------------------------------- Gross profit 345 243 203 Research and development 8 7 7 Selling, administrative and other expenses 115 79 73 Restructuring costs 30 - 33 Other (income) expense (net) 3 (5) 10 - ------------------------------------------------------------------------------- Operating profit 189 162 80 - ------------------------------------------------------------------------------- Interest expense 93 14 10 Interest expense - C&M Finance & Trading, B.V. (affiliate) - 5 11 - ------------------------------------------------------------------------------- Total interest expense 93 19 21 - ------------------------------------------------------------------------------- Income before provision for income taxes 96 143 59 Provision for income taxes 74 37 8 - ------------------------------------------------------------------------------- Income of consolidated entities 22 106 51 Less: minority stockholders' share of income 4 10 5 Plus: UCAR share of net income from company carried at equity 7 4 4 - ------------------------------------------------------------------------------- Income before extraordinary charge and cumulative effect of change in accounting principles 25 100 50 Extraordinary charge, net of tax 37 - - - ------------------------------------------------------------------------------- Income (loss) before cumulative effect of change in accounting principles (12) 100 50 Cumulative effect on prior years of change in accounting principles for postemployment benefits - - (20) - ------------------------------------------------------------------------------- Net income (loss) $ (12) $100 $ 30 _______________________________________________________________________________ Per share data (unaudited) (note 19): Pro forma net income per share $1.87 _______________________________________________________________________________ See accompanying Notes to Consolidated Financial Statements 30 UCAR International Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Equivalents _______________________________________________________________________________ (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ (12) $ 100 $ 30 Extraordinary charge, net of tax 37 - - Non-cash (credits) charges to net income (loss): Depreciation 38 39 39 Deferred income taxes (18) (4) (11) Restructuring costs 30 - 33 Vesting of performance stock options 19 - - Cumulative effect of accounting changes - - 18 Other non-cash charges 11 10 1 Investing credits to net income - (1) - Working capital* 14 32 (36) Long-term assets and liabilities 11 (2) (10) - ------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 130 174 64 - ------------------------------------------------------------------------------- CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures (65) (34) (26) Purchase of minority shares in subsidiary (55) (23) - Redemption/sale of assets 4 1 1 - ------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (116) (56) (25) - ------------------------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Short-term debt (11) (174) 16 Long-term debt borrowings 1,480 220 - Long-term debt reductions (1,088) (67) (8) Financing costs (70) - - Sale of common stock, net of loans to management 427 - - Cash distribution to stockholders (756) (84) (21) - ------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (18) (105) (13) - ------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (4) 13 26 Effect of exchange rate changes on cash and cash equivalents (3) (7) - Cash and cash equivalents at beginning of period 60 54 28 - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 53 $ 60 $ 54 _______________________________________________________________________________ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Net cash paid during the year for: Interest expense $ 79 $ 16 $ 20 Income taxes 30 30 9 _______________________________________________________________________________ Net change in working capital by component (excluding cash and cash equivalents, deferred income taxes and short-term debt): (Increase) decrease in current assets Notes and accounts receivable: Sale of receivables - $ 4 $(22) Other changes (25) 53 (50) Inventories (16) (15) 2 Prepaid expenses and other current assets (5) (2) (2) Increase (decrease) in payables and accruals 60 (8) 36 - ------------------------------------------------------------------------------- Working capital $ 14 $ 32 $(36) _______________________________________________________________________________ See accompanying Notes to Consolidated Financial Statements 31 UCAR International Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) _______________________________________________________________________________
(Dollars in millions) - --------------------------------------------------------------------------------------------------------- Cumulative Foreign Total Additional Currency Retained Stockholders' Common Paid-in Translation Earnings Equity Stock Capital Adjustment (Deficit) (Deficit) ------ --------- ---------- --------- ------------ BALANCE AT DECEMBER 31, 1992 $ 81 $ 86 $ (79) $ 110 $ 198 Formation of UCAR International Inc. (81) 81 - - - Translation adjustments - (1) (18) - (19) Net income - - - 30 30 Dividends paid - - - (21) (21) - --------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 - 166 (97) 119 188 Cash distribution to stockholders - (27) - (57) (84) Translation adjustment from liquidated investment included in determining net income - - 2 - 2 Change in functional currency in Mexico - - (8) - (8) Translation adjustment - - (6) - (6) Net income - - - 100 100 - --------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 - 139 (109) 162 192 Sale of common stock - 424 - - 424 Vesting of performance stock options - 19 - - 19 Repurchase and cancellation of common stock - (70) - (336) (406) Dividends paid - - - (350) (350) Transaction fees - (9) - - (9) Transfer of pension liability from Union Carbide Corporation - (18) - - (18) Translation adjustments - - (7) - (7) Net (loss) - - - (12) (12) - --------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 $ - $ 485 $(116) $(536) $(167)
_______________________________________________________________________________ See accompanying Notes to Consolidated Financial Statements 32 UCAR International Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS _______________________________________________________________________________ NOTE 1 DISCUSSION OF BUSINESS AND STRUCTURE UCAR International Inc. ("UCAR") and its subsidiaries (collectively with UCAR, the "Company") is engaged in the development, manufacturing and marketing of carbon and graphite products for the steel, ferroalloys, aluminum, chemicals, aerospace and transportation industries. Its principal products are graphite electrodes, carbon electrodes, specialty graphite and flexible graphite. BACKGROUND The Company was formerly the Carbon Products Division of Union Carbide Corporation ("Union Carbide"). On February 25, 1991, a 50% interest in the Company was sold by Union Carbide to Mitsubishi Corporation ("Mitsubishi"). From that date until December 31, 1993, Union Carbide and Mitsubishi owned equal shares of 100% of the common stock of UCAR Carbon Company Inc., UCAR Carbon Navarra, S.L., UCAR Carbon Canada Inc. and UCAR Carbon France S.A. and 50.24% of the common stock of UCAR Carbon S.A. UCAR Carbon Company Inc. owns an additional 2.31% of UCAR Carbon S.A. Effective December 31, 1993, the shares of these companies owned by Union Carbide and Mitsubishi were transferred to UCAR International Inc., a newly formed holding company owned in equal shares by Union Carbide and Mitsubishi. LEVERAGED RECAPITALIZATION On January 26, 1995, the Company consummated a leveraged recapitalization (the "Recapitalization") pursuant to the Recapitalization and Stock Purchase and Sale Agreement (the "Agreement"), dated as of November 14, 1994, among UCAR, Union Carbide, Mitsubishi and a Delaware corporation owned by Blackstone Capital Partners II Merchant Banking Fund L.P., Blackstone Offshore Capital Partners II L.P. and an affiliate (collectively, "Blackstone"). The principal elements of the Recapitalization included the following: . The sale of newly issued shares of common stock of UCAR for cash of $203 million to Blackstone, certain members of management of the Company and Chemical Equity Associates (a limited partnership affiliated with Chemical Bank). . The repurchase and cancellation of all shares of common stock of UCAR held by Mitsubishi for cash of $406 million. . The payment of a cash dividend on the shares of common stock of UCAR held by Union Carbide in the amount of $347 million. . The repayment of existing indebtedness of the Company consisting of (a) $69 million of outstanding loans under its then existing credit agreements, (b) $175 million of senior notes and (c) $6 million of other indebtedness. . The borrowing by UCAR Global Enterprises Inc., a direct wholly owned subsidiary of UCAR ("Global") and certain of its foreign subsidiaries of $585 million under a new $695 million senior bank facility obtained by Global from a syndicate of banks led by Chemical Bank, as agent (the "Recapitalization Bank Facilities"). The Recapitalization Bank Facilities were refinanced in October 1995 (the "Refinancing") with a new $630 million senior bank facility (the "Senior Bank Facilities"). . The issuance by Global of $375 million of 12% Senior Subordinated Notes due 2005 (the "Recapitalization Notes"), which were sold in an offering exempt from registration with the Securities and Exchange Commission (the "Commission"). UCAR and Global filed with the Commission a registration statement with respect to an offer to exchange the Recapitalization Notes for a series of notes (the "Subordinated Notes") of Global with terms substantially identical to the Recapitalization Notes, which registration statement became effective on May 11, 1995. The exchange was consummated in June 1995. $175 million of Subordinated Notes were redeemed in September 1995 at a redemption price of 110% of the principal amount thereof (the "Redemption"). Total financing fees and legal, accounting and other related costs of the Recapitalization amounted to approximately $62 million. $6 million of these costs ($4 million after income tax) were charged to other (income) expense (net) at the date of the Recapitalization. Costs of $7 million associated with the sale and redemption of common stock have been charged to additional paid-in capital. Financing costs of $49 million associated with the Recapitalization Bank Facilities and the Subordinated Notes were deferred. The unamortized portion of fees and costs associated with the Recapitalization Bank Facilities were written off in the fourth quarter of 1995 in connection with the refinancing. A portion of such fees associated with the Subordinated Notes was written off in connection with the Redemption. In addition, tax expense of approximately $37 million was incurred as a result of the repatriation to the U.S. of funds borrowed by certain foreign subsidiaries as part of the Recapitalization. Retirement, death and disability benefits related to employee service through February 25, 1991 are covered by the Union Carbide retirement plan. Benefits paid by the Union Carbide retirement plan are based on final average pay through February 25, 1991 plus salary increases (not to exceed 6% per year) until January 26, 1995 when Union Carbide ceased to own at least 50% of the equity of UCAR. The Company's projected benefit obligation increased, and Union Carbide's projected benefit obligation decreased, by approximately $28 million ($18 million after income taxes) attributable to such estimated future salary increases upon consummation of the 33 Recapitalization. The increase in the Company's projected benefit obligation was charged to additional paid-in capital. On September 30, 1994, UCAR made a cash distribution of $84 million to its stockholders. UCAR's Board of Directors designated that $57 million of such distribution be paid from retained earnings and $27 million be paid from additional paid-in capital. On January 20, 1995, UCAR paid a dividend to stock-holders of $10 million and, on March 29, 1995, approximately $6.5 million was refunded to UCAR as part of the Recapitalization. STOCK SPLITS On January 26, 1995, UCAR's Board of Directors increased the authorized shares of common stock of UCAR to 1,170,000 shares and approved a 1,000-for-one stock split. On July 17, 1995, UCAR's Board of Directors approved an increase in the authorized shares of common stock of UCAR to 100 million shares and a 35.507-for-one stock split effective August 3, 1995. All share and per share amounts have been adjusted to reflect both stock splits. INITIAL PUBLIC OFFERING On July 17, 1995, UCAR's Board of Directors approved: (i) the filing of a registration statement to proceed with an initial public offering of its common stock (the "Offering"); (ii) the Redemption, with proceeds of the Offering, of up to $175 million principal amount of Subordinated Notes at a redemption price of 110% of the principal amount thereof; and (iii) an amendment to the Management Stock Option Plan to provide for the immediate vesting, upon the closing of the Offering, of performance options for 1,190,292 shares of common stock which were scheduled to vest in 1995, 1996 and 1997 if EBITDA for those years was equal to or exceeded target amounts. Upon consummation of the Offering, UCAR recognized compensation expense of $18 million in connection with the accelerated vesting of performance stock options and matching restricted stock. On August 9, 1995, UCAR's registration statement became effective and on August 15, 1995, 10,120,000 shares were sold by UCAR and 8,876,750 shares were sold by Union Carbide at a price to the public of $23.75 per share. After the closing of the Offering, Blackstone and Union Carbide beneficially owned 53.5% and none, respectively, of the outstanding shares of common stock. The net proceeds to UCAR from the Offering were $227 million, after deducting underwriting discounts paid by UCAR. UCAR contributed sufficient net proceeds from the Offering to Global to redeem $175 million aggregate principal amount of Subordinated Notes (the maximum amount permitted to be redeemed under the applicable indenture) at a redemption price equal to 110% of the aggregate principal amount thereof, plus accrued interest thereon of approximately $4 million. The balance of the net proceeds were used for general corporate purposes and to reduce other outstanding indebtedness. UCAR did not receive any of the proceeds from the sale of shares by Union Carbide. OTHER TRANSACTIONS In May and July 1994, the Company increased its ownership of its Mexican subsidiary from 78.8% to 100% (at a cost of $23 million). This transaction was effected through a purchase. The Consolidated Financial Statements have not been restated to reflect the increased ownership at any date or for any period prior to the date of purchase. On September 11, 1995, pursuant to a tender offer, the Company acquired a substantial percentage of the shares of its Brazilian subsidiary, UCAR Carbon S.A., that had been owned by public shareholders in Brazil. The aggregate purchase price through December 31, 1995 was $52 million, plus expenses of $3 million. The acquisition was accounted for as a purchase transaction and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on estimated fair values. _______________________________________________________________________________ NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Consolidated Financial Statements present the consolidated financial position and results of operations of the Company for all periods presented. All significant intercompany transactions have been eliminated in consolidation. CASH EQUIVALENTS Cash equivalents are considered to be all highly liquid investments that are readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. INVENTORIES Inventories are stated at cost or market, whichever is lower. Cost is determined generally on the "last-in, first-out" ("LIFO") method in the United States. The "average cost" method is used by elsewhere. Approximately 34% of inventory amounts before application of the LIFO method at December 31, 1995 (33% at December 31, 1994) have been valued on the LIFO basis. If inventories had been valued at current costs, they would have been approximately $40 million and $41 million higher at December 31, 1995 and 1994, respectively. FIXED ASSETS AND DEPRECIATION Fixed assets are carried at cost. Expenditures for replacements are capitalized and the replaced items are retired. Gains and losses from the sale of property are included in other (income) expense (net). 34 Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The Company generally uses accelerated depreciation methods for tax purposes, where appropriate. Depreciation expense was $38 million in 1995 ($39 million in both 1994 and 1993). During 1995, the Company capitalized $1 million of interest costs as part of property, plant and equipment. COMPANY CARRIED AT EQUITY The Company's investment in EMSA (Pty.) Ltd. ("EMSA"), a 50%-owned company, is carried on the equity basis and its proportional share of the net income of EMSA is reported in income under the caption "UCAR share of net income from company carried at equity." At December 31, 1995, retained earnings included $35 million, representing UCAR's share of the undistributed earnings (prior to foreign currency translation adjustment) of EMSA. Dividends received by UCAR from EMSA were $4 million in 1995 ($2 million in each of 1994 and 1993). DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into forward foreign exchange contracts and currency option collars to manage exposure to foreign exchange fluctuations. These contracts and collars hedge primarily United States dollar-denominated debt held by several of the Company's foreign subsidiaries and identifiable foreign currency receivables, payables, and commitments. Forward exchange contracts are agreements to exchange different currencies at a specified future date and a specified rate. Premiums and discounts on forward exchange contracts are amortized over the lives of the contracts. Currency option collars are financial arrangements for simultaneous purchase and sale 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 premium cost. Net premiums on options bought and sold are amortized over the life of the option. Forward exchange contracts and currency option collars are carried at market value. Gains and losses due to revaluation of these contracts or option positions are recognized currently as other income or other expense, and are intended to mitigate income or expense caused by the accounting revaluation of foreign subsidiaries, net United States dollar positions. 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. RETIREMENT PLAN Effective February 26, 1991, the Company formed its U.S. retirement plan. Prior to February 26, 1991, the Company's employees in the United States were included in Union Carbide's U.S. retirement plan. The cost of pension benefits under the plan is determined by an independent actuarial firm using the "projected unit credit" actuarial cost method. Contributions to the plan are made in accordance with the requirements of the Employee Retirement Income Security Act of 1974. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The Company provides health care and life insurance benefits for eligible retired employees. These benefits are provided through various insurance companies and health care providers. The estimated cost of future medical and life insurance benefits is determined by an independent actuarial firm using the "projected unit credit" actuarial cost method. Such costs are recognized as employees render the service necessary to earn the postretirement benefits. Benefits have been accrued, but not funded. POSTEMPLOYMENT BENEFITS Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 112, "Accounting for Postemployment Benefits," which requires that postemployment benefits expected to be paid before retirement, principally severance, be accrued over employees' active service period. The cumulative effect of the change in the method of accounting is reported in the 1993 Consolidated Statement of Operations. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION Generally, except for Brazil (and Mexico prior to 1994), unrealized gains and losses resulting from translating foreign companies' assets and liabilities into U.S. dollars are accumulated in an equity account on the balance sheet until such time as the company is sold or substantially or completely liquidated. Translation gains and losses relating to operations of companies in Brazil (and in Mexico prior to 1994), where hyperinfla- 35 tion exists, are included in the Consolidated Statement of Operations. Foreign currency gains on debt and prior period tax liabilities of companies operating in Brazil are included in interest expense and provision for income taxes, respectively. Effective January 1, 1994, because of significant declines in the rate of inflation in Mexico, the Company changed its functional currency in Mexico from the U.S. dollar to the new Mexican peso. The change in the functional currency required the application of the current rate translation method, wherein all assets and liabilities are translated using the quoted period-end exchange rate and all revenues are translated at the average rate of exchange in effect during the period. As a result of the change, the new functional currency bases exceed the local currency bases of nonmonetary items. The difference between the bases resulted in temporary differences generating a deferred tax liability of $8 million, the effect of which was recorded as an initial adjustment to the cumulative foreign currency translation adjustment component of stockholders' equity. During 1994, the Company concluded a substantially complete liquidation of its investments in UCAR Finance and Trading S.A. (Switzerland) and UCAR Carbon Limited (United Kingdom). Accordingly, the Company wrote off the attributable pro rata amounts of accumulated translation adjustments of $2 million that were previously reported in the cumulative foreign currency translation adjustment component of stockholders' equity. RECLASSIFICATION Certain reclassifications have been made to the 1994 and 1993 amounts in order to conform to the 1995 presentation. _______________________________________________________________________________ NOTE 3 UCAR GLOBAL ENTERPRISES INC. UCAR has no material assets, liabilities or operations other than those that result from its ownership of 100% of the outstanding common stock of Global. The following is a summary of the consolidated assets and liabilities of Global and its subsidiaries at December 31, 1995 and 1994 and its consolidated results of operations for the years ended December 31, 1995, 1994 and 1993: (Dollars in millions) - ------------------------------------------------------------------------------- At December 31, 1995 1994 - ------------------------------------------------------------------------------- ASSETS: Current assets $ 403 $362 Non-current assets 461 416 - ------------------------------------------------------------------------------- Total assets $ 864 $778 - ------------------------------------------------------------------------------- LIABILITIES: Current liabilities $ 228 $167 Non-current liabilities 793 365 - ------------------------------------------------------------------------------- Total liabilities $1,021 $532 - ------------------------------------------------------------------------------- Minority stockholders' equity in consolidated entities $ 5 $ 54 _______________________________________________________________________________ (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Net sales $901 $758 $740 Gross profit 345 243 203 Income before extraordinary charge and cumulative effect of change in accounting principles 25 100 50 Net income (loss) (12) 100 30 _______________________________________________________________________________ 36 NOTE 4 FINANCIAL INSTRUMENTS The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate risk and specific financial markets risk caused by currency fluctuations. FOREIGN CURRENCY CONTRACTS The amount of forward foreign exchange contracts used by the Company to minimize foreign currency exposure was $269 million at December 31, 1995 ($80 million at December 31, 1994 and $3 million at December 31, 1993). Approximately $11 million (4%) of these contracts were offsetting at December 31, 1995 ($13 million (16%) at December 31, 1994). The remaining contracts hedged existing assets and liabilities. At December 31, 1995, $198 million of these contracts hedged U.S. dollar-denominated debt held by the Company's foreign subsidiaries. Market risk was not expected to have a material adverse effect on the consolidated financial position of the Company at December 31, 1995. CURRENCY OPTIONS In order to minimize foreign exchange exposure related to U.S. dollar-denominated debt held by a French subsidiary, the Company has entered into a currency option collar which allows it to buy or sell $20 million U.S. dollars at strike prices which effectively limit foreign currency exposure to a band between 5.00 and 4.79 French Francs to the U.S. Dollar. There was no premium cost associated with this collar. SALE OF RECEIVABLES During 1995, certain of the Company's foreign subsidiaries sold receivables of $10 million ($11 million in 1994 and $14 million in 1993) without recourse and sold $42 million in 1995 ($38 million in 1994 and $21 million in 1993) of receivables with recourse to banking institutions. At December 31, 1995 and 1994, $13 million of these receivables remained uncollected from customers. INTEREST RATE RISK MANAGEMENT During 1995, the Company entered into agreements with financial institutions which limit the Company's exposure to increases in variable interest rates. At December 31, 1995, the Company had interest rate caps on $375 million of debt which limits the interest expense on this debt to 8.5% through 1997. Fees related to these agreements are charged to other (income) expense (net) over the term of the agreements. During 1992, the Company entered into agreements with financial institutions which effectively set interest rate limits on $80 million of the Company's short-term debt to a range of approximately 4.75% to 6.375% for a three year period. These agreements included interest rate collars of $70 million. The effects of these contracts were not material to the results of operations in 1995, 1994 or 1993. Fees related to these agreements are charged to other (income) expense (net) over the term of the agreement. FAIR MARKET VALUE DISCLOSURES Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Market Value of Financial Instrument's" defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Such fair values must often be determined by using one or more methods that indicate value based on estimates of quantifiable characteristics as of a particular date. Values were estimated as follows: CASH, SHORT-TERM RECEIVABLES AND ACCOUNTS PAYABLE - 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, 1995 and 1994, except for the Subordinated Notes which are carried at $200 million and have an estimated fair value at December 31, 1995 of $230 million. FOREIGN CURRENCY CONTRACTS - Foreign currency forward contracts, both purchased and written, are carried at market. 37 _______________________________________________________________________________ NOTE 5 GEOGRAPHIC SEGMENT DATA The following is a summary of net sales, operating profit and total assets by geographic area: (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Net sales: U.S. $354 $320 $299 Canada and Mexico 118 107 96 Brazil 55 62 66 Europe 374 269 279 - ------------------------------------------------------------------------------- Total $901 $758 $740 - ------------------------------------------------------------------------------- Operating profit: U.S. $ 17 $ 42 $ 31 Canada and Mexico 43 30 16 Brazil 14 21 9 Europe 115 69 24 - ------------------------------------------------------------------------------- Total $189 $162 $ 80 - ------------------------------------------------------------------------------- Operating profit shown above includes the following costs: Restructuring: U.S. $ 29 $ - $ - Europe 1 - 33 Compensation due to accelerated vesting of performance stock options and matching shares: U.S. 22 - - - ------------------------------------------------------------------------------- Total $ 52 $ - $ 33 - ------------------------------------------------------------------------------- Transfers between geographic segments were as follows: U.S. $122 $106 $ 95 Canada and Mexico 37 30 24 Brazil 12 5 - Europe 10 1 3 - ------------------------------------------------------------------------------- Total $181 $142 $122 _______________________________________________________________________________ Finished products are transferred between segments at estimated market price less a reseller's commission and unfinished products are transferred at cost plus a mark-up to allow for a fair profit at the manufacturing location. At December 31, - ------------------------------------------------------------------------------- Total assets: U.S. $351 $280 $272 Canada and Mexico 134 125 146 Brazil 135 128 119 Europe 324 274 330 Inter-segment eliminations (80) (29) (36) - ------------------------------------------------------------------------------- Total $864 $778 $831 _______________________________________________________________________________ 38 NOTE 6 COMPANY CARRIED AT EQUITY The following is a financial summary of EMSA, the Company's 50%-owned company carried at equity: (Dollars in millions) _______________________________________________________________________________ For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Net sales $68 $53 $53 Cost of sales 42 37 38 Selling, administrative and other expenses 4 3 3 Other (income) expense (net) (1) - (2) Income taxes 10 5 6 - ------------------------------------------------------------------------------- Net income $13 $ 8 $ 8 - ------------------------------------------------------------------------------- UCAR share of net income $ 7 $ 4 $ 4 _______________________________________________________________________________ At December 31, _______________________________________________________________________________ Current assets $34 $30 $25 Non-current assets 18 18 18 - ------------------------------------------------------------------------------- Total assets 52 48 43 - ------------------------------------------------------------------------------- Current liabilities 10 10 8 Non-current liabilities 5 6 6 - ------------------------------------------------------------------------------- Total liabilities 15 16 14 - ------------------------------------------------------------------------------- Net assets $37 $32 $29 - ------------------------------------------------------------------------------- UCAR share of net assets $18 $16 $14 _______________________________________________________________________________ NOTE 7 LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES The following table presents the long-term debt of the Company for the periods presented: (Dollars in millions) - ------------------------------------------------------------------------------- At December 31, 1995 1994 - ------------------------------------------------------------------------------- Senior Bank Facilities $434 $ - Subordinated Notes 200 - Series A senior notes - 100 Series B senior notes - 75 Revolving credit agreement borrowings - 45 French Franc revolving credit agreement borrowings - 3 Italian Lire loans and obligations 3 4 - ------------------------------------------------------------------------------- Subtotal 637 227 Less: payments due within one year 1 4 - ------------------------------------------------------------------------------- Total $636 $223 _______________________________________________________________________________ SENIOR BANK FACILITIES On October 19, 1995, UCAR refinanced the Recapitalization Bank Facilities with the Senior Bank Facilities which provide improved terms and conditions. The Senior Bank Facilities were negotiated through Chemical Bank, as agent, and had an original aggregate principal amount of $630 million. The Senior Bank Facilities consist of: (a) a Tranche A Facility in an original amount of $355 million consisting of (i) a Tranche A Senior Secured Letter of Credit Facility of $310 million providing for the issuance of U.S. dollar-denominated letters of credit for the purpose of supporting $300 million of U.S. dollar-denominated loans and 90 days' interest thereon to certain foreign subsidiaries of Global under facilities arranged with local lending institutions; and (ii) a Tranche A Senior Secured Term Loan Facility providing for term loans of $45 million to Global; (b) a Tranche B Senior Secured Term Loan Facility providing for term loans of $175 million to Global; and (c) a Senior Secured Revolving Credit Facility providing 39 for revolving and swing line loans to Global and the issuance of U.S. dollar-denominated letters of credit for the account of Global or other designated credit parties in an aggregate principal and stated amount at any time not to exceed $100 million. The Tranche A Facility (including the letters of credit issued thereunder) amortizes quarterly over 6 years with installments ranging from $40 million in year one to $85 million in year six. Loans made under the Tranche B Term Facility amortizes over 7 years providing for nominal quarterly installments during the first 5 years, quarterly installments totaling $50 million in the sixth year and quarterly installments totaling $120 million in the seventh year. The Revolving facility terminates on December 31, 2001. Commencing with the fiscal year ending December 31, 1996, the credit parties are required to make mandatory prepayments of loans, and letters of credit will be mandatorily reduced, subject to certain exceptions, in the amount of (a) 100% of consolidated excess cash flow (as defined) of Global and its subsidiaries (after giving effect to debt service on the Senior Bank Facilities and the Subordinated Notes), (b) 100% of the net proceeds of certain dispositions of assets or stock of subsidiaries or incurrence of certain indebtedness by UCAR, Global or any of their subsidiaries and (c) 50% of the net proceeds of the issuance of any equity securities by UCAR. The obligations of the credit parties under the Senior Bank Facilities are fully and unconditionally guaranteed by UCAR and each of its domestic subsidiaries. In addition, the Senior Bank Facilities and such guarantees are secured by all capital stock and tangible and intangible assets of Global and the guarantors, including all capital stock of each direct or indirect domestic subsidiary of Global and up to 65% of the capital stock of each direct foreign subsidiary of Global or any guarantor. Certain of the foreign subsidiaries have agreed to provide additional credit support for obligations of foreign credit parties in respect of the Tranche A Facility in the form of collateral and/or cross guarantees. At Global's option, the interest rates applicable to the Senior Bank Facilities are either adjusted LIBOR plus a margin ranging from 1.50% to 2.00% or the alternate base rate plus a margin ranging from 0.50% to 1.00%. The alternate base rate is the higher of Chemical Bank's prime rate or the federal funds effective rate plus 0.50%. At the relevant foreign credit party's option, the interest rate applicable to such foreign subsidiary loans is either adjusted LIBOR plus 0.25% or the alternate base rate (or the local equivalent thereof). Margins on either adjusted LIBOR or the alternate base rate may decline based on the Company's performance as measured against specified ratios and tests. The average interest rate on the Senior Bank Facilities during 1995 was 8.22%. Global pays a per annum fee equal to 1.50% of the aggregate face amount of outstanding letters of credit under, and a per annum fee equal to 0.375% on the undrawn portion of the commitments in respect of, the Senior Bank Facilities. In accordance with the terms of the Senior Bank Facilities, Global has purchased interest rate caps for the Tranche A Facility. The interest rate caps ensure that adjusted LIBOR for the Tranche A Facility will not exceed 8.50% through February 1998. The Senior Bank Facilities contain a number of significant covenants that, among other things, restrict the ability of UCAR, Global and their subsidiaries to dispose of assets, incur additional indebtedness, repay or refinance other indebtedness or amend other debt instruments, pay dividends, create liens on assets, enter into leases, investments or acquisitions, engage in mergers or consolidations, make capital expenditures in excess of a predetermined amount, or engage in certain transactions with subsidiaries and affiliates, and otherwise restrict corporate activities. In addition, under the Senior Bank Facilities, Global is required to comply with specified financial ratios and tests, including minimum interest coverage and maximum leverage ratios. Under the Senior Bank Facilities, Global and UCAR are permitted to pay dividends to their respective stockholders only in an annual amount up to the greater of $15 million or a percentage, ranging from 25% to 35% based on certain financial tests, of adjusted consolidated net income (as defined), where any such amount not used may be accumulated on an ongoing basis. In addition, Global is permitted to pay dividends to UCAR (i) in respect of UCAR's administrative fees and expenses and (ii) for the specific purpose of the purchase or redemption by UCAR of capital stock held by present or former officers of the Company up to $5 million per year or $25 million in the aggregate. The proceeds of the term loans under the Senior Bank Facilities were used to refinance the Recapitalization Bank Facilities and to pay related fees, expenses and other transaction costs (including tax liabilities). As a result of the extinguishment of the Recapitalization Bank Facilities, the Company recorded an extraordinary charge of $19 million (after related income tax effect of $11 million) associated with the write-off of related debt issuance costs. During the fourth quarter of 1995, the Company repaid $86 million of principal Tranche A indebtedness under the Senior Bank Facilities. SUBORDINATED NOTES The Subordinated Notes are unsecured, senior subordinated obligations of Global which will mature on January 15, 2005 and bear interest payable semiannually at a rate per annum of 12%. The Subordinated Notes are fully and unconditionally guaranteed on an unsecured, senior subordinated basis by UCAR. None of Global's subsidiaries has guaranteed the Subordinated Notes. As permitted by the applicable indenture, Global redeemed, during September 1995, $175 million principal amount of Subordinated Notes with proceeds of the Offering at a redemption price of 110% of the principal amount thereof. 40 Except as described below, the remaining Subordinated Notes are not redeemable at the option of Global prior to January 15, 2000. On and after such date, subject to certain restrictions, the Subordinated Notes are redeemable, at Global's option, in whole or in part, at specified redemption prices commencing at 104.5% of principal amount and declining annually to 100% of principal amount on and after January 15, 2003. The Subordinated Notes are also redeemable as a whole at the option of Global upon the occurrence of a change of control at a redemption price equal to 100% of principal amount plus a specified premium. If Global does not so redeem the Subordinated Notes, Global will be required to make an offer to repurchase the Subordinated Notes at a price equal to 101% of principal amount. The indenture relating to the Subordinated Notes restricts the payment of dividends by Global to UCAR if (a) at the time of such proposed dividend, Global is unable to meet certain indebtedness incurrence and income tests set forth therein or (b) the total amount of the dividend paid exceeds specified aggregate limits based on consolidated net income, net proceeds from asset and stock sales and certain other transactions. Such restrictions are not applicable to dividends (i) in respect of UCAR's administrative fees and expenses and (ii) for the specific purpose of the purchase or redemption by UCAR of capital stock held by present or former officers of the Company up to $5 million per year or $25 million in the aggregate. RECAPITALIZATION BANK FACILITIES At Global's option, the interest rates applicable to the Recapitalization Bank Facilities were either adjusted LIBOR plus a margin ranging from 2.50% to 3.75% or the alternate base rate plus a margin ranging from 1.50% to 2.75%. The alternate base rate was the higher of Chemical Bank's prime rate and the federal funds effective rate plus 0.5%. At the relevant foreign credit party's option, the interest rate applicable to the foreign subsidiary loans was either adjusted LIBOR plus 0.5% or the alternate base rate (or the local equivalent thereof). The average interest rate on the Recapitalization Bank Facilities during 1995 was 9.68%. Global paid a per annum fee equal to 2.50% of the aggregate face amount of outstanding letters of credit, and a per annum fee equal to 0.50% on the undrawn portion of the commitments, under the Recapitalization Bank Facilities. SENIOR NOTES AND REVOLVING CREDIT AGREEMENT In June 1994, the Company privately placed, with a group of institutional investors, two series of senior notes in the aggregate principal amount of $175 million: series A notes in the aggregate principal amount of $100 million, bearing interest at 7.88% per annum; and series B notes in the aggregate principal amount of $75 million, bearing interest at a rate of 8.18% per annum. The senior notes were unsecured. The Company used the proceeds from the sale of the senior notes to repay amounts due to C&M Finance & Trading. On September 15, 1994, the Company established two revolving credit facilities with a syndicate of banks for whom Credit Suisse acted as the agent: a five-year revolving credit facility providing for borrowings up to $100 million and a 364-day revolving credit facility providing for borrowings of up to $50 million. Borrowings under the facilities bore interest at a rate per annum equal to, at the Company's option, depending on the type of borrowing, (i) the higher of the federal funds rate (as defined) plus 0.5% or Credit Suisse's prime rate, (ii) LIBOR (as defined) plus 0.225% to 0.625%, depending upon the Company's then current credit rating, or (iii) certain other bid or prevailing market interest rates. The average interest rate on these facilities during 1994 was 5.75%. These facilities were terminated, and the senior notes were repaid in connection with of the Recapitalization. OTHER At December 31, 1995, $21 million ($20 million in 1994 and $19 million in 1993) of foreign assets were pledged as security for short and long-term debt and certain tax liabilities. At December 31, 1995, payments due on long-term debt in the four years after 1996 were: 1997, $21 million; 1998, $50 million; 1999, $60 million; and 2000, $75 million. 41 _______________________________________________________________________________ NOTE 8 INCOME TAXES Total income taxes were allocated as follows: (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Income from operations $ 74 $37 $ 8 Extraordinary charge (20) - - Cumulative effect of change in accounting for postemployment benefits - - (5) Stockholders' equity (10) - - - ------------------------------------------------------------------------------- $ 44 $37 $ 3 _______________________________________________________________________________ The income taxes charged to stockholders' equity relates to the increased projected benefit obligation of approximately $28 million resulting from the Recapitalization (see note 1). The following is a summary of U.S. and non-U.S. components of income (loss) before provision for income taxes: (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- U.S. $(45) $ 29 $19 Non-U.S. 141 114 40 - ------------------------------------------------------------------------------- $ 96 $143 $59 - ------------------------------------------------------------------------------- Income tax expense attributable to income from operations consists of: (Dollars in millions) - ------------------------------------------------------------------------------- Current Deferred Total - ------------------------------------------------------------------------------- Year ended December 31, 1995: U.S. Federal income taxes $ 33 $(28) $25 Non-U.S. income taxes 59 10 69 - ------------------------------------------------------------------------------- $ 92 $(18) $74 - ------------------------------------------------------------------------------- Year ended December 31, 1994: U.S. Federal income taxes $ 17 $ (5) $12 Non-U.S. income taxes 24 1 25 - ------------------------------------------------------------------------------- $ 41 $ (4) $37 - ------------------------------------------------------------------------------- Year ended December 31, 1993: U.S. Federal income taxes $ 5 $ - $ 5 Non-U.S. income taxes 14 (11) 3 - ------------------------------------------------------------------------------- $ 19 $(11) $ 8 _______________________________________________________________________________ In December 1992, the Company obtained an income tax exemption from the Brazilian government on income generated from graphite electrode production until 1999. The exemption reduced 1995, 1994 and 1993 income tax expense by $2 million, $6 million and $2 million, respectively. 42 Income tax expense attributable to income from operations differed from the amounts computed by applying the U.S. Federal income tax rate of 35 percent to pretax income from operations as a result of the following: (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Tax at statutory U.S. Federal rate $ 34 $50 $21 Net taxes related to the Recapitalization 37 - - Net taxes related to foreign dividends and other remittances 5 5 - Adjustments to deferred tax asset valuation allowance (12) (7) (6) Foreign earnings taxed at different rates 3 (2) (2) Other 7 (9) (5) - ------------------------------------------------------------------------------- $ 74 $37 $ 8 _______________________________________________________________________________ The significant components of deferred income tax expense attributable to income from operations are as follows: (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Deferred tax expense (exclusive of the effects of other components below) $ (5) $ 3 $ 6 Increase (decrease) in beginning-of-the-year balance of the valuation allowance for deferred tax assets (13) (7) (17) - ------------------------------------------------------------------------------- $(18) $(4) $(11) _______________________________________________________________________________ The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are presented below: (Dollars in millions) - ------------------------------------------------------------------------------- At December 31, 1995 1994 - ------------------------------------------------------------------------------- Deferred tax assets: Depreciation $ 9 $ 9 Sales and product allowances 4 4 Compensation and benefit plans 59 43 Excess foreign tax credits 13 7 Inventory adjustments 2 3 Provision for scheduled plant closings and other restructuring 14 9 Net operating loss carryforwards 1 9 Debt issuance costs 6 - Other 5 5 - ------------------------------------------------------------------------------- Total gross deferred tax assets 113 89 Less: valuation allowance (11) (23) - ------------------------------------------------------------------------------- Net deferred tax assets 102 66 - ------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation 58 59 Compensation and benefit plans 3 - Inventory adjustments 6 4 Other 12 10 - ------------------------------------------------------------------------------- Total gross deferred tax liabilities 79 73 - ------------------------------------------------------------------------------- Net deferred tax asset (liability) $ 23 $ (7) _______________________________________________________________________________ 43 Deferred income tax assets and liabilities are classified on a net current and noncurrent basis within each tax jurisdiction. Deferred income tax assets are included in prepaid expenses in the amount of $18 million at December 31, 1995 ($20 million at December 31, 1994) and other assets in the amount of $34 million at December 31, 1995 ($9 million at December 31, 1994). Deferred tax liabilities are included in accrued income and other taxes in the amount of $9 million at December 31, 1995 ($2 million at December 31, 1994). The net change in the total valuation allowance for the years ended December 31, 1995, 1994 and 1993 was a decrease of $12 million, $15 million and $10 million respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 1995, the Company had $2 million of non-U.S. tax operating loss carryforwards that will expire in 2005. During the year the Company used $25 million of net operating loss carryforwards from prior years to offset non-U.S. taxable income for 1995 ($38 million for 1994) resulting in a reduction of $9 million in current tax liabilities ($13 million in 1994). At December 31, 1995, the Company had excess foreign tax credit carryforwards of $13 million. Of these tax credit carryforwards, $1 million expire in 1996, $2 million expire in 1997, $1 million expire in 1998, $3 million expire in 1999, and $6 million expire in 2000. The Company used $95 million of foreign tax credits (including $89 million related to the Recapitalization) to reduce U.S. current tax liabilities in 1995 ($14 million in 1994 and $4 million in 1993). Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deferred tax assets net of the existing valuation allowances at December 31, 1995. Provision has not been made for U.S. taxes on the excess of the financial reporting amounts over the tax bases of the Company's investments in foreign subsidiaries and the company carried at equity that are essentially permanent in duration. Such excess amounted to approximately $29 million at December 31, 1995. Determination of the deferred tax liability related to this excess is not practicable. Management believes that the tax liabilities resulting from the reversal of this excess can be substantially mitigated with effective tax planning strategies. _______________________________________________________________________________ NOTE 9 OTHER (INCOME) EXPENSE (NET) The following is an analysis of other (income) expense (net): (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Foreign currency adjustments $ 6 $ 2 $ 32 Interest income (23) (21) $(39) Loss on sales and disposals of assets 1 - - Brazilian monetary correction 2 2 4 Write-down of investments to net realizable value - 1 1 Bank fees due to the Recapitalization 7 - - Discount on sale of receivables 1 1 2 Other 9 10 10 - ------------------------------------------------------------------------------- $ 3 $ (5) $ 10 _______________________________________________________________________________ Foreign currency adjustments exclude for 1994 and 1993, respectively, $1 million and $(1) million representing foreign currency net gains (losses) on debt of the Company's Brazilian subsidiary which have been reported in interest expense, and excludes, for 1993, $1 million, representing foreign currency net gains on prior period taxes payable which have been reported in the provision for income taxes. 44 _______________________________________________________________________________ NOTE 10 INTEREST EXPENSE The following is an analysis of interest expense: (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Interest incurred on debt $ 88 $ 15 $ 9 Amortization of debt issuance costs 6 - - Capitalized interest (1) - - Related foreign currency adjustment - (1) 1 - ------------------------------------------------------------------------------- Interest expense 93 14 10 Interest expense - C&M Finance & Trading, B.V. - 5 11 - ------------------------------------------------------------------------------- Total interest expense $ 93 $ 19 $ 21 _______________________________________________________________________________ NOTE 11 SUPPLEMENTARY BALANCE SHEET DETAIL (Dollars in millions) - ------------------------------------------------------------------------------- At December 31, 1995 1994 - ------------------------------------------------------------------------------- Notes and accounts receivable: Trade $ 177 $143 Affiliates 3 8 Other 11 7 - ------------------------------------------------------------------------------- 191 158 - ------------------------------------------------------------------------------- Allowance for doubtful accounts (11) (10) - ------------------------------------------------------------------------------- $ 180 $148 - ------------------------------------------------------------------------------- Property, plant and equipment: Land and improvements $ 36 $ 35 Buildings 166 166 Machinery and equipment 761 748 Construction in progress and other 50 21 - ------------------------------------------------------------------------------- $1,013 $970 - ------------------------------------------------------------------------------- Accounts payable: Trade $ 44 $ 44 Affiliates - 1 Other 12 3 - ------------------------------------------------------------------------------- $ 56 $ 48 - ------------------------------------------------------------------------------- Other accrued liabilities: Accrued accounts payable $ 23 $ 12 Payrolls 6 8 Restructuring 14 7 Employee compensation and benefits 40 37 Employee severance cost 3 4 Other 4 7 - ------------------------------------------------------------------------------- $ 90 $ 75 - ------------------------------------------------------------------------------- Other long-term obligations: Postretirement benefits $ 79 $ 81 Employee severance cost 16 17 Pension benefits 34 6 Other 8 4 - ------------------------------------------------------------------------------- $ 137 $108 _______________________________________________________________________________ The following is an analysis of the allowance for doubtful accounts: (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Balance at beginning of year $ 10 $ 17 $ 18 Charged to costs and expenses 2 2 1 Deductions 1 9 2 - ------------------------------------------------------------------------------- Balance at end of year $ 11 $ 10 $ 17 _______________________________________________________________________________ 45 NOTE 12 EXTRAORDINARY CHARGE During 1995, the Company recorded an extraordinary charge of $37 million related to early extinguishment of debt (net of tax benefit of $20 million) resulting from the prepayment of $175 million of Senior Notes, the Redemption of $175 million of Subordinated Notes and all amounts borrowed under the Recapitalization Bank Facilities. The extraordinary charge consisted of a premium of $18 million paid on the redemption of the Subordinated Notes and the write-off of deferred debt issuance costs of $39 million. _______________________________________________________________________________ NOTE 13 LEASES Lease commitments under noncancelable operating leases extending for one year or more will require the following future payments: (Dollars in millions) - ----------------------------------- 1996 $3 1997 2 1998 1 1999 1 2000 1 After 2000 6 - ----------------------------------- Total lease and rental expenses under noncancelable operating leases extending one month or more were $4 million in 1995 ($3 million and $4 million in 1994 and 1993, respectively). _______________________________________________________________________________ NOTE 14 MANAGEMENT COMPENSATION AND INCENTIVE PLANS Upon consummation of the Recapitalization, the Company entered into three year employment agreements with certain officers. The employment agreements provide the officers with the opportunity to receive bonuses based in part on the achievement of designated EBITDA targets. The Company recorded expenses applicable to these bonuses of $4 million in 1995. The Company also had a long-term incentive plan for certain management employees which provided incentive compensation based on the Company's performance versus established profitability and cash flow goals for the three years ending December 31, 1995. The goals for 1995 were deemed achieved in accordance with the plan at the date of the Recapitalization. The Company recorded expenses applicable to this plan of $2 million, $6 million and $3 million in 1995, 1994 and 1993 respectively. In connection with the Recapitalization, UCAR adopted the Management Stock Option Plan under which it granted non-qualified stock options to certain members of management to purchase up to an aggregate of 4,761,000 shares of common stock at an exercise price of $7.60 per share (the price per share paid for the common stock purchased by Blackstone and Chemical Equity Associates in the Recapitalization), of which (i) options for 2,777,000 shares ("Time Options") vested fully at the time of the Offering and (ii) options for 1,984,000 shares ("Performance Options") vested and will vest as follows: 60% at the time of the Offering and 20% in each of 1998 and 1999 if EBITDA for those years is equal to or exceeds a target amount. On December 13, 1995, UCAR granted an additional fully vested Time Option to purchase 10,000 shares of common stock at an exercise price of $31.59 per share. To encourage senior management to acquire shares of common stock in connection with the Recapitalization, UCAR adopted an equity ownership program. Under this program, certain members of management were given the opportunity to purchase from UCAR shares of common stock at $7.60 per share. Approximately 733,000 shares were purchased for $6 million by members of management under this program. The Company loaned approximately $3 million to certain members of management in connection with these purchased shares. In addition, for each two dollars of common stock purchased, UCAR granted the purchaser one dollar of matching stock (the "Matching Shares"), approximately 329,000 shares. The Matching Shares vested at the time of the Offering. The shares purchased by management and the Matching Shares are subject to restrictions which generally prohibit transfer thereof prior to the first public offering of common stock in which Blackstone sells shares. In addition, shares held by certain senior executives are subject to further restrictions which limit the amount of such shares which may be transferred until the net proceeds realized by Blackstone from the sale of its shares is at least equal to 90% of the aggregate amount originally paid by Blackstone to acquire its shares. The shares purchased by management and the Matching Shares are subject to "puts" under which the holder can require UCAR to repurchase the shares under certain conditions. In connection with the Offering, UCAR recognized $18 million of compensation expense in relation to the accelerated vesting of Performance Options and Matching Shares. _______________________________________________________________________________ 46 NOTE 15 BENEFITS PLANS RETIREMENT PLANS Until February 25, 1991, the Company participated in the U.S. retirement plan of Union Carbide. Effective February 26, 1991, the Company formed its own U.S. retirement plan which covers substantially all U.S. employees. Retirement, death and disability benefits related to employee service through February 25, 1991 are covered by the Union Carbide plan. Benefits paid by the Union Carbide retirement plan will be based on final average pay through February 25, 1995, plus salary increases (not to exceed 6% per year), until January 26, 1995 when Union Carbide ceased to own at least 50% of the equity of UCAR. All Company employees who retired prior to February 25, 1991 are covered under the Union Carbide retirement plan. Pension benefits under the Company plan are based primarily on years of service and compensation levels prior to retirement. Net pension costs for the U.S. retirement plan were $6 million in 1995 ($5 million and $4 million in 1994 and 1993, respectively). Pension coverage for employees of foreign subsidiaries is provided, to the extent deemed appropriate, through separate plans. Obligations under such plans are systematically provided for by depositing funds with trustees, under insurance policies or by book reserves. Net pension costs for plans of foreign subsidiaries amounted to $1 million in 1995 ($1 million and $2 million in 1994 and 1993, respectively). The components of net pension cost for 1995, 1994 and 1993 are as follows: (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 7 $ 6 $ 7 Interest costs on projected benefit obligation 8 5 5 Actual return on plan assets (10) (5) (5) Net amortization and deferral 2 - - - ------------------------------------------------------------------------------- Net pension cost $ 7 $ 6 $ 7 - ------------------------------------------------------------------------------- Pension fund assets are invested primarily in equity investments and fixed income investments. At December 31, 1995, these investments represented 60% and 38% of the total plan assets at fair value, respectively. At December 31, 1995, the remainder of the pension fund assets consisted of cash and cash equivalents held in various financial institutions. The funded status of the retirement plans at December 31, 1995 and 1994 is as follows: (Dollars in millions) - ------------------------------------------------------------------------------- At December 31, 1995 1994 - ------------------------------------------------------------------------------- Overfunded Overfunded Underfunded Plans Plans Plans - ------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefits $(56) $(44) $(1) Non-vested benefits (9) (2) (3) - ------------------------------------------------------------------------------- Accumulated benefit obligation (65) (46) (4) Effect of projected future salary increases (46) (16) (3) - ------------------------------------------------------------------------------- Projected benefit obligation (111) (62) (7) Fair value of plan assets 97 65 3 - ------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation (14) 3 (4) Unamortized net asset at transition (3) (5) 2 Unamortized prior service cost 2 2 1 Unrecognized net (gain) (6) (2) - - ------------------------------------------------------------------------------- Accrued pension cost $(21) $ (2) $(1) - ------------------------------------------------------------------------------- 47 The actuarial assumptions used in determining the net pension cost and pension liability shown above were as follows: - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 - ------------------------------------------------------------------------------- Overfunded Overfunded Overfunded Plans Plans Plans - ------------------------------------------------------------------------------- Discount rate for determining projected benefit obligation 7.0%-9.0% 8.0%-9.0% 6.0% Rate of increase in compensation levels 4.5%-7.5% 5.5%-7.5% 4.0% Expected long-term rate of return on plan assets 9.0%-9.5% 7.5%-9.5% 6.0% - ------------------------------------------------------------------------------- POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE The Company provides health care and life insurance benefits for eligible retired employees. These benefits are provided through various insurance companies and health care providers. The Company accrues the estimated cost of these benefits during the employees' credited service period. Effective January 1, 1993, the Company made changes to its retiree health care programs principally related to plan eligibility requirements for active employees. Beginning January 1, 1995, employees are required to have 10 years of company service after age 45 to receive the Company's full contribution for retiree health care. These changes resulted in a reduction of the accumulated postretirement benefit obligation at January 1, 1993 of $20 million. The Company is amortizing this reduction over the average remaining credited service period of eligible employees (6.5 years) which results in a reduction of net postretirement benefit expense of $3 million per year. For the years 1995, 1994 and 1993, the components of expense for these postretirement benefits were as follows: (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 3 $ 2 $ 2 Interest costs on accumulated postretirement benefit obligation 4 5 4 Amortization of the reduction resulting from plan amendments (3) (3) (3) - ------------------------------------------------------------------------------- Total expense $ 4 $ 4 $ 3 _______________________________________________________________________________ At December 31, 1995 and 1994, the actuarial and recorded liabilities for these postretirement benefits, none of which have been funded, were as follows: (Dollars in millions) - ------------------------------------------------------------------------------- At December 31, 1995 1994 - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $46 $44 Fully eligible active plan participants 19 19 Other active participants 4 4 Unrecognized reduction of the obligation resulting from plan amendments 11 15 Unrecognized net gain (loss) (1) (1) - ------------------------------------------------------------------------------- Accrued postretirement benefit costs $79 $81 _______________________________________________________________________________ 48 The discount rate used in determining the accumulated postretirement benefit obligation ("APBO") as of December 31, 1995 was 7% (8.0% in 1994). The assumed health care cost trend rate used in determining this obligation was 10% (12.5% in 1994), declining between 0.5% and 1% per year to an ultimate rate of 5.5% for the year 2004 and thereafter. The assumed rate of increase in salary levels for the life insurance portion of the APBO was 4.5% (7% in 1994). Cost-sharing provisions between the Company and its employees are assumed to remain constant in the future. If the health care cost trend rate assumptions were increased by 1%, the APBO as of December 31, 1995 would be increased by $4 million. The effect of this change on the sum of service cost and interest cost components of net periodic postretirement benefit cost for 1995 would be less than $1 million. SAVINGS PLAN The Company's employee savings plan provides eligible employees the opportunity for long-term savings and investment. Participating employees can contribute 1% to 7.5% of employee compensation as basic contributions and an additional 0.5% to 10% of employee compensation as supplemental contributions. The Company contributes on behalf of each participating employee an amount equal to 30% of the employee's basic contribution. The Company contributed approximately $1 million in each of the years ended 1995, 1994 and 1993. INCENTIVE PLAN The Company provides a group profit sharing plan for all employees in the United States. Compensation payments from this plan are based on the Company's performance in exceeding certain profit goals. Costs for the profit sharing plan were $10 million, $7 million, and $4 million in 1995, 1994 and 1993, respectively. _______________________________________________________________________________ NOTE 16 RELATED PARTY TRANSACTIONS The Company has significant business relations with related parties, including Blackstone and EMSA. Prior to the Recapitalization and the Offering, Union Carbide and its subsidiaries, Mitsubishi and its subsidiaries, C&M Finance and Trading, B.V. ("C&M") (jointly owned by Union Carbide and Mitsubishi) were related parties and the Company had significant business relations with them. C&M provided financing to the Company during 1993 and 1994 at interest rates of 6% through June 30, 1993 and 4.5% thereafter. The following represents purchase, sale and certain allocated expense transactions with affiliated companies during 1995, 1994 and 1993. Other related party transactions are described elsewhere in the notes to Consolidated Financial Statements. (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Affiliated companies (excluding EMSA): Net sales $ 4 $19 $25 Purchases - 11 8 Expenses included in selling, administrative and other expenses 1 2 3 - ------------------------------------------------------------------------------- EMSA: Net sales 11 9 8 Purchases 2 - - - ------------------------------------------------------------------------------- Settlements with affiliated companies are normally concluded with a range of terms similar to those made with unrelated parties. _______________________________________________________________________________ NOTE 17 RESTRUCTURING COSTS The Company recorded restructuring costs of $30 million during 1995 to write-off fixed assets of $22 million and accrue $8 million of related shutdown costs in connection with a project to close certain high cost manufacturing operations and to add modern lower cost manufacturing operations at the Company's North American graphite electrode plants. During 1993, the Company recorded $33 million of costs associated with restructuring plans. The restructuring plans, designed to increase overall profitability, mainly involved closing or downsizing operations at certain locations and related shutdown costs. The employee severance costs associated with the downsizing activities have been included in the cumulative effect on prior years of change in accounting principles for postemployment benefits. 49 The following is a summary of the restructuring costs: (Dollars in millions) - ------------------------------------------------------------------------------- For the year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Fixed asset write-offs $22 - $28 Other 8 - 5 - ------------------------------------------------------------------------------- $30 $- $33 _______________________________________________________________________________ NOTE 18 SUBSEQUENT EVENT - PUBLIC OFFERING On March 6, 1996, certain stockholders of the Company sold 16,675,000 shares of UCAR's common stock in a secondary public offering. In the secondary offering, Blackstone, Chemical Equity Associates and certain members of management sold approximately 15,449,000 shares, 826,000 and 400,000 shares, respectively. After the secondary offering, Blackstone owns approximately 20% of the outstanding shares of UCAR's common stock. The Company did not sell any shares in the secondary offering and will not receive any proceeds from the shares sold by the selling stockholders. Approximately 193,000 of the shares sold by management are from vested stock options which were exercised concurrently with the secondary offering and the Company received exercise proceeds of approximately $1.5 million. _______________________________________________________________________________ NOTE 19 PRO FORMA NET INCOME PER SHARE (UNAUDITED) For the unaudited pro forma net income per share data presented on the Consolidated Statements of Operations, historical net (loss) for the year ended December 31, 1995 has been adjusted as if the Recapitalization, Offering, Redemption and Refinancing occurred as of January 1, 1995 and to exclude the extraordinary charge and the non-recurring effects of the Recapitalization and the Offering. The weighted average shares outstanding reflects shares of common stock outstanding after the Offering, including common stock equivalents calculated in accordance with the "treasury stock method," wherein the net proceeds therefrom are assumed to repurchase shares of common stock at $25.74 (the average price for the year ended December 31, 1995). Historical net income (loss) per share has been omitted as the historical capitalization of the Company is not indicative of the Company's current capital structure. The following table sets forth summary pro forma consolidated statement of operations data for the year ended December 31, 1995: (Dollars in millions except per share amounts) - ----------------------------------------------------------------- Pro Forma Amounts: Operating profit $ 214 Interest expense 74 Provision for income taxes 52 Net income 91 Net income per share $ 1.87 Weighted average shares outstanding (in thousands) 48,763 - ----------------------------------------------------------------- The following table sets forth a summary of the pro forma adjustments to net income reflected in the above table: (Dollars in millions) - ------------------------------------------------------------------------------- Net loss as reported in the Consolidated Financial Statements $(12) Extraordinary charge 37 Pro forma effects of the Recapitalization (after tax): Compensation expense related to the Long Term Incentive Compensation Plan 1 Senior subordinated credit facility expense 4 Net adjustment to interest (3) Taxes due to the Recapitalization 37 Pro forma effects of the Offering and Redemption (after tax): Accelerated vesting of performance stock options and matching shares 12 Net adjustment to interest 9 Pro forma effects of the Refinancing (after tax): Net adjustment to interest 6 - ------------------------------------------------------------------------------- Pro forma net income $ 91 _______________________________________________________________________________ 50 INDEPENDENT AUDITOR'S REPORT _______________________________________________________________________________ To the Board of Directors UCAR International Inc.: We have audited the accompanying Consolidated Balance Sheets of UCAR International Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related Consolidated Statements of Operations, Cash Flows and Stockholders' Equity (Deficit) for each of the years in the three year period ended December 31, 1995. These Consolidated Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of UCAR International Inc. and Subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in note 2 to the Consolidated Financial Statements, in 1993 the Company adopted the provisions of Statement of Financial Accounting Standards 112, "Employers' Accounting for Postemployment Benefits." /s/ KPMG PEAT MARWICK LLP Stamford, Connecticut March 8, 1996 51
DIRECTORS AND OFFICERS _______________________________________________________________________________________________________________ DIRECTORS Robert P. Krass (2,3) Glenn H. Hutchins (2,3,4) Peter G. Peterson (2) Chairman of the Board, General Partner Chairman President and Chief The Blackstone Group LP The Blackstone Group LP Executive Officer UCAR International Inc. R. Eugene Cartledge* (1) Robert D. Kennedy (1,4) Stephen A. Schwarzman Former Chairman and Former Chairman and Chief President and Chief Chief Executive Officer Executive Officer Executive Officer Union Camp Corporation Union Carbide Corporation The Blackstone Group LP John R. Hall (1) Howard A. Lipson (2) * Effective February, 1996 Chairman and Chief General Partner (1) Audit Committee Executive Officer The Blackstone Group LP (2) Nominating Committee Ashland Inc. (3) Compensation Committee (4) Stock Compensation Committee _______________________________________________________________________________________________________________ OFFICERS Robert P. Krass (1963, age 59) Peter B. Mancino (1975, age 53) William P. Wiemels (1967, age 51) Chairman of the Board, Vice President, General Vice President, Chief Financial President and Chief Counsel and Secretary Officer and Treasurer Executive Officer Robert J. Hart (1961, age 58) Maurice Marcellin (1962, age 61) Fred C. Wolf (1967, age 51) Vice President and Vice President and Vice President, Administration General Manager, General Manager, and Strategic Projects North and South America Europe and South Africa ( ) Year first employed and current age.
52 CORPORATE AND INVESTOR INFORMATION _______________________________________________________________________________ CORPORATE HEADQUARTERS UCAR International Inc. 39 Old Ridgebury Road, Section J4, Danbury, Connecticut 06817-0001 203-207-7700 LOCATION OF FACILITIES & SALES OFFICES United States International - ------------------------- -------------------------------------------------- Irvine, California Salvador Bahia, Brazil Forno Allione, Italy Danbury, Connecticut Sao Paulo, Brazil Milan, Italy Niagara Falls, New York Welland, Canada Monterrey, Mexico Lakewood, Ohio Beijing, China Singapore Parma, Ohio Calais, France Pamplona, Spain Clarksville, Tennessee Notre Dame, France Meyerton, South Africa Columbia, Tennessee Rungis, France Geneva, Switzerland Lawrenceburg, Tennessee Hong Kong Sheffield, United Kingdom Clarksburg, West Virginia Caserta, Italy STOCK EXCHANGE LISTING The common stock of UCAR International Inc. is listed on the New York Exchange - -- trading symbol UCR. STOCK PROFILE As of December 31, 1995, there were 45,961,718 shares of common stock outstanding and 54 stockholders of record. The Company estimates over 3,800 stockholders are represented by nominees. COMMON STOCK PRICE INFORMATION UCAR's common stock closed at $33 3/4 on December 29, 1995, the last trading of the Company's fiscal year. The quarterly high and low market prices of the UCAR's common stock in 1995 were as follows: _____________________________________________________ Quarter Ended High Low _____________________________________________________ March 31 -- -- June 30 -- -- September 30* 29 1/4 24 3/4 December 31 33 3/4 26 3/8 _____________________________________________________ * Public trading commenced on August 10, 1995. DIVIDEND POLICY It is the current policy of UCAR's Board of Directors to retain earnings to repay debt and finance operations of the Company and not to pay any cash dividends on the common stock. ANNUAL MEETING The Annual Meeting of Stockholders will be held on May 7, 1996 at 10:30 AM at the Danbury Hilton, 18 Old Ridgebury Road, Danbury, Connecticut 06810 STOCKHOLDER CONTACT AND FORM 10-K Stockholders and prospective investors are welcome to call or write UCAR with questions or requests for additional information. Copies of UCAR's Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 are also available, without charge. Inquiries should be directed to: William P. Wiemels, Vice President and Chief Financial Officer, or Michael T. Norton, Director of Strategic Planning and Budgeting, at UCAR's corporate headquarters, telephone 203-207-7700. TRANSFER AGENT For information or assistance regarding individual stock records, transactions or stock certificates, contact: Bank of New York, Shareholder Relations, Department - E P.O. Box 11258, Church Street Station New York, New York 10286 1-800-524-4458 INDEPENDENT AUDITORS KPMG Peat Marwick LLP Stamford, Connecticut [front of back page] UCAR International Inc. 39 Old Ridgebury Road Danbury, CT 06817 [back page] EX-23.1 6 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors UCAR International Inc.: We consent to incorporation by reference in the registration statements on Form S-8 (No. 33-95546, No. 33-95548, No. 33-95550, No. 333-2560 and No. 333-2598) of UCAR International Inc. of our report dated March 8, 1996, relating to the Consolidated Balance Sheets of UCAR International Inc. and subsidiaries as of December 31, 1995 and 1994, and the related Consolidated Statements of Operations, Cash Flows and Stockholders' Equity (Deficit) for each of the years in the three-year period ended December 31, 1995 appearing on page 51 of the Annual Report to Stockholders for 1995 which is incorporated in this Annual Report on Form 10-K. /s/ KPMG PEAT MARWICK LLP Stamford, Connecticut March 21, 1996 EX-27.1 7 ARTICLE 5 FINANCIAL DATA SCHEDULES
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF UCAR INTERNATIONAL INC.'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000931148 UCAR INTERNATIONAL INC. 1,000,000 YEAR YEAR DEC-31-1995 DEC-31-1994 JAN-01-1995 JAN-01-1994 DEC-31-1995 DEC-31-1994 53 60 0 0 191 158 11 10 136 122 403 362 1013 970 635 595 864 778 228 167 636 223 0 0 0 0 0 0 (167) 192 864 778 901 758 901 758 556 515 556 515 38 7 2 2 93 19 96 143 74 37 25 100 0 0 37 0 0 0 (12) 100 1.87 0 1.87 0 Pro forma for 1995. See Note 19 of the Notes to Consolidated Financial Statements.
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