UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D C 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999March 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-1463
UNION CARBIDE CORPORATION
(Exact name of registrant as specified in its charter)
New York 13-1421730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
39 Old Ridgebury Road, Danbury, CT 06817-0001
(Address of principal executive offices) (Zip Code)
203-794-2000
Registrant's telephone number, including area code
(Former name, former address and former fiscal year,
if changed since last report.)
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 _______No__
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at October 31, 1999April 30, 2000
Common Stock, $1 par value 133,857,750134,685,834 shares
Total number of sequentially numbered pages in this filing,
including exhibits thereto: 2722
UNION CARBIDE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements of Union Carbide Corporation and
Subsidiaries
Condensed Consolidated Statement of Income -
Quarter ended September 30, 1999 and 1998.............. 3
Condensed Consolidated Statement of Income -
Nine months ended September 30, 1999 and 1998.......... 4
Condensed Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998............... 5
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 1999 and 1998.......... 6
Notes to Condensed Consolidated Financial Statements..... 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 14-23
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 15-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 24
Item 6. Exhibits and Reports on Form 8-K......................... 24
Signature.......................................................... 25
Exhibit Index...................................................... 26
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements of Union Carbide
Corporation and Subsidiaries
Condensed Consolidated Statement of Income -
Quarter ended March 31, 2000 and 1999 3
Condensed Consolidated Balance Sheet -
March 31, 2000 and December 31, 1999 4
Condensed Consolidated Statement of Cash Flows -
Quarter Ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial
Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Exhibit Index 21
Cautionary statement: All statements in this Quarterly Report on
Form 10-Q that do not reflect historical information are forward-lookingforward-
looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995 (as amended). Forward-looking
statements include statements concerning the pending merger with
The Dow Chemical Company (the "Dow Merger")(and, with regard to the merger, the Dow
Merger); plans; objectives; strategies; anticipated future events
or performance; sales; cost, expense and earnings expectations;
the Year 2000 issue; interest rate and currency risk management; the chemical markets
in 19992000 and beyond; development, production and acceptance of new
products and process technologies; ongoing and planned capacity
additions and expansions; joint ventures; Management's Discussion
&and Analysis; and any other statements that do not reflect
historical information. Such forward-looking statements are
subject to risks and uncertainties. Important factors that could
cause actual results to differ materially from those discussed in
such forward-
lookingforward-looking statements include the supply/demand balance
for the corporation's products; customer inventory levels;
competitive pricing pressures; raw material availability and
costs; changes in industry production capacities and operating
rates; currency exchange rates; interest rates; global economic
conditions; competitive technology positions; failure by the
corporation to achieve technology objectives, complete Year 2000 readiness, achieve cost
reduction targets or complete projects on schedule and on budget;
inability to obtain new customers or retain existing ones; and,
with respect to the Dow Merger, failure to obtain necessary
regulatory and other governmental approvals and failure to satisfy
conditions of the merger agreement.
- 2 --2-
PART I. FINANCIAL INFORMATION
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Millions of dollars
(Except per share figures)
Quarter ended September 30,Mar. 31,
2000 1999 1998
NET SALES $1,498 $1,350$1,617 $1,402
Cost of sales, exclusive of depreciation and
amortization 1,232 1,0361,314 1,032
Research and development 38 3439 37
Selling, administrative and other expenses(a) 72 7873 70
Depreciation and amortization 103 95102 104
Partnership income (loss) 18 (46)3 6
Other income - net 52 12924 14
INCOME BEFORE INTEREST EXPENSE AND PROVISION
FOR INCOME TAXES 123 190116 179
Interest expense 32 2837 31
INCOME BEFORE PROVISION FOR INCOME TAXES 91 16279 148
Provision for income taxes 24 5820 38
INCOME OF CONSOLIDATED COMPANIES AND PARTNERSHIPS 67 10459 110
Minority interest 2 -1 1
Income (loss) from corporate investments carried
at equity 12 (28)
NET INCOME $ 77 $ 76
Earnings per common share
Basic $ 0.58 $ 0.56
Diluted $ 0.57 $ 0.55
Cash dividends declared per common share $ 0.225 $ 0.225
(a) Selling, administrative and other expenses include:
Selling $ 24 $ 25
Administrative 28 26
Other expenses 20 27
$ 72 $ 78
The Notes to Condensed Consolidated Financial Statements on Pages 7
through 13 should be read in conjunction with this statement.
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UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Millions of dollars
(Except per share figures)
Nine months ended September 30,
1999 1998
NET SALES $4,318 $4,370
Cost of sales, exclusive of depreciation and
amortization 3,369 3,284
Research and development 114 107
Selling, administrative and other expenses(a) 199 234
Depreciation and amortization 302 288
Partnership income 20 18
Other income - net 93 150
INCOME BEFORE INTEREST EXPENSE AND PROVISION FOR
INCOME TAXES 447 625
Interest expense 98 84
INCOME BEFORE PROVISION FOR INCOME TAXES 349 541
Provision for income taxes 90 168
INCOME OF CONSOLIDATED COMPANIES AND PARTNERSHIPS 259 373
Minority interest 4 2
Loss from corporate investments carried at equity 38 3539 (32)
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 217 33697 77
Cumulative effect of change in accounting
principle - (20) -
NET INCOME $ 19797 $ 33657
Earnings per common share
Basic -
Income before cumulative effect of change
in accounting principle $ 1.630.72 $ 2.470.57
Cumulative effect of change in accounting
principle (0.15) - (0.14)
Net income 1.48 2.47$ 0.72 $ 0.43
Diluted -
Income before cumulative effect of change
in accounting principle $ 1.590.71 $ 2.410.56
Cumulative effect of change in accounting
principle - (0.14) -
Net income 1.45 2.41$ 0.71 $ 0.42
Cash dividends declared per common share $ 0.675 $ 0.675$0.225 $0.225
(a) Selling, administrative and other expenses include:
Selling $ 7023 $ 7423
Administrative 69 8422 25
Other expenses 60 7628 22
$ 19973 $ 234
70
The Notes to Condensed Consolidated Financial Statements on Pages
76 through 1311 should be read in conjunction with this statement.
- 4 --3-
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
Millions of dollars
Sept. 30,Mar. 31, Dec. 31,
2000 1999 1998
ASSETS
Cash and cash equivalents $ 3663 $ 4941
Notes and accounts receivable 1,112 9331,113 1,132
Inventories 608 667687 680
Other current assets 257 257303 297
Total current assets 2,013 1,9062,166 2,150
Property, plant and equipment 8,872 8,4099,247 9,057
Less: Accumulated depreciation 4,444 4,2284,603 4,536
Net fixed assets 4,428 4,1814,644 4,521
Companies carried at equity 629 624818 756
Other investments and advances 88 14194 75
Total investments and advances 717 765912 831
Other assets 502 439489 455
Total assets $7,660 $7,291$ 8,211 $ 7,957
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 267333 $ 264329
Short-term debt and current portion of
long-term debt 634 426954 782
Accrued income and other taxes 30 11034 -
Other accrued liabilities 693 670743 678
Total current liabilities 1,624 1,4702,064 1,789
Long-term debt 1,868 1,7961,759 1,869
Postretirement benefit obligation 434 450433 438
Other long-term obligations 608 602587 603
Deferred credits 562 488629 599
Minority stockholders' equity in consolidated
subsidiaries 40 3643 42
Stockholders' equity:
Common stock - authorized - 500,000,000 shares
- issued - 157,226,880157,969,279 shares
157 155
(155,052,017(157,571,933 shares in 1998)1999) 158 158
Additional paid-in capital 128 79178 165
Other equity adjustments 1 (1) (2)
Accumulated other comprehensive loss (150) (104)(166) (160)
Retained earnings 3,466 3,3573,597 3,530
Unearned employee compensation - ESOP (57) (67)(53) (56)
Treasury stock, at cost- 23,414,857cost - 23,416,933 shares
(22,366,017(23,428,229 shares in 1998)1999) (1,019) (969)(1,019)
Total stockholders' equity 2,524 2,4492,696 2,617
Total liabilities and stockholders' equity $7,660 $7,291
$ 8,211 $ 7,957
The Notes to Condensed Consolidated Financial Statements on Pages 76
through 1311 should be read in conjunction with this statement.
- 5 --4-
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of dollars
Nine monthsQuarter ended Sept. 30,Mar. 31,
2000 1999
1998
Increase (decrease)in
cashCash and cash
equivalents
OPERATIONS
Income before cumulative effect of change in
accounting principle $ 21797 $ 33677
Noncash charges (credits) to net income:
Depreciation and amortization 302 288102 104
Deferred income taxes 99 9322 39
Equity in (earnings) losses of joint ventures,
net of cash received 53 104(20) 33
Other 36 32
Increase(16) 2
Decrease (increase) in working capital(a) (211) (49)54 (141)
Long-term assets and liabilities (77) (55)(8) (13)
Cash Flow From Operations 419 749231 101
INVESTING
Capital expenditures (559) (571)(195) (173)
Investments, advances and acquisitions (91) (30)(65) (19)
Proceeds from the sale of
available-for-sale securities 28 3312 8
Purchase of available-for-sale securities (35) (39)(16) (9)
Sale of fixed and other assets 26 78 18
Cash Flow Used Forfor Investing (631) (600)(256) (175)
FINANCING
Change in short-term debt (3 months or less) 243 (70)
Proceeds from short-term debt 2 2271 111
Repayments of short-term debt (17) (11)(7) (4)
Proceeds from long-term debt 285 248- 37
Repayments of long-term debt (227) (5)- (52)
Issuance of common stock 41 3410 9
Purchase of common stock (50) (258)- (22)
Payment of dividends (90) (92)(30) (29)
Other 113 9
Cash Flow From (Used For) Financing 198 (123)47 59
Effect of exchange rate changes on cash and
cash equivalents 1- (1)
Change in cash and cash equivalents (13) 2522 (16)
Cash and cash equivalents, beginning-of-period 41 49 20
Cash and cash equivalents, end-of-period $ 3663 $ 4533
Cash (received) paid for interest and income taxes
Interest (net of amount capitalized) $ 9331 $ 7324
Income taxes $ 31(45) $ 34
_____________
6
(a) Net change in certain components of working
capital (excluding non-cash expenditures)noncash transactions):
(Increase) decrease in current assets
Notes and accounts receivable $(176) $ 71(3) $ (79)
Inventories 62 2(7) 96
Other current assets (21) (21)
Decrease3 (36)
(Decrease) increase in payables and accruals (76) (101)
Increase61 (122)
(Increase) decrease in working capital $(211) $ (49)54 $(141)
The Notes to Condensed Consolidated Financial Statements on Pages 76
through 1311 should be read in conjunction with this statement.
- 6 --5-
UNION CARBIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Consolidated Financial Statements
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all
adjustments necessary for a fair statement of the results
for the interim periods. These adjustments consist of only
normal recurring adjustments. The accompanying statements
should be read in conjunction with the Notes to Financial
Statements of Union Carbide Corporation and Subsidiaries
("the corporation" or "UCC") in the 19981999 annual report to
stockholders.
Unrealized gains and losses resulting from translating
foreign subsidiaries' assets and liabilities into U.S.
dollars generally are recognized as part of "Comprehensive
Income,"Income", and are included in "Accumulated other
comprehensive loss" on the Condensed Consolidated Balance
Sheet until such time as the subsidiary is sold or
substantially or completely liquidated. Translation gains
and losses relating to those operations located in Latin
American countries where hyperinflation exists and to
international operations using the U.S. dollar as their
functional currency are included in the Condensed
Consolidated Statement of Income.
Certain amounts in the Condensed Consolidated Statement of Cash Flows
for the nine months ended September 30, 1998 have been reclassified to
conform to the current period's presentation.
2. Comprehensive Income
The following summary presents the components of
comprehensive income:
Quarter Ended
Mar. 31, Mar. 31,
Millions of dollars, Quarter Ended Nine Months Ended
Sept. 30 Sept. 30,2000 1999
1998 1999 1998
Net income $77 $ 76 $197 $33697 $ 57
Other comprehensive income (loss):income:
Unrealized gains and losses on available-for-saleavailable-
for-sale securities, net of reclassification
adjustment,adjustments and net of tax (1) (3) 1 14 -
Foreign currency translation adjustments 8 (26) (47) (34)(10) (53)
Total comprehensive income $84Comprehensive Income $ 47 $151 $30391 $ 4
3. Inventories
Sept. 30,Mar. 31, Dec. 31,
Millions of dollars, 2000 1999 1998
Raw materials and supplies $150 $187$ 159 $ 152
Work in process 68 4147 45
Finished goods 390 439
$608 $667481 483
$ 687 $ 680
- 7 --6-
4. Business and Geographic Segment Information
The corporation has two operating segments, Specialties &
Intermediates ("S&I")(S&I) and Basic Chemicals & Polymers ("BC&P")(BC&P).
The S&I segment includes the corporation's specialty
chemicals and polymers product lines, licensing, and solvents
and chemical intermediates. The BC&P segment includes the
corporation's ethylene and propylene manufacturing operations
as well as the production of first-level ethylene and
propylene derivatives-polyethylene, polypropylene, ethylene
oxide and ethylene glycol. In addition to its operating
segments, the corporation's Other segment includes its non-corenon-
core operations and financial transactions other than
derivatives designated as hedges, which are included in the
same segment as the item being hedged.
Sales of the BC&P segment include intersegment sales,
principally ethylene oxide, which are made at the estimated
market value of the products transferred. The corporation
evaluates performance based on Income before interest expense
and provision for income taxes (operating profit).
S&I BC&P Other Total
Millions of dollars,
quarterfor the three months ended
September 30, 1999March 31, 2000
Net sales $1,057 $441$1,108 $509 $ - $1,498$1,617
Intersegment revenues - 8199 - 8199
Segment revenues 1,057 5221,108 608 - 1,5791,716
Depreciation and
amortization 67 3635 - 103102
Partnership income (loss) 172 1 - 183
Operating profit (loss) 134 (7) (4) 12382 30 4 116
Interest expense - - 32 3237 37
Income (loss) from
corporate investments
carried at equity 1 38 - 12 - 12
September 30, 1998
Net sales $ 995 $355 $ - $1,350
Intersegment revenues - 66 - 66
Segment revenues 995 421 - 1,416
Depreciation and amortization 61 34 - 95
Partnership income (loss) (49) 3 - (46)
Operating profit (loss) 233 (13) (30) 190
Interest expense - - 28 28
Income (loss) from corporate
investments carried at equity (3) (25) - (28)
- 8 -
39
S&I BC&P Other Total
Millions of dollars,
ninefor the three months ended
September 30,March 31, 1999
Net sales $3,127 $1,191$1,034 $368 $ - $4,318$1,402
Intersegment revenues - 18853 - 18853
Segment revenues 3,127 1,3791,034 421 - 4,5061,455
Depreciation and
amortization 192 11063 41 - 302104
Partnership income 19 14 2 - 206
Operating profit (loss) 530 (82) (1) 447208 (33) 4 179
Interest expense - - 98 9831 31
Income (loss) from
corporate investments
carried at equity 4 (42)(36) - (38)
September 30, 1998
Net sales $3,175 $1,195 $ - $4,370
Intersegment revenues - 224 - 224
Segment revenues 3,175 1,419 - 4,594
Depreciation and amortization 182 106 - 288
Partnership income 12 6 - 18
Operating profit (loss) 601 65 (41) 625
Interest expense - - 84 84
Income (loss) from corporate
investments carried at equity 2 (37) - (35)(32)
Operating profit of the S&I segment includes $38 million and $50 million
in net gains from litigation settlements related to the licensing
business for the quarter and nine months ended September 30, 1999,
respectively.
Operating profit of the S&I segment includes a net gain of $118 million
related to the favorable settlement of UNIPOL Systems business litigation
and a $53 million reduction in partnership earnings related to losses
associated with Aspell Polymeres SNC for the quarter and nine months
ended September 30, 1998.
- 9 --7-
5. Earnings Per Share
Quarter Ended
Millions of dollars, Quarter Ended Sept. 30, Nine Months Ended Sept. 30,Mar. 31, Mar. 31,
except per share amounts 2000 1999 1998 1999 1998
Basic -
Income before cumulative effect of
change in accounting principle $ 7797 $ 76 $ 217 $ 33677
Cumulative effect of change in
accounting
principle -accounting - (20) -
Net income $ 7797 $ 76 $ 197 $ 33657
Basic -
Weighted average number of shares
outstanding for basic calculation 133,464,524 134,286,957 133,135,986 135,755,666134,406,055 132,848,490
Earnings per share -
Income before cumulative effect of
change in accounting principle $0.58 $0.56 $1.63 $2.47$0.72 $ 0.57
Cumulative effect of change in
accounting principle - - (0.15) -(0.14)
Net income $0.58 $0.56 $1.48 $2.47$0.72 $ 0.43
Diluted -
Income before cumulative effect of change
in accounting principle $ 77 $ 76 $ 217 $ 336
Cumulative effect of change in accounting
principle - - (20) -
Net income $ 77 $ 76 $ 197 $ 336
Weighted average number of shares
outstanding for basic calculation 133,464,524 134,286,957 133,135,986 135,755,666134,406,055 132,848,490
Add: Effect of stock options 3,434,248 3,258,418 3,220,422 3,521,8613,157,879 2,861,529
Weighted average number of shares
outstanding for diluted calculation 136,898,772 137,545,375 136,356,408 139,277,527137,563,934 135,710,019
Earnings per share -
Income before cumulative effect of
change in accounting principle $0.57 $0.55 $1.59 $2.41$0.71 $ 0.56
Cumulative effect of change in
accounting principle - - (0.14) -
Net income $0.57 $0.55 $1.45 $2.41$0.71 $ 0.42
6. Long-Term Debt
In April 1999, the corporation issued $250 million 6.70 percent Public
Notes due April 2009. These notes pay interest semi-annually in April
and October of each year.
The corporation intends to refinance its $110 million of Floating Rate
Public Notes due in April 2000 by either borrowing under its existing
major bank credit agreement aggregating $1 billion or under a prospective
borrowing. Accordingly, such amount has been classified as non-current
debt.
7. Common Stock
On August 3, 1999, the Board of Directors rescinded the corporation's
authorization to repurchase shares under the common stock repurchase
authorization, subsequent to that date. Since inception of its
repurchase
- 10 -
authorization in 1993 through August 3, 1999, the corporation repurchased
56.4 million shares (1.0 million during the first nine months of 1999)
out of a total authorization of 60 million shares, at an average
effective price of $36.26 per share.
8. Commitments and Contingencies
The corporation has entered into three major agreements for the purchase
of ethylene-related products and two other purchase
agreements.agreements in the U.S. and Canada. The net present value of
the fixed and determinable portion of obligations under these
obligationspurchase commitments at September 30, 1999March 31, 2000 totaled $206$196 million.
The corporation is subject to loss contingencies resulting
from environmental laws and regulations, which include
obligations to remove or remediate the effects on the
environment of the disposal or release of certain wastes and
substances at various sites. The corporation has established
accruals in current dollars for those hazardous waste sites
where it is probable that a loss has been incurred and the
amount of the loss can be reasonably estimated. The
reliability and precision of the loss estimates are affected
by numerous factors, such as different stages
-8-
of site evaluation, the allocation of responsibility among
potentially responsible parties and the assertion of
additional claims. The corporation adjusts its accruals as
new remediation requirements are defined, as information
becomes available permitting reasonable estimates to be made,
and to reflect new and changing facts.
At September 30, 1999,March 31, 2000, the corporation had established
environmental remediation accruals in the amount of
$198$196 million. These accruals have two components, estimated
future expenditures for site investigation and cleanup and
estimated future expenditures for closure and postclosure
activities. In addition, the corporation had environmental
loss contingencies of $120$107 million.
The corporation has sole responsibility for the remediation
of approximately 40 percent of its environmental sites.sites for
which accruals have been established. These sites are well
advanced in the investigation and cleanup stage. The
corporation's environmental accruals at September 30, 1999March 31, 2000
included $158$154 million for these sites, of which $58$42 million
was for estimated future expenditures for site investigation
and cleanup and $100$112 million was for estimated future
expenditures for closure and postclosure activities. In
addition, $81$67 million of the corporation's environmental loss
contingencies related to these sites. The twothree sites with
the largest total potential cost to the corporation are
nonoperating sites. Of the above accruals, these sites
accounted for $36$56 million, of which $18 million was for
estimated future expenditures for site investigation and
cleanup and $18$38 million was for estimated future expenditures
for closure and postclosure activities. In addition,
$42$45 million of the above environmental loss contingencies
related to these sites.
The corporation does not have sole responsibility at the
remainder of its environmental sites.sites for which accruals have
been established. All of these sites are in the
investigation and cleanup stage. The corporation's
environmental accruals at September 30,
1999March 31, 2000 included $40$42 million
for estimated future expenditures for site investigation and
cleanup at these sites. In addition, $39$40 million of the
corporation's environmental loss contingencies related to
these sites. The largest three of these sites are also
nonoperating sites. Of the above accruals, these sites
accounted for $15$14 million for estimated future expenditures
for site investigation and cleanup. In addition, $17 million
of the above environmental loss contingencies related to
these sites.
- 11 -
In 1998,1999, worldwide expenses of continuing operations related to environmental
protection for compliance with Federal, state and local laws
regulating solid and hazardous wastes and discharge of
materials to air and water, as well as for waste site
remedial activities, totaled $91$118 million. Expenses in 1998
and 1997 and 1996 were $100$91 million and $110$100 million, respectively.
While estimates of the costs of environmental protection for
19992000 are necessarily imprecise, the corporation estimates
that the level of these expenses will be at a level
comparable to the average of the last three years.
The corporation has severally guaranteed 45 percent (approximately
$641up to approximately
$174 million at September 30, 1999)March 31, 2000 of EQUATE Petrochemical
Company's ("EQUATE") debt and working capital
financing needs. Of this amount,
approximately $474 million is severally guaranteed until certain
completion and financial tests are achieved. The corporation has also severally
guaranteed certain sales volume targets until EQUATE's sales
capabilities are proved. In addition, the corporation has
pledged its shares in EQUATE as security for EQUATE's debt.
The corporation has political risk insurance coverage for its
equity investment and through
March 31, 2001, substantially alla majority of its guarantee of
EQUATE's debt.
-9-
The corporation had additional contingent obligations at
September 30,
1999 of $123March 31, 2000 totaling $108 million, of which $32$35 million
related to guarantees of debt.
The corporation and its consolidated subsidiaries are
involved in a number of legal proceedings and claims with
both private and governmental parties. These cover a wide
range of matters, including, but not limited to,to: product
liability; trade regulation; governmental regulatory
proceedings; health, safety and environmental matters;
employment; patents; contractscontracts; taxes; and taxes.commercial
disputes. In some of these legal proceedings and claims, the
cost of remedies that may be sought or damages claimed is
substantial.
The corporation has recorded nonenvironmental litigation
accruals of $129$143 million and related insurance recovery
receivables of $112$124 million. At September 30, 1999,March 31, 2000, the
corporation had nonenvironmental litigation loss
contingencies of $66 million.
While it is impossible at this time to determine with
certainty the ultimate outcome of any of the legal
proceedings and claims referred to in this note, management
believes that adequate provisions have been made for probable
losses with respect thereto and that such ultimate outcome,
after provisions therefor, will not have a material adverse
effect on the consolidated financial position of the
corporation, but could have a material effect on consolidated
results of operations in a given quarter or year. Should any
losses be sustained in connection with any of such legal
proceedings and claims in excess of provisions therefor, they
will be charged to income when determinable.
9.7. Accounting Changes
Effective January 1, 1999, the corporation adopted the
provisions of the American Institute of Certified Public
Accountants ("AICPA")Accountants' Statement of Position ("SOP") 98-5, "Reporting on
the Costs of Start-Up Activities." This SOP requires the
expensing of certain costs, such as pre-operatingpreoperating expenses and
organizational costs associated with an entity's start-up
activities. In accordance with this SOP's provisions, on
January 1, 1999, the corporation recognized a charge of $27
million ($20 million after tax)after-tax) as a cumulative effect of change
in accounting principle, the majority of which represented
formation costs associated with the corporation's joint
ventures.
- 12 -
Also effective January 1, 1999, the corporation prospectively adopted the
provisions of the AICPA's SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The effect of this
adoption was not material to the corporation's results of operations or
financial condition in the quarter of adoption and is not expected to be
material to the corporation's results of operations or financial
condition for the year ending December 31, 1999.
In 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("Statement")
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." It requires that an entity recognize all
derivative instruments as either assets or liabilities in the
statement of financial position and measure those instruments
at fair value. This Statement, as amended by Statement No.
137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement
No. 133," is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The corporation is
currently evaluating the effect Statement No. 133 will have
on its financial position and results of operations in the
period of adoption.
10.In 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in
Financial Statements," which summarizes the staff's views
regarding the application of generally accepted accounting
principles to selected revenue recognition issues.
-10-
The corporation is evaluating whether SAB 101 will cause any
change in its revenue recognition policies and procedures.
8. The Dow Merger
On August 3, 1999, the corporation and The Dow Chemical
Company ("Dow") entered into a definitivean Agreement and Plan of Merger. UnderMerger
providing for the agreementmerger of a subsidiary of Dow with and into
the corporation. As a result of the merger, the corporation
will become a wholly-owned subsidiary of Dow and the
corporation's shareholders will receive 0.537 of a share of
Dow common stock for each share of UCC common stock they own
as of the date of the merger. On March 6, 2000, Dow announced
plans for a three-for-one split of its common stock, subject
to approval of Dow shareholders. If the record date for the
stock split occurs prior to the merger, the exchange ratio
will be adjusted so that the corporation's shareholders will
receive 1.611 shares of Dow common stock for each share of UCC
common stock they own. On December 1, 1999, the corporation's
shareholders approved the merger agreement. The merger is
subject to certain conditions including
approval by UCC shareholders, and review by antitrust
regulatory authorities in the United States Europe and Canada. - 13 -On
May 3, 2000 the European Commission approved the merger
subject to the divestiture of certain assets and the licensing
of certain technology.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Union Carbide operates in two business segments. The
Specialties & Intermediates ("S&I")(S&I) segment converts basic and
intermediate chemicals into a diverse portfolio of chemicals and
polymers serving industrial customers in many markets. This
segment also provides technology services, including licensing,
to the oil and petrochemicals industries. The Basic Chemicals &
Polymers ("BC&P")(BC&P) segment converts hydrocarbon feedstocks,
principally liquefied petroleum gas and naphtha, into ethylene
or propylene used to manufacture polyethylene, polypropylene,
ethylene oxide and ethylene glycol for sale to third-party
customers, as well as ethylene, propylene, ethylene oxide and
ethylene glycol for consumption by the S&I segment. In
comparison towith those of S&I, the revenues and operating profit
of BC&P tend to be more cyclical and very sensitive to a number
of external variables, including overall economic demand,
hydrocarbon feedstock costs, industry capacity increases and
plant operating rates.
In addition to its business segments, the corporation's Other
segment includes its non-corenoncore operations and financial
transactions other than derivatives designated as hedges, which
are included in the same segment as the item being hedged.
Summary
The corporation reported thirdfirst quarter 2000 net income of
$77$97 million, or $0.57$0.71 per diluted share ($0.580.72 per basic share).
For the samecorresponding quarter of 1998in 1999 the corporation reported
net income of $76$57 million, or $0.55$0.42 per diluted share ($0.56 per basic share). Net income for the first nine months of 1999 was
$197 million, or $1.45 per diluted share ($1.480.43 per
basic share) after a
charge for the cumulative effect of a change in
accounting principle of $20 million or $0.14 per diluted share
($0.15 per basic share), reported in the
first quarter of 1999. Net income for the first nine months of 1998 was $336
million, or $2.41 per diluted share ($2.470.14 per basic share).
Consolidated net sales increased 15.3 percent from $1,402
million for the thirdfirst quarter of 1999 increased $148to $1,617 million or 11.0 percent from $1,350 million infor the
thirdsame quarter of 1998. This2000. The increase was the result ofrepresented a 4.314.2 percent
decreaseincrease in average selling prices coupled with a slight
increase in volume. Both segments experienced an increase in
average customer selling pricesprices; however, the majority of the
increase was associated with products in the BC&P segment.
Overall, the slight consolidated volume increase reflected an
increase of volume in the S&I segment, which was significantly
offset by a 15.8 percent increase in customer volume. Consolidated net
sales for the first nine months of 1999 decreased $52 million, or 1.2 percent
over the same period in 1998. The decline in the year-to-date amounts is the
result of a 12.5 percent decrease in average customer selling prices partially
offset by a 12.9 percent increase in customer volume. Volume increases in
both segments, for the three and nine month periods ended September 30, 1999
compared with the same periods in 1998, reflected an increase in current year
demand, as well as an increaseethylene oxide/glycol shipments in the
production and sale of hydrocarbon
co-products. In the third quarter of 1998, production and sale of hydrocarbon
co-products were reduced as the result of a longer than anticipated plant
shutdown at Taft, La. in connection with a scheduled plant turnaround and
expansion. Additionally, shipments for the prior year nine month period were
adversely affected by transportation delays in the U.S. Gulf Coast.
ConsolidatedBC&P segment.
The corporation's unit variable margin (revenues less variable
manufacturing and distribution costs divided by customer volume)
declined from 17.516.2 cents per pound in the thirdfirst quarter of 19981999
to 14.114.6 cents per pound in the comparable
periodfirst quarter of 1999 mainly due2000, largely
reflecting the results of the S&I segment. Although the S&I
segment benefited from rising average selling prices it was
unable to risingoffset significant increases in raw material costs. Consolidatedcosts,
which the industry has experienced over the past several
quarters. Conversely, the BC&P segment showed improved unit
variable margin for the first nine months of 1998 was 18.0 cents per pound
- 14 -
compared with 15.0 cents per pound for the same period of 1999. Declinesas increases in unit variable margin for the nine month period reflected falling average customer selling prices
coupled with risingmore than offset similar raw material costs, particularly ethane.cost increases.
Fixed cost per pound of products sold (fixed manufacturing and
distribution costs, plus research and development and selling,
administrative and other expenses, divided by customer volume)
declinedincreased from 11.99.9 cents per pound infor the thirdfirst
-12-
quarter of 19981999 to 10.410.1 cents per pound for the same quarter in 2000,
primarily due to somewhat higher fixed costs in the current
period.
Pension expense was reduced by $24 million as a result of 1999. For the
nine months ended September 30, 1999, consolidated fixed cost
per poundamortization of products soldinvestment gains and changes in actuarial
assumptions reflecting long-term investment returns on pension
plan assets.
Partnership income decreased from 11.3 cents per poundto $3 million in the first quarter
of 2000, compared to $6 million in the same periodquarter in 1999,
principally the result of 1998increased losses related to 9.9 cents per pound. Overall, declines are primarily due to
higher volumes over relatively stable fixed costs in eachAspell,
partly offset by better performance of the comparable
periods. Fixed costs in 1999 included costs associated with a plant
turnaround in Canada and a firecorporation's UOP
joint venture. Income from corporate investments carried at
the corporation's plant in Wilton, U.K.
Fixed costs in 1998 included costs related to the longer than anticipated
plant turnaround at the Taft, La. facility.
Partnership incomeequity increased substantially from a loss of $46$32 million in the
thirdfirst quarter of 19981999 to income of $18$39 million in the thirdsame
quarter of 1999. Partnership
income for2000 the nine months ended September 30, 1999 increased $2 millionmajority of which related to $20 million over the same nine monthsbetter
performance of 1998. Increases for the three and
nine month periods reflect lower losses from Aspell Polymeres, SNC ("Aspell")
in 1999 than those recognized by the corporation in the same periods of 1998.
Additionally, the nine month period includes lower income from the corporation's UOP,LLC ("UOP")Polimeri Europa and EQUATE
joint venture. Throughout the end of 1998 and
into the beginning of 1999, UOP experienced lower sales in areas with weak
economies such as Russia, Asia and the Middle East.ventures.
Other income - net forin the first quarter and nine months ended September 30, 1999
includes $38of 2000 included
interest income of $15 million and $50 million, respectively, of net gains from
favorable litigation settlements related to the licensing business. Other
income - net for the third quarter and first nine months of 1998 included a net gain from a favorable litigation settlement related to the licensing
business of $118 million.tax refund.
Interest expense increased $4 million and $14$6 million for the first three and nine
month periods ended September 30, 1999, respectively, asmonths
of 2000 compared to similar
periodsthe same three months in 1998. These increases are due1999, directly
related to additional debt outstanding
throughout 1999 as compared to 1998.
Thean increase in short-term debt.
For the quarter ended March 31, 2000, the corporation's
effective tax rate was 26.425.3 percent and 25.8compared with 25.7 percent
for the three and
nine month periods ended September 30, 1999, respectively. The corporation's
effective tax rate for the same three and nine month periods in 1998 was 35.8
percent and 31.1 percent, respectively. The effective tax rate for 1998 was
increased as the result of higher tax rates associated with the corporation's
favorable litigation settlement in the third quarter of 1998. Excluding this
settlement, the effective tax rates would have been 27.3 percent and 28.8
percent for the three and nine month periods ended September 30, 1998.
Declines in the 1999 rates from the adjusted 1998 rates principally reflect
the expected effect of a higher percentage of research and experimentation and
foreign sales corporation tax credits in 1999.
Corporate Matters
Interest Rate and Currency Risk Management
The corporation selectively uses financial instruments to manage
its exposure to market risk related to changes in foreign
currency exchange rates and - 15 -
interest rates. The corporation
does not hold derivative financial instruments for trading
purposes.
At September 30, 1999,March 31, 2000, the corporation held open foreign currency
forward contracts and purchased options with net notional
amounts of $253$80 million and an unrecognized net loss of $1.0less than
$1 million. At March 31, 2000, the corporation did not hold any
derivatives related to its interest rate exposure.
The corporation used sensitivity analysis to evaluate the
potential effect of movements in foreign currency exchange rates
and interest rates on the condensed consolidated financial
statements. Based on this analysis, a hypothetical 10 percent
weakening in the U.S. dollar across all currencies would have
resulted in a $0.2$3.5 million net loss at September 30, 1999.March 31, 2000.
Alternatively, a hypothetical 10 percent strengthening in the
U.S. dollar across all currencies would have resulted in a $4.9$5.4
million net gain at September 30, 1999.March 31, 2000. These types of gains and
losses if any, would generally be offset by fluctuations in the
underlying currency transactions.
The corporation'sAt March 31, 2000, the corporation had long-term debt totaledof $1,869
million, at September 30, 1999, of which $125 million was variable-rate debt. The corporation held short-term
debt of $633 million at September 30, 1999. At that
date, a hypothetical 10 percent increase or decrease in market
interest rates would not have materially affected interest
expense or cash flows related to variable-rate debt or short-term debt. A 10
percent increase in market interest rates would have decreased
the net fair market value of fixed-rate debt instruments by $103
million at September 30, 1999,March 31, 2000, and a 10 percent decrease in market
interest rates would have
-13-
increased the net fair market value of fixed-rate debt instruments
by $116$117 million at September 30, 1999.March 31, 2000.
Outlook - Corporate
TheLooking ahead to the second quarter, the corporation anticipates
that fourth quarter results will reflect recently
announced increases inraw material costs to stabilize and average customer selling
prices for polyethylene, polypropylene
and for ethylene glycol. Although volume is expected to be similar to the
third quarter, costrise resulting in some improvement of sales is expected to be negatively affected by raw
material cost increases which are anticipated to continue into the fourth
quarter. Licensing income, excluding the litigation settlement received in the
third quarter, is expected to increase slightly from third quarter levels.
Partnership income could decline, as a result of increased expenses associated
with cost reduction programs at UOP; however,unit variable margins.
Additionally, income from corporate investments carried at
equity are expected to remain consistent with first quarter
amounts while partnership income should show improvement. Excluding the
litigation gain in the third quarter of 1999, the combination of improved
results for BC&P and corporate investments carried at equity are anticipated
to more than offset any decline in the S&I results for overall improved fourth
quarter net income.improve slightly.
On August 3, 1999, the corporation and The Dow Chemical Company
("Dow") entered into a definitivean Agreement and Plan of Merger. UnderMerger providing for the
agreementmerger of a subsidiary of Dow with and into the corporation. As
a result of the merger, the corporation will become a wholly-
owned subsidiary of Dow and the corporation's shareholders will
receive 0.537 of a share of Dow common stock for each share of
UCC common stock they own as of the date of the merger. On March
6, 2000, Dow announced plans for a three-for-one split of its
common stock, subject to approval of Dow shareholders. If the
record date for the stock split occurs prior to the merger, the
exchange ratio will be adjusted so that the corporation's
shareholders will receive 1.611 shares of Dow common stock for
each share of UCC common stock they own. On December 1, 1999,
the corporation's shareholders approved the merger agreement.
The merger is subject to certain conditions including approval by UCC shareholders,
and review by
antitrust regulatory authorities in the United States Europe and Canada.
On May 3, 2000 the European Commission approved the merger
subject to the divestiture of certain assets and the licensing of
certain technology. The transaction is intended to qualify as a
tax-free reorganization for United States Federal income tax
purposes and is expected to be accounted for under the pooling-of-interestspooling-of-
interests method of accounting.
The corporation regularly reviews its assets with the objective of maximizing
the deployment of resources in core operations. In this regard, UCC continues
to consider strategies and/or transactions with respect to assets not essential
to the operation of the business that, if implemented, could result in material
nonrecurring gains or losses.
- 16 -
Specialties and Intermediates
Quarter Ended
Nine MonthsMillions of dollars, Mar. 31, Mar. 31,
Except as indicated 2000 1999
Segment revenues $1,108 $1,034
Depreciation and amortization 67 63
Partnership income 2 4
Operating profit 82 208
Income from corporate investments
carried at equity 1 4
Unit variable margin (cents/pound) 19.0 26.0
Fixed cost per pound of products sold
(cents/pound) 12.9 14.1
Capital expenditures 69 69
Segment revenues of the S&I segment increased 7.2 percent for
the quarter ended March 31, 2000 compared with the same quarter
in 1999, the result of a 1.9 percent increase in average selling
prices coupled with a 5.1 percent increase in volume. Although
average selling prices increased from the first quarter of 1999,
they were unable to offset the continuing increase in raw
material costs, which escalated throughout 1999 and into the
first quarter of 2000. Volume increases occurred in almost all
of the S&I products due to increasing demand in Asia.
Partnership income in the first quarter of 2000 compared with
the first quarter of 1999 showed slightly better results of the
UOP and Univation joint ventures offset by increased losses
associated with Aspell.
-14-
Outlook - Specialties & Intermediates
For the second quarter of 2000, it is expected that variable
margin will benefit from the stabilization of raw material
coupled with continued increases in average selling prices and
volume. Partnership income is anticipated to improve due to
reduced losses associated with the Aspell joint venture.
Basic Chemicals & Polymers
Quarter Ended
Millions of dollars, Sept. 30, Sept. 30, Sept. 30, Sept. 30,Mar. 31, Mar. 31,
except as indicated 2000 1999
1998 1999 1998
Segment revenues $1,057 $ 995 $3,127 $3,175$608 $421
Depreciation and amortization 67 61 192 18235 41
Partnership income (loss) 17 (49) 19 121 2
Operating profit 134 233 530 601(loss) 30 (33)
Income (loss) from corporate investments
carried at equity - (3) 4 238 (36)
Unit variable margin (cents/pound) 20.1 25.3 22.9 24.29.4 5.6
Fixed cost per pound of products sold
(cents/pound) 14.1 14.7 13.7 14.36.2 5.2
Capital expenditures 58 111 220 332126 104
Segment revenues of the BC&P segment for the S&I segment increased 6.2 percent for the thirdfirst quarter of
1999, the result of a 6.42000 increased 44.4 percent decline in average selling prices
which was offset by a 13.3 percent increase in customer volume,as compared with the same quarter in
1998. S&I segment revenues1999, the result of a 44.3 percent increase in average customer
selling prices slightly offset by a 3.9 percent decline in customer
volume. Although raw material costs continued to increase
throughout 1999 and into the first quarter of 2000, larger
increases in average customer selling prices positively affected
unit variable margin. Declines in customer volume for the first
nine months of
1999 declined 1.5 percent, reflecting a 9.9 percent decline in average selling
prices, partially offset by a 9.3 percent increase in customer volume.
Declines in average selling prices for the current periods reflect worldwide
competitive pricing pressure in solvent, intermediate, monomer, industrial
performance chemical and wire and cable products. Volume increases for the
quarter and year-to-date periods ended September 30, 1999 reflected an
increase in demand, partly in Asia, over the same periods in 1998.
For the quarter and nine months ended September 30, 1999, unit variable margin
decreased 20.6 percent and 5.4 percent, respectively, as compared with the
same periods in 1998, as average selling prices declined while raw material
costs increased. Throughout 1999, raw material costs have steadily been
rising to the high levels experienced in the third quarter. Historically,
average selling price increases for products in the S&I segment have generally
lagged raw material cost increases.
Fixed cost per pound of products sold decreased for the three and nine month
periods ended September 30, 1999 compared to the same periods in 1998
primarily due to an increase in volume which more than offset higher fixed
costs.
Increases in partnership income for the three and nine month periods ended
September 30, 1999 as compared with the same periods in 1998, resulted from
the recognition of lower losses related to Aspell in 1999. Additionally, the
nine month period was negatively impacted by poor results experienced by UOP
due to a decline in projects coming from markets in Russia, Asia and the
Middle East.
Operating profit for the quarter and nine months ended September 30, 1999
included $38 million and $50 million of net gains from litigation settlements
related to the licensing business, respectively. Operating profit for the
same periods in 1998 included the above mentioned $53 million of losses
associated with Aspell and a $118 million net gain related to a favorable
litigation settlement for the licensing business.
Outlook - Specialties and Intermediates
Looking into the fourth quarter, the corporation expects that margins will
continue to suffer as increases in average selling prices will continue to lag
- 17 -
increases in raw material costs. Excluding the reported litigation gain,
licensing income is anticipated to increase slightly from third quarter 1999
levels. Partnership income may decline as a result of increased expenses
associated with cost reduction programs at UOP.
Basic Chemicals & Polymers
Quarter Ended Nine Months Ended
Millions of dollars, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
except as indicated 1999 1998 1999 1998
Segment revenues $ 522 $ 421 $1,379 $1,419
Depreciation and amortization 36 34 110 106
Partnership income (loss) 1 3 1 6
Operating profit (loss) (7) (13) (82) 65
Income (loss) from corporate
investments carried at equity 12 (25) (42) (37)
Unit variable margin (cents/pound) 7.1 8.2 5.8 10.3
Fixed cost per pound of products
sold (cents/pound) 5.9 7.8 5.4 7.4
Capital expenditures 120 103 339 239
Segment revenues for the third quarter of 1999 as2000 compared with the same quarter of 1998 reflected a 4.1 percent increase in average selling prices and
an 18.9 percent increase in customer volume. Segment revenues for the first
nine months of 1999 reflected
a 14.9 percent declinereduction of ethylene oxide glycol volume, which is now being
produced and sold by the corporation's joint venture in average selling prices
and a 17.4 percentKuwait,
as well as the delay of certain shipments to customers. The
increase in customer volume. Average customer selling
prices declined steadily throughout 1998, experienced a slower decline in the
first quarter of 1999 and showed growing improvement in the second and third
quarters of 1999. Although pricing in the third quarter of 1999 was higher
than in the same quarter of 1998, the overall average for the nine months is
much lower due to weak pricing in the first half of 1999 as compared with the
first half of 1998. Volume increases in both the three and nine month periods
reflected an increase in current year demand and an increase in the production
and sale of hydrocarbon co-products in the current year. In the third quarter
of 1998, production and sale of hydrocarbon co-products were reduced as a
result of the longer than anticipated plant shutdown at Taft, La. in
connection with a scheduled plant turnaround and expansion. Additionally,
shipments for the prior year nine month period were adversely affected by
transportation delays in the U.S. Gulf Coast region.
Unit variable margin for the third quarter of 1999, as compared with the same
quarter of 1998, declined as increases in average selling prices were unable
to offset the increases in raw material costs. Unit variable margin for the
nine month period ended September 30, 1999, as compared to the same period in
1998, declined as average customer selling prices fell while the cost of raw
materials increased. The reduction in fixed cost per pound of products sold was the resultresulted from
a modest increase of volume increases and a decline in fixed costs from levels
forcoupled with the same periodsreduction in
1998.customer volume.
Income from corporate investments carried at equity was $12increased
from a loss of $36 million in the thirdfirst quarter of 1999 a significant improvement over the lossto
income of $25$38 million
reported in the same quarter of 1998.2000. This
improvementincrease represents better performance at Polimeri Europa and
EQUATE, where demand was mainly
attributable tostrong and increases in average selling
prices were experienced. Additionally, the corporation's EQUATE
joint venture based in Kuwait, EQUATE
Petrochemical Company K.S.C. ("EQUATE"). In addition to strong manufacturing
operations, this venture benefitedbenefits from rising basic chemical prices coupled
with advantaged raw material supply
arrangements. In addition, lossescontracts.
Outlook - Basic Chemicals & Polymers
The corporation anticipates that results for the second quarter
will reflect continued improvement in 1998
reflected the effects of EQUATE's plant shutdown due to a power supply
disruption. Lossesaverage customer selling
prices, customer volumes and variable margins. Income from
corporate investments carried at equity totaled $42
million in the nine month period ended September 30, 1999 compared with $37
- 18 -
million in the same period of 1998. Increased losses in the year-to-date
period reflected lower average basic chemical prices in the first half of 1999
versus the same period of 1998.
Outlook - Basic Chemicals and Polymers
The corporation anticipates that announced fourth quarter price increases in
polyethylene, polypropylene and ethylene glycol could offset any anticipated
increase in raw material costs. Additionally, it is expected that the
corporation's companies carried at equity will continue to show improved
profitability.remain
consistent with first quarter levels.
-15-
Environmental
Estimates of future expenses related to environmental protection
for compliance with Federal, state and local laws regulating
solid and hazardous wastes and discharge of materials to air and
water, as well as for waste site remedial activities, have not
changed materially since December 31, 1998.1999. The reliability and
precision of the loss estimates are affected by numerous
factors, such as different stages of site evaluation, the
allocation of responsibility among potentially responsible
parties and the assertion of additional claims. The
corporation's environmental exposures are discussed in more
detail in the "Commitments and Contingencies" footnote to the
condensed
consolidated financial statements on pages 11 and 128 through 10 of this report on
Form 10-Q.
Accounting Changes
Effective January 1, 1999, the corporation adopted the provisions
of the American Institute of Certified Public Accountants ("AICPA")Accountants'
Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP requires the expensing of certain
costs, such as pre-operatingpreoperating expenses and organizational costs
associated with an entity's start-up activities. In accordance
with this SOP's provisions, on January 1, 1999, the corporation
recognized a charge of $27 million ($20 million after tax)after-tax) as a
cumulative effect of change in accounting principle, the majority
of which represented formation costs associated with the
corporation's joint ventures.
Also effective January 1, 1999, the corporation prospectively adopted the
provisions of the AICPA's SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The effect of this adoption
was not material to the corporation's results of operations or financial
condition in the quarter of adoption and is not expected to be material to the
corporation's results of operations or financial condition for the year ending
December 31, 1999.
In 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("Statement")
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." It requires that an entity recognize all
derivative instruments as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. This Statement, as amended by Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," is
effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The corporation is currently evaluating
the effect Statement No. 133 will have on its financial position
and results of operations in the period of adoption.
- 19 -
Year 2000 Readiness Disclosure
OverviewIn 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in
Financial Statements," which summarizes the staff's views
regarding the application of generally accepted accounting
principles to selected revenue recognition issues. The
corporation has a comprehensive program to addressis evaluating whether SAB 101 will cause any change
in its systems that may be
affected by the Year 2000 problem, including hardwarerevenue recognition policies and software, and to
assess the readiness of its customers and suppliers. Year 2000 readiness
remains one of the corporation's top priorities for the remainder of 1999.
Remediation efforts and discussions with entities outside the corporation
whose Year 2000 readiness could impact the corporation are continuing.
Internal Activities
Since 1995, the corporation has been working to ready its internal operations
and has expended significant funds to replace most of its U.S. office
information systems with an integrated, advanced system supported by Systems
Applications and Products ("SAP") software. This SAP project, implemented
during 1998, made Year 2000 ready, the corporation's internal finance, plant
operation and supply chain computer systems. SAP was implemented at selected
U.S. subsidiaries and Canadian operations in early November. Additionally, in
1998 a total upgrade of the principal integrated business software application
used outside of North America was completed, which made that system Year 2000
ready.
As of September 30, 1999, the Year 2000 remediation program is essentially
complete, with only minor work remaining. The applications supporting payroll
systems, employee benefits, select Health, Safety and Environmental systems,
select engineering systems, select Process IT Applications, electronic
interchange and the local and wide area network systems have been made Year
2000 ready.
Year 2000 readiness for the following systems and equipment will be finalized
in the fourth quarter of 1999:
- - Commercial computer systems in Health, Safety and Environmental Management
and Engineering Research and Development. A few implementations remain to be
completed by the middle of November.
- - Process control systems, logic controllers, process and laboratory
analyzers, embedded devices, office and medical equipment and building/site
systems. A few minor items will be completed in the fourth quarter.
- - International computer infrastructure was essentially completed in October
of this year. All major sites have been completed and only two minor sites
remain.
The corporation has addressed the Year 2000 project with resources of more
than 300 employees around the world at the peak in midyear. This staffing has
been substantially reduced since the midyear peak. At the end of 1999, all of
the corporation's business information systems are expected to be Year 2000
ready.
Business Continuity Planning
Business continuity planning was essentially completed during the third
quarter. The contingency and recovery plans for the corporation's business
-20 -
operations were developed, reviewed and approved. The implementation of these
plans will be finalized during the fourth quarter.
The objectives of business continuity planning are to guide the business in
managing risks resulting from potential Year 2000 events, provide a work
process flow to businesses, geographic areas, and common services for
integration of Year 2000 business continuity plans, and to institute a process
for dealing with potential unforeseen Year 2000 problems.
Finally, Event Management design, communications strategy and plans have been
developed. The Event Management team will be staffed 24 hours a day during the
Year 2000 changeover and will serve as an information clearinghouse and will
facilitate business and operational decisions as required during any
communication outage.
External Groups
While business applications and commercial computing are essentially Year 2000
compliant, the corporation is reviewing its external relationships to address
potential Year 2000 impacts arising from interfaces with customers, suppliers
and service providers with whom the corporation has a significant
relationship, including the corporation's joint ventures.
The corporation conducts ongoing risk assessments and continues to communicate
with its most significant suppliers and customers to assess their ability to
meet their sales and purchasing obligations, as well as with its joint
ventures to assess their readiness for the Year 2000. The corporation has
assessed its 500 most critical suppliers regarding their Year 2000 readiness.
It is anticipated that less than 2 percent of these suppliers will require
contingency plans to be implemented during the fourth quarter. Additionally,
the corporation is continually assessing approximately 1,000 vendors supplying
other products, such as office equipment, to assess their Year 2000 readiness.
At this time we are not anticipating any business continuity issues with these
1,000 vendors.
The corporation has completed written responses to approximately 6,500
inquiries sent by its customers: 4,500 in North America and 2,000 outside
North America. The corporation's Year 2000 efforts to monitor customers and
suppliers will continue into the early part of the Year 2000. The corporation
has assessed its 500 most critical domestic and select international customers
as to their Year 2000 readiness and based on this assessment, the corporation
does not anticipate Year 2000 issues with these customers.
Expenditures
Costs for project work are expected to range between $47 and $49 million.
Additionally, internal personnel costs are expected to range between $31 and
$33 million. All costs are expected to be funded through operations of the
corporation. As of September 30, 1999, approximately $43 million and $29
million had been incurred for costs of project work and internal personnel,
respectively. Approximately 75 percent of the planned external costs are
expected to relate to repairing or upgrading current systems and 25 percent to
replacement of existing hardware and software. These estimates do not include
costs associated with the replacement of most of the corporation's North
American computer systems with SAP, the environmental reporting project,
international information technology infrastructure, or Year 2000 issues that
the corporation's joint ventures may incur, all of which are being implemented
independently of the corporation's Year 2000 project. It is anticipated that
- 21 -
the corporation's share of the internal and external cost incurred by its
joint ventures to address Year 2000 issues will range between $9 and $10
million.
Risks and Contingency Plan
Failure to remediate newly identified Year 2000 problems would pose risks for
the corporation. Reasonable worst-case scenarios include, but are not limited
to, manufacturing system malfunctions including shutdowns and failure in the
supply chain. The full extent of these risk scenarios is uncertain at this
time, and the corporation is taking extensive measures to minimize exposure
through business continuity planning.
The corporation has essentially completed its Year 2000 project. However,
unforeseen difficulties may arise that could adversely affect the
corporation's operations. In addition, there can be no assurance that
customers, suppliers and service providers on whom the corporation relies, as
well as the corporation's joint ventures, will resolve their Year 2000 issues
accurately, thoroughly and on time. Failure by the corporation or failure by
the corporation's customers, suppliers, service providers or joint ventures to
complete the Year 2000 project by year end could have a material adverse
effect on future operating results and the financial condition of the
corporation.procedures.
Financial Condition - September 30, 1999March 31, 2000
Cash flow from operations for the first nine monthsquarter of 19992000 was
$419$231 million, a decreasean increase of $330$130 million from the same period in 1998. The decline
primarily results from an increasefirst quarter
of 1999, principally the result of a decrease in working capital
coupled with decreases
in income before the cumulative effect of change in accounting principle and
equity in (earnings)/lossesoffset by increased undistributed earnings of joint ventures. The increase in working
capital is attributable to increases in notes and accounts receivable and a
decrease in payables and accruals, partly offset by a decrease in inventory.
Cash flow used for investing totalled $631totaled $256 million, an increase
of $31 million
from $600$175 million in the comparable period of 1998. The majority of cash flow
used for investing related1999, principally
due to an increase in capital expenditures.expenditures and investments,
advances and acquisitions. Funding of major capital projects in
the first nine monthsquarter of 2000 and 1999 included a new olefins
facility, being built jointly with NOVA Chemicals Corporation,
and a polyolefins project, both in Canada.
Major capital projects funded in the same nine
months of 1998 included work on an olefins expansion, a new butanol unit and a
new CARBOWAX polyethylene glycol and TERGITOL surfactants facility, all at
Taft, La.; the new olefins facility and polyolefins project, both in Canada;
and the upgrade of information technology infrastructure.
At September 30, 1999, the corporation had approximately $244 million in
commitments related to authorized construction projects. These commitments
are anticipated to be sourced through operating cash flows and borrowings.-16-
Cash flow from financing was $198$47 million for the first nine monthsquarter
of 2000, as compared with $59 million for the first quarter of
1999. The first quarter of 2000 primarily included cash
received for issuances of common stock of $10 million and net
borrowings of $64 million offset by cash paid for dividends of
$30 million. The first quarter of 1999 compared with cash flow used for financing of $123 million in the same period
of 1998. The first nine months of 1999 included net proceeds of $250 million
from the April issuance of 6.70 percent Public Notes due in April 2009, common stock
repurchases of $50$22 million cash dividends paid of $90 million and net
increases in debt, excluding the April 1999 issuance of Public Notes, of $36
million. The first nine months of 1998 included net proceeds of $248 million
from the issuance of 6.25 percent public debentures due in June 2003, common
stock repurchases of $258 million, cash dividends paid of $92 million and net
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repayments of debt, excluding the June 1998 issuance of public debentures, of
$64 million.
On August 3, 1999, the Board of Directors rescinded the corporation's
authorization to repurchase shares under the common stock repurchase
authorization, subsequent to that date.
In April 1998, the corporationprogram and Petroliam Nasional Berhad ("PETRONAS"), the
national oil companycash dividends totaling $29 million, both of Malaysia, agreed to form three joint venture companies
(the OPTIMAL Group) that will build and operate a 600,000 metric-tons-per-year
ethylene plant, a 385,000 metric-tons-per-year ethylene oxide/glycol plant,
and a multiple specialties & intermediates derivatives plant in Kerteh,
Terengganu, Malaysia. The joint ventures' primary marketing focus will be in
Southeast Asia. The corporation anticipates funding its approximate
$500 million sharewhich
were offset by net borrowings of the cost of the complex through its 2001 planned start-
up date with internally generated funds and external debt. At September 30,
1999, the corporation had invested approximately $79 million, and was firmly
committed to an additional $76$92 million.
The corporation's ratio of debt to total capital was
49.449.8 percent at September
30, 1999March 31, 2000 as compared to 47.249.9 percent at
December 31, 1998.1999. At September 30, 1999March 31, 2000 there were no borrowings
outstanding borrowings under the existing major bank credit agreement
aggregating $1 billion.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 86 to the corporation's condensed consolidated financial
statements on pages 11 and 128 through 10 of this report on Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting - April 26, 2000
(b) Election of Directors
Proxies for the meeting were solicited pursuant to
Regulation 14A. There was no solicitation in
opposition to management's nominees as listed
in the proxy statement. All of the
management's nominees as listed in the proxy
statement were elected.
(c) Matters voted upon.
Election of Directors
Shares Voted
Directors Shares For Shares Withheld
C. Fred Fetterolf 111,239,751 4,070,402
Rainer E. Gut 111,506,566 3,803,587
Vernon E. Jordan, Jr. 106,152,616 9,157,537
William H. Joyce 108,477,496 6,832,657
Robert D. Kennedy 109,091,349 6,218,804
Ronald L. Kuehn, Jr. 110,500,308 4,809,845
Rozanne L. Ridgway 110,595,110 4,715,043
James M. Ringler 111,571,745 3,738,408
Paul J. Wilhelm 111,567,632 3,742,521
Proposal to Ratify the Appointment of Auditors
Shareholders ratified the appointment of KPMG LLP
to conduct the annual audit of the financial statements
of the corporation and its consolidated subsidiary
companies for the year ending December 31, 2000.
The vote was:
FOR - 113,435,301 shares or 98.96 percent of the shares voted.
AGAINST - 1,192,494 shares or 1.04 percent of the shares voted.
ABSTAIN - 682,358 shares.
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Proposal to Adopt an Amendment to the 1997 Union
Carbide Long-Term Incentive Plan
Shareholders approved an amendment to the 1997
Union Carbide Long-Term Incentive Plan to provide
an additional 2,500,000 shares of common stock for
award under the plan and to limit to 400,000 the total
number of shares of restricted stock which can
be granted under the plan.
The vote was:
FOR - 102,728,690 shares or 90.12 percent of the shares voted.
AGAINST - 11,263,530 shares or 9.88 percent of the shares voted.
ABSTAIN - 1,317,933 shares.
Proposal to Reapprove Performance Goals Under the
1995 Union Carbide Corporation Performance Incentive Plan
Shareholders reapproved the performance goals established under
the 1995 Union Carbide Performance Incentive Plan.
The vote was:
FOR - 106,987,527 shares or 93.80 percent of the shares voted.
AGAINST - 7,073,842 shares or 6.20 percent of the shares voted.
ABSTAIN - 1,248,784 shares.
Item 6. Exhibits and Reports on Form 8-K
(a) ExhibitsExhibits.
The following exhibits areexhibit is filed as part of this report:
2 Agreement and Plan of Merger dated as of August 3, 1999
among the corporation, The Dow Chemical Company
and Transition Sub Inc. (See Exhibit 2 of the
corporation's Current Report on Form 8-K dated
August 3, 1999).
3.2 By-Laws of Union Carbide Corporation, amended as of
September 22, 1999. (See Exhibit 3 of the corporation's
Current Report on Form 8-K dated September 22, 1999).
27 - Financial Data Schedule.
99 Stock Option Agreement dated as of August 3, 1999
between the corporation and The Dow Chemical Company
(See Exhibit 99.1 of the corporation's Current Report
on Form 8-K dated August 3, 1999).
(b) The corporation filed the following current reports
on Form 8-K for the quarterthree months ended September 30, 1999:March 31, 2000:
1. Form 8-K dated July 26, 1999,January 21, 2000, contained the corporation's
press release dated July 26, 1999.
2. Form 8-K dated August 3, 1999, contained:
a. an Agreement and Plan of Merger, dated August 3, 1999,
by and among the corporation, The Dow Chemical Company
and Transition Sub Inc.;
b. a Stock Option Agreement, dated August 3, 1999, by and
between the corporation and The Dow Chemical Company;
and
c. the text of a joint press
release dated August 4, 1999, issued by the corporation and The Dow Chemical
Company.
3.Company dated January 21, 2000.
2. Form 8-K dated September 22, 1999, contained the By-Laws
of the corporation and the corporation's press release
dated September 22, 1999.
4. Form 8-K dated September 23, 1999,January 31, 2000, contained the corporation's
press release dated September 23, 1999.
- 24 -January 31, 2000.
3. Form 8-K dated March 30, 2000, contained the corporation's
press release dated March 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
UNION CARBIDE CORPORATION
(Registrant)
Date: November 9, 1999May 5, 2000 By: /s/JohnJ. K. Wulff
JOHN K. WULFF
Vice-President, Chief
Financial Officer and
Controller
- 25 --20-
EXHIBIT INDEX
Exhibit Page
No. Exhibit 2 Agreement and Plan of Merger dated as of August 3, 1999
among the corporation, The Dow Chemical Company
and Transition Sub Inc. (See Exhibit 2 of the
corporation's Current Report on Form 8-K dated
August 3, 1999).
3.2 By-Laws of Union Carbide Corporation, amended as of
September 22, 1999. (See Exhibit 3 of the corporation's
Current Report on Form 8-K dated September 22, 1999).No.
27 Financial Data Schedule.
99 Stock Option Agreement dated as of August 3, 1999
between the corporation and The Dow Chemical Company
(See Exhibit 99.1 of the corporation's Current Report
on Form 8-K dated August 3, 1999).
Wherever an exhibit listed above refers to another exhibit (e.g., "See Exhibit
6 of..."), that exhibit or document is incorporated herein by such reference.
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