To: Mr. John Alexander, Jr.

From: Allan Ketchi

Re: Proposed Production Project in Japan

Date: March 10, 1995

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This Memorandum is in response to your request for our recommendations concerning the financial aspects of the proposed production base in Japan. As you know, from a financial point of view, Japan is not necessarily the best location for the Asian production base since costs there are very high because of the relative strength of the Japanese Yen. On the other hand, since domestic sales will be denominated in Yen, we should be able to hedge some of the Yen costs with Yen revenues.

Finance estimates that the cost of the proposed manufacturing plant and joint venture offices will be approximately $250,000,000. Of this we could expect to finance $100,000,000 with equity capital and $150,000,000 with Yen (or possibly Dollar) denominated debt (which would be serviced by revenues from the joint venture).

Unfortunately, as you are aware, we do not have sufficient cash resources from retained earnings to fund our proposed 50% share of the joint venture capital ($50,000,000). The maximum we could free up prior to the establishment of the joint venture would be $25,000,000 without borrowing from banks.

Unfortunately, we are fully extended on our existing lines of credit with our banks and it may be difficult to once again request that we extend these lines. Under the terms of our loan agreements with certain of these banks, we require their consent before opening new lines with other banks. Capital market sources of funds (Eurobonds, NIFs, etc.) would similarly be constrained by these agreements.

Finance also has a concern that if we add more debt now, the rating agencies could lower our rating from AA- to A+ (or even A) and this change could accelerate certain lines (and our relatively cheap 1992 Eurodollar debt). A ratings change would also cost us as much as 20 basis points on certain other lines. The impact would be to increase our debt cost by as much as $20,000,000 a year substantially reducing the amount of cash payable to stockholders as dividends.

From the point of view of finance, the optimal structure for raising the $250,000,000 required to establish the joint venture would be to have the joint venture borrow $150,000,000 on a project basis (i.e., with no credit support from UT so that it does not appear on our balance sheet or affect our credit rating). This debt would be serviced by revenues from the joint venture and raised in the Japanese market (perhaps Yasuda can help us here).

Of the remaining $100,000,000 of equity required, UT would put up $25 million with Yasuda putting in $75 million (or its equivalent in non-cash assets). Of course, the big challenge here will be how to persuade Yasuda to keep it a 50-50 joint venture when they are putting in 75% of the equity.

Putting in more than $25,000,000 of equity will require major renegotiation of our credit lines and probably significantly increase our borrowing cost thus depressing our profits and financial performance. We have to do our best to progress this joint venture using not more that $25,000,000 million from finance.

Allan