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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
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(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM........TO........
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COMMISSION FILE NUMBER: 1-13888
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GRAFTECH INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1385548
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
---------------
1521 CONCORD PIKE
BRANDYWINE WEST, SUITE 301 19803
WILMINGTON, DE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (302) 778-8227
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
As of March 31, 2002, 55,885,559 shares of common stock, par value $.01 per
share, were outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 2001
and March 31, 2002....................................................................... Page 2
Consolidated Statements of Operations for the Three Months
ended March 31, 2001 and 2002............................................................ Page 3
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2001 and 2002............................................................ Page 4
Consolidated Statement of Stockholders' Deficit for the
Three Months ended March 31, 2002........................................................ Page 5
Notes to Consolidated Financial Statements................................................... Page 6
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1................................................. Page 33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................. Page 39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS................................ Page 67
PART II. OTHER INFORMATION:......................................................................... Page 69
ITEM 1. LEGAL PROCEEDINGS......................................................................... Page 75
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... Page 77
SIGNATURE .......................................................................................... Page 79
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
DECEMBER 31, MARCH 31,
ASSETS 2001 2002
---- ----
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 38 $ 33
Notes and accounts receivable.................................... 95 97
Inventories:
Raw materials and supplies..................................... 33 34
Work in process................................................ 111 105
Finished goods................................................. 33 32
-------- --------
177 171
Prepaid expenses and deferred income taxes....................... 12 19
-------- --------
Total current assets........................................... 322 320
-------- --------
Property, plant and equipment........................................ 931 936
Less: accumulated depreciation...................................... 650 655
-------- --------
Net fixed assets............................................... 281 281
-------- --------
Goodwill............................................................. 29 29
Less: accumulated amortization....................................... 12 12
-------- --------
17 17
Deferred income taxes................................................ 140 153
Other assets......................................................... 37 46
-------- --------
Total assets................................................... $ 797 $ 817
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable................................................. $ 101 $ 68
Short-term debt.................................................. 7 8
Accrued income and other taxes................................... 45 47
Other accrued liabilities........................................ 57 58
Total current liabilities...................................... 210 181
-------- --------
Long-term debt...................................................... 631 688
Other long-term obligations.......................................... 231 228
Deferred income taxes................................................ 32 38
Minority stockholders' equity in consolidated entities............... 25 25
STOCKHOLDERS' DEFICIT:
Preferred stock, par value $.01, 10,000,000 shares authorized, - -
none issued...................................................
Common stock, par value $.01, 100,000,000 shares authorized, 1 1
58,532,209 shares issued at December 31, 2001, 58,642,203
shares issued at March 31, 2002...............................
Additional paid-in capital....................................... 629 635
Accumulated other comprehensive loss............................. (269) (277)
Retained deficit................................................. (602) (606)
Unearned restricted stock........................................ - (5)
Less: cost of common stock held in treasury, 2,322,412 shares 5 5
at December 31, 2001, 2,330,244 shares at March 31, 2002...... (8) (8)
Common stock held in employee benefits trust, 426,400 shares at
December 31, 2001 and March 31, 2002.......................... (6) (6)
-------- --------
Total stockholders' deficit...................................... (332) (343)
-------- --------
Total liabilities and stockholders' deficit.................... $ 797 $ 817
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
2001 2002
---- ----
Net sales................................................................... $ 171 $ 138
Cost of sales............................................................... 122 107
---------- ---------
Gross profit......................................................... 49 31
Research and development.................................................... 3 3
Selling, administrative and other expenses.................................. 21 18
Global realignment and related expenses..................................... - 1
Restructuring charge and impairment loss of long-lived and other assets..... - 5
Other (income) expense, net................................................. - (3)
---------- ---------
Operating profit..................................................... 25 7
Interest expense............................................................ 19 13
---------- ---------
Income (loss) before provision (benefit) for income taxes,
minority interest and extraordinary item......................... 6 (6)
Provision (benefit) for income taxes........................................ 2 (5)
---------- ---------
Income (loss) of consolidated entities before minority interest
and extraordinary item........................................... 4 (1)
Less: minority stockholders' share of income................................ 1 1
---------- ---------
Income (loss) before extraordinary item.............................. $ 3 (2)
Extraordinary item, net of tax.............................................. - 2
---------- ---------
Net income (loss)................................................ $ 3 $ (4)
========== =========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income before extraordinary item....................................... $ 0.07 $ (0.03)
Extraordinary item, net of tax......................................... - (0.03)
---------- ---------
Net income (loss) per share............................................ $ 0.07 $ (0.06)
========== =========
Weighted average common shares outstanding (IN THOUSANDS).............. 45,222 55,823
========== =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income before extraordinary item....................................... $ 0.07 $ (0.03)
Extraordinary item, net of tax......................................... - (0.03)
---------- ---------
Net income (loss) per share............................................ $ 0.07 $ (0.06)
========== =========
Weighted average common shares outstanding (IN THOUSANDS).............. 46,033 55,823
========== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PART I (CONT'D)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2001 2002
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ 3 $ (4)
Extraordinary item, net of tax............................................... - 2
Non-cash charges to net income (loss):
Depreciation and amortization............................................ 10 7
Deferred income taxes.................................................... - (8)
Restructuring charge and impairment loss on
long-lived and other assets......................................... - 5
Other non-cash charges................................................... (5) (4)
Working capital *............................................................ 5 (45)
Long-term assets and liabilities............................................. (2) -
-------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................. 11 (47)
-------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures......................................................... (5) (9)
Sale of assets............................................................... 1 -
-------- -------
NET CASH USED IN INVESTING ACTIVITIES............................... (4) (9)
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt borrowings (reductions), net................................. (1) 1
Revolving credit facility borrowings (reductions), net....................... 2 (25)
Long-term debt borrowings.................................................... - 400
Long-term debt reductions.................................................... (7) (312)
Minority interest investment................................................. 9 -
Sale of common stock under stock options..................................... 1 1
Financing costs.............................................................. - (14)
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................... 4 51
-------- -------
Net increase (decrease) in cash and cash equivalents.............................. 111 (5)
Effect of exchange rate changes on cash and cash equivalents...................... (2) -
Cash and cash equivalents at beginning of period.................................. 47 38
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 56 $ 33
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest expense......................................................... $ 17 $ 12
======== =======
Income taxes............................................................. $ 6 $ 3
======== =======
* Net change in working capital due to the following components:
(Increase) decrease in current assets:
Notes and accounts receivable............................................ $ 22 $ (3)
Inventories.............................................................. (11) 4
Prepaid expenses......................................................... - (3)
Increase (decrease) in accounts payable and accruals......................... 6 (40)
Antitrust investigations and related lawsuits and claims..................... (8) -
Restructuring payments....................................................... (4) (3)
-------- -------
WORKING CAPITAL..................................................... $ 5 $ (45)
======== =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
PART I (CONT'D)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(DOLLARS IN MILLIONS)
(UNAUDITED)
Accumulated
Additional Other Unearned
Common Paid-in Comprehensive Retained Restricted Treasury
Stock Capital Loss Deficit Stock Stock
----- ------- ---- ------- ----- -----
Balance at December 31, 2001............ $ 1 $ 630 $ (269) $ (602) $ - $ (85)
Comprehensive income (loss):
Net income (loss).................... - - - (4) - -
Foreign currency translation
adjustments........................ - - (8) - - -
Total comprehensive income
(loss)........................ - - (8) (4) - -
Issuance of restricted stock............ - 4 - - - -
Unamortized restricted stock............ - - - - (5) -
Sale of common stock under stock options - 1 - - - -
---- ------- ------- ----- ---- ----
Balance at March 31, 2002............... $ 1 $ 635 $ (277) $ (606) $ (5) $ (85)
==== ======= ======= ===== ==== ====
COMMON
STOCK HELD
IN TOTAL
EMPLOYEE STOCKHOLDER
BENEFITS EQUITY
TRUST (DEFICIT)
----- ---------
Balance at December 31, 2001............ $ (6) $ (332)
Comprehensive income (loss):
Net income (loss).................... - (4)
Foreign currency translation
adjustments........................ - (8)
Total comprehensive income
(loss)........................ - (12)
Issuance of restricted stock............ - 5
Unamortized restricted stock............ - (5)
Sale of common stock under stock options - 1
----- ------
Balance at March 31, 2002............... $ (6) $ (343)
===== ======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(1) INTERIM FINANCIAL PRESENTATION
These interim Consolidated Financial Statements are unaudited; however,
in the opinion of management, they have been prepared in accordance with Rule
10-01 of Regulation S-X adopted by the SEC and reflect all adjustments (all of
which are of a normal, recurring nature) which are necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods presented. Results of operations for the three months ended March 31,
2002 are not necessarily indicative of the results of operations that may be
expected for the entire year ending December 31, 2002.
IMPORTANT TERMS
We use the following terms to identify various companies or groups of
companies in the Consolidated Financial Statements.
"GTI" refers to GrafTech International Ltd. only. GTI is our public
parent company and the issuer of the publicly traded common stock covered by the
Consolidated Financial Statements. GTI is a guarantor of the Senior Notes as
defined in Note 10 (the "SENIOR NOTES"). Prior to our Annual Meeting of
Stockholders for 2002, GTI was named UCAR International Inc.
"UCAR GLOBAL" refers to UCAR Global Enterprises Inc. only. UCAR Global
is a direct, wholly owned subsidiary of GTI and the direct or indirect holding
company for all of our operating subsidiaries. UCAR Global is a guarantor of the
Senior Notes.
"UCAR CARBON" refers to UCAR Carbon Company Inc. only. UCAR Carbon is
our wholly owned subsidiary through which we conduct most of our U.S.
operations. In connection with the corporate realignment of our subsidiaries as
described below, UCAR Carbon will change its name to UCAR Technology Company
Inc. and transfer its businesses to one or more newly formed wholly owned U.S.
subsidiaries. UCAR Carbon is a guarantor of the Senior Notes.
"UCAR FINANCE" refers to UCAR Finance Inc. only. UCAR Finance is a
direct, wholly owned special purpose finance subsidiary of GTI and the borrower
under our senior secured bank credit facilities (as amended, the "SENIOR
FACILITIES"). UCAR Finance is the issuer of our 10.25% senior notes due 2012.
"GRAFTECH" refers to Graftech Inc. only. Graftech is our 97.5% owned
(wholly owned, prior to June 2001) subsidiary engaged in the development,
manufacture and sale of natural graphite-based products. In connection with the
corporate realignment of our subsidiaries as described below, Graftech will
change its name to Graftech Technology Company Inc. and transfer its business to
a newly formed 100% owned U.S. subsidiary (to be named Graftech Inc.).
"CARBONE SAVOIE" refers to Carbone Savoie S.A.S. and its subsidiaries.
Carbone Savoie is our 70% owned subsidiary engaged in the development,
manufacture and sale of graphite and carbon cathodes.
6
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
"SUBSIDIARIES" refers to those companies which, at the relevant time,
are or were majority owned or wholly owned directly or indirectly by GTI or its
predecessors to the extent that those predecessors' activities related to the
graphite and carbon business. All of GTI's subsidiaries have been wholly owned
(with de minimis exceptions in the case of certain foreign subsidiaries) from at
least January 1, 1999 through March 31, 2002, except for:
o our German subsidiary, which was acquired in early 1997 and 70% owned
until early 1999, when it became wholly owned to facilitate its
liquidation;
o Carbone Savoie, which has been and is 70% owned; and
o Graftech, which was 100% owned until it became 97.5% owned in June
2001.
Our 100% owned Brazilian cathode manufacturing operations were contributed to
Carbone Savoie and, as a result, became 70% owned on March 31, 2001.
"WE," "US" or "OUR" refers to GTI and its subsidiaries collectively or,
if the context so requires, GTI, UCAR Global or UCAR Finance, individually.
We are realigning the corporate organizational structure of our
subsidiaries. Upon completion of this corporate realignment, most of the
businesses of each division will be segregated into separate companies along
divisional lines. In addition, because most of the operations, net sales and
growth opportunities of our Graphite Power Systems Division are located outside
the U.S., most of its operations will be held by our Swiss subsidiary or its
subsidiaries. Most of our technology will continue to be held by our U.S.
subsidiaries.
FOREIGN CURRENCY TRANSLATION
Generally, except for financial statements of our subsidiary in Russia
where high inflation has existed, unrealized gains and losses resulting from
translation of financial statements of our foreign subsidiaries from their
functional currencies into dollars are accumulated in other comprehensive income
(loss) on the Consolidated Balance Sheets until such time as the subsidiaries or
their operations are sold or the subsidiaries are substantially or completely
liquidated. Translation gains and losses relating to financial statements of
foreign subsidiaries in countries where high inflation has existed or which
predominantly use the dollar for their operations are included in other (income)
expense, net in the Consolidated Statements of Operations. Our Mexican
subsidiary began using the dollar as its functional currency during 1999 because
its sales and purchases are predominantly dollar-denominated. Prior to August 1,
2000, our Swiss subsidiary used the dollar as its functional currency. Beginning
August 1, 2000, our Swiss subsidiary began using the euro as its functional
currency because its operations became predominantly euro-dominated. Prior to
the 2002 first quarter, we had designated [euro]125 million of Tranche A Term
Loans as a net equity hedge for our net investments in Europe. In the 2002 first
quarter, a majority of the Tranche A Term Loans were repaid and the net equity
hedge was eliminated and the resulting $1 million of loss in other comprehensive
income (loss) was
7
charged to other (income) expense. The currency effects associated with the
Tranche A Term Loans were reflected in accumulated other comprehensive income
(loss) in the Consolidated Statements of Operations where they offset gains and
losses recorded on our net investment in Europe.
NEW ACCOUNTING STANDARDS
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, excluding
goodwill and other intangible assets not being amortized pursuant to SFAS No.
142, and certain other assets. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. We adopted
SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 did not
have a significant impact on our consolidated financial position or results of
operations.
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. SFAS
No. 143 will be effective for financial statements issued for fiscal years
beginning after June 15, 2002. We anticipate that the adoption of SFAS No. 143
will not have a significant impact on our consolidated financial position or
results of operations.
In July 2001, FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets," both of which are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. SFAS No. 141 and SFAS No. 142 establish accounting and
reporting standards for business combinations, goodwill and intangible assets.
We adopted SFAS No. 141 and SFAS No. 142 effective January 1, 2002. The adoption
of SFAS No. 141 and SFAS No. 142 did not have a significant impact on our
consolidated financial position or results of operations, except that we no
longer amortize goodwill. Goodwill amortization was $1 million in the 2001
first quarter.
8
(2) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
share data:
THREE MONTHS
ENDED MARCH 31,
---------------
2001 2002
---- ----
Weighted average common shares
outstanding for basic calculation................... 45,221,935 55,823,444
Add: effect of stock options.......................... 811,362 -
-------------- -------------
Weighted average common shares
outstanding for diluted calculation................ 46,033,297 55,823,444
============== =============
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Basic earnings (loss) per common share is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the sum of the weighted average number of common shares
outstanding plus the additional common shares that would have been outstanding
if potentially dilutive securities had been issued. As a result of the net loss
for the three months ended March 31, 2002, 1,109,941 of potential common shares
underlying dilutive securities have been excluded from the calculation of
diluted earnings (loss) per share because their effect would reduce the loss per
share.
In addition, the calculation of weighted average common shares
outstanding for the diluted calculation excludes consideration of stock options
covering 4,318,247 shares and 4,329,097 shares in the three months ended March
31, 2001 and 2002, respectively, because the exercise of these options would not
have been dilutive for those periods due to the fact that the exercise prices
were greater than the weighted average market price of our common stock for each
of those periods.
The calculation of both basic and diluted earnings (loss) per share
gives effect to, among other things, the grant of 412,300 shares of restricted
stock to employees in March 2002. In general, 50% of such shares vest on January
1, 2003 and 50% of such shares vest on January 1, 2004 if the employees are
employed by us on the vesting date. Shares which do not vest are forfeited to us
and become treasury shares.
(3) SEGMENT REPORTING
We evaluate the performance of our operating segments based on gross
profit. Intersegment sales and transfers of goods and services are not material.
The following tables summarize financial information concerning our
reportable segments.
9
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2002
---- ----
(DOLLARS IN MILLIONS)
Net sales to external customers:
Graphite Power Systems Division................. $ 136 $ 111
Advanced Energy Technology Division............. 35 27
------ ------
Consolidated net sales....................... $ 171 $ 138
====== ======
Gross profit:
Graphite Power Systems Division................. $ 38 $ 25
Advanced Energy Technology Division............. 11 6
------ ------
Consolidated gross profit.................... $ 49 $ 31
====== ======
Depreciation and amortization:
Graphite Power Systems Division................. $ 9 $ 6
Advanced Energy Technology Division............. 1 1
-------- -------
Consolidated depreciation and amortization... $ 10 $ 7
====== =======
(4) RESTRUCTURING AND IMPAIRMENT CHARGES
In the 2002 first quarter, we recorded a $5 million restructuring
charge that related primarily to the mothballing of our graphite electrode
operations in Caserta, Italy. This charge includes estimated pension, severance
and other related employee benefit costs for 102 employees and other costs
related to the mothballing.
In the 2001 fourth quarter, we recorded a $7 million restructuring
charge and a $27 million impairment loss on long-lived and other assets. The
restructuring charge related primarily to exit costs related to the mothballing
of our graphite electrode operations in Caserta, Italy. $24 million of the
impairment loss related to assets located at our facility in Caserta. The
remaining $3 million of the impairment loss related to impairment of
available-for-sale securities.
In the 2001 third quarter, we recorded a $2 million restructuring
charge and impairment loss on long-lived assets related to our restructuring and
realignment of our businesses into our Advanced Energy Technology and Graphite
Power Systems Divisions, the relocation of our corporate headquarters and the
shutdown of our coal calcining operations located in Niagara Falls, New York. As
part of the realignment, we have centralized management functions of our
Advanced Energy Technology Division in Cleveland, Ohio, and management functions
of our Graphite Power Systems Division in Etoy, Switzerland. We have relocated
our corporate headquarters, consisting of approximately 10 employees, from
Nashville, Tennessee, to Wilmington, Delaware. The relocation was substantially
completed by the end of 2001. The charge includes severance and related benefits
associated with a workforce reduction of 24 employees and impairment of
leasehold improvement assets.
10
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
In the 2001 third quarter, we reversed $2 million of prior
restructuring charges based on revised lower estimates of workforce reductions
and plant closure costs, and we reclassified $4 million of prior restructuring
charges related to on-site waste disposal post monitoring costs to the other
long-term obligations.
In the 2001 second quarter, we recorded a $58 million charge for
restructuring and impairment loss on long-lived assets related to the shutdown
of our graphite electrode manufacturing operations in Clarksville and Columbia,
Tennessee and our coal calcining operations in Niagara Falls, New York. The $58
million charge included restructuring charges of $2 million for severance and
related benefits associated with a work force reduction of 171 employees and $3
million in plant shutdown and related costs. The remaining $53 million of the
charge related to the impairment loss on long-lived assets. The shutdown was
completed on schedule by the end of the 2001 third quarter.
In the 2000 fourth quarter, we recorded a charge of $4 million in
connection with a corporate restructuring, mainly for severance and related
benefits associated with a workforce reduction of 85 employees. The functional
areas affected included finance, accounting, sales, marketing and
administration. In 2001, we paid about $1 million of these expenses. In the 2001
third quarter, we revised the workforce reduction estimate to 45 employees and
reversed a portion of the $4 million charge. The reversal is part of the $2
million reversal described above.
In the 2000 third quarter, we recorded an impairment loss on long-lived
assets of $3 million in connection with the re-sourcing of our U.S. cathode
production to our facilities in Brazil and France and the reduction of graphite
electrode production capacity to accommodate such increased cathode production
in Brazil and France. This non-cash charge related to the write-off of certain
long-lived assets located at one of our facilities in the U.S. The charge
affected GPS.
In the 2000 first quarter, we recorded a restructuring charge of $6
million in connection with a restructuring of our advanced graphite materials
business. Key elements of the restructuring included elimination of certain
product lines and rationalization of operations to reduce costs and improve
profitability of remaining product lines. This rationalization included
discontinuing certain manufacturing processes at one of our facilities in the
U.S. that will be performed at our other facilities in the future. Based on
subsequent developments in the 2000 third quarter, we decided not to demolish
certain buildings. Therefore, in the 2000 third quarter, we reversed the $4
million of the charge related to demolition and related environmental costs. The
$2 million balance of the charge included estimated severance costs for 65
employees. The restructuring was completed in 2000.
The following table summarizes activity relating to the accrued expense
in connection with the restructuring charges.
11
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
POST
PLANT SHUTDOWN MONITORING
SEVERANCE AND AND RELATED AND RELATED
RELATED COSTS COSTS COSTS TOTAL
------------- ----- ----- -----
(DOLLARS IN MILLIONS)
Balance at December 31, 2000............. $ 13 $ 9 $ 4 $ 26
Restructuring charges in 2001............ 4 8 - 12
Payments in 2001......................... (13) (5) - (18)
Non-cash write-offs in 2001.............. - (4) - (4)
Reclassification of on-site disposal and
monitoring costs..................... - - (4) (4)
------ ------ ------ -----
Balance at December 31, 2001............. $ 4 $ 8 $ - $ 12
Restructuring charges in 2002............ 5 - - 5
Payments in 2002......................... (1) (1) - (2)
------ ------ ------ -----
Balance at March 31, 2002................ $ 8 $ 7 $ - $ 15
====== ====== ====== =====
The restructuring accrual is included in other accrued liabilities on
the Consolidated Balance Sheets.
(5) LONG-TERM DEBT AND LIQUIDITY
The following table presents our long-term debt:
DECEMBER 31, MARCH,
2001 2002
---- ----
(DOLLARS IN MILLIONS)
Senior Facilities:
Tranche A euro facility............................ $ 194 $ 22
Tranche A U.S. dollar facility..................... 23 -
Tranche B U.S. dollar facility..................... 313 190
Revolving credit facility.......................... 95 70
--------- --------
Total Senior Facilities.......................... 625 282
Swiss mortgage and other European debt.................. 6 6
Senior Notes due 2012................................... - 400
--------- --------
Total.............................................. $ 631 $ 688
========= ========
SENIOR NOTES
On February 15, 2002, UCAR Finance issued $400 million aggregate
principal amount of Senior Notes. As described in Note 10, on May 6, 2002, UCAR
Finance issued an additional $150 million aggregate principal amount of Senior
Notes. Interest on the Senior Notes is payable semi-annually on February 15 and
August 15 of each year, commencing August 15, 2002, at the rate of 10.25% per
annum. The Senior Notes mature on February 15, 2012.
12
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Except as described below, UCAR Finance may not redeem the Senior Notes
prior to February 15, 2007. On or after that date, UCAR Finance may redeem the
Senior Notes, in whole or in part, at specified redemption prices beginning at
105.125% of the principal amount redeemed for the year commencing February 15,
2007 and reducing to 100% of the principal amount redeemed for the years
commencing February 15, 2010, and thereafter, in each case plus accrued and
unpaid interest to the redemption date.
In addition, before February 15, 2005, UCAR Finance is entitled at its
option on one or more occasions to redeem Senior Notes (which includes
additional Senior Notes, if any) in an aggregate principal amount not to exceed
35% of the aggregate principal amount of the Senior Notes (which includes
additional Senior Notes, if any) originally issued at a redemption price of
110.25% of the principal amount redeemed, plus accrued and unpaid interest to
the redemption date, with the net cash proceeds from one or more underwritten
primary public offering of common stock of GTI pursuant to an effective
registration statement under the Securities Act so long as:
o at least 65% of such aggregate principal amount of Senior Notes (which
includes additional Senior Notes, if any) remains outstanding
immediately after each such redemption (other than Senior Notes held,
directly or indirectly, by us); and
o each such redemption occurs within 60 days after the date of the
related public offering.
Upon the occurrence of a change of control, UCAR Finance will be
required to make an offer to repurchase the Senior Notes at a price equal to
101% of the principal amount redeemed, plus accrued and unpaid interest to the
redemption date. For this purpose, a change in control occurs on:
o the date on which any person beneficially owns more than 35% of the
total voting power of GTI; or
o the date on which individuals, who on the issuance date of the Senior
Notes, were directors of GTI (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 GTI's Board of
Directors then in office; or
o the date on which a plan relating to the liquidation or dissolution of
GTI is adopted; or
o the date on which GTI merges or consolidates with or into another
person or another person merges into GTI, or all or substantially all
of GTI's assets are sold (in each case, determined on a consolidated
basis), with certain specified exceptions; or
o the date on which GTI ceases to own, directly or indirectly, all of
the voting power of UCAR Global, UCAR Carbon and UCAR Finance.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The Senior Notes rank senior to present and future subordinated debt
and equally with present and future senior debt and obligations of UCAR Finance.
The Senior Notes are effectively subordinated to present and future secured debt
and obligations of UCAR Finance, to the extent of the value of the assets
securing such debt and obligations, and are structurally subordinated to debt
and obligations, including trade payables, of subsidiaries that are neither
guarantors of the Senior Notes nor unsecured intercompany term note obligors.
13
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The Senior Notes have been guaranteed on a senior unsecured basis by
GTI, UCAR Global and UCAR Carbon and other U.S. subsidiaries holding a
substantial majority of our U.S. assets, except that the guarantee by UCAR
Carbon is secured as described below.
Unsecured intercompany term notes in an aggregate principal amount
equal to $382 million (based on currency exchange rates in effect at March 31,
2002) and guarantees of those unsecured intercompany term notes issued to UCAR
Finance by certain of our foreign subsidiaries have been pledged by UCAR Finance
to secure the Senior Notes, subject to the limitation that at no time will the
combined value of the pledged portion of any foreign subsidiary's unsecured
intercompany term note and unsecured guarantee of unsecured intercompany term
notes issued by other foreign subsidiaries exceed 19.99% of the principal amount
of the then outstanding Senior Notes. As a result of this limitation and
assuming no change in the aggregate principal amount of unsecured intercompany
term notes due to changes in currency exchange rates since March 31, 2002, and
after giving effect to the issuance of additional Senior Notes on May 6, 2002,
the principal amount of unsecured intercompany term notes pledged to secure the
Senior Notes equals $381 million, or about 69% of the principal amount of the
outstanding Senior Notes (including the additional Senior Notes issued on May 6,
2002 as discussed in Note 10). The remaining unsecured intercompany term notes
held by UCAR Finance (in an aggregate principal amount of $1 million (based on
currency exchange rates in effect at March 31, 2002 and after giving effect to
the issuance of additional Senior Notes on May 6, 2002) and any pledged
unsecured intercompany term notes that cease to be pledged due to a reduction in
the principal amount of the then outstanding Senior Notes due to redemption,
repurchase or other events, will not be subject to any pledge and will be
available to satisfy the claims of creditors (including the lenders under the
Senior Facilities and the holders of the Senior Notes) of UCAR Finance, as their
interests may appear. The Senior Notes contain provisions restricting, subject
to certain exceptions, the pledge of those unsecured intercompany term notes to
secure any debt or obligation unless they are equally and ratably pledged to
secure the Senior Notes for so long as such other pledge continues in effect.
The guarantee by UCAR Carbon has been secured by a pledge of all of our
shares of Graftech, but at no time will the value of the pledged portion of such
shares exceed 19.99% of the principal amount of the then outstanding Senior
Notes. The pledge of the shares of Graftech is junior to the pledge of the same
shares to secure UCAR Carbon's guarantee of the Senior Facilities.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The unsecured intercompany term note obligations rank senior to present
and future subordinated guarantees, debt and obligations of the respective
obligors, and equally with present and future senior guarantees, debt and
obligations of the respective obligors. The unsecured intercompany term note
obligations are effectively subordinated to present and future secured
guarantees, debt and obligations of the respective obligors, to the extent of
the value of the assets securing such guarantees, debt and obligations, and are
structurally subordinated to guarantees, debt and obligations, including trade
payables, of subsidiaries of the respective obligors that are not also unsecured
intercompany term note obligors.
The Senior Notes contain a number of covenants that, among other
things, restrict our ability to incur additional indebtedness, pay dividends,
make investments, create or permit to exist restrictions on distributions from
subsidiaries, sell assets, engage in certain transactions with affiliates or
enter into certain mergers and consolidations.
In addition to the failure to pay principal and interest on, or
repurchase when required, the Senior Notes, events of default under the Senior
Notes include failure to comply with certain covenants in the Senior Notes,
failure to pay at maturity or acceleration of other indebtedness exceeding $10
million, judgment defaults in excess of $10 million to the extent not covered by
insurance and certain events of bankruptcy.
The Senior Notes contain provisions as to legal defeasance and covenant
defeasance.
SENIOR FACILITIES
The Senior Facilities, which have been amended and which amendments
since January 1, 2001 are described below, consist of:
o A Tranche A Facility providing for initial term loans of $137 million
and of [euro]161 million (equivalent to $158 million based on currency
exchange rates in effect at February 22, 2000) to UCAR Finance. The
Tranche A Facility amortizes in quarterly installments over six years,
commencing June 30, 2000, with quarterly installments ranging from
about [euro] 2 million in 2000 to about [euro] 17 million in 2005,
with the final installment payable on December 31, 2005. In October
2000, we converted $78 million of these loans from dollar-denominated
to euro-denominated loans.
o A Tranche B Facility providing for initial term loans of $350 million
to UCAR Finance. The Tranche B Facility amortizes over eight years,
commencing June 30, 2000, with nominal quarterly installments during
the first six years, and quarterly installments of about $41 million
in 2006 and 2007, with the final installment payable on December 31,
2007.
o A Revolving Facility providing for dollar and euro-denominated
revolving and swingline loans to, and the issuance of
dollar-denominated letters of credit for the account of, UCAR Finance
and certain of our other subsidiaries in an aggregate
15
principal and stated amount at any time not to exceed [euro]200
million. The Revolving Facility terminates on February 22, 2006. As a
condition to each borrowing under the Revolving Facility, we are
required to represent, among other things, that the aggregate amount
of payments made (excluding certain imputed interest) and additional
reserves created in connection with antitrust, securities and
stockholder derivative investigations, lawsuits and claims do not
exceed $340 million by more than $75 million (which $75 million is
reduced by the amount of certain debt (excluding the Senior Notes)
incurred by us that is not incurred under the Senior Facilities).
At March 31, 2002, after giving effect to the issuance of additional
Senior Notes in May 2002 and the application of the net proceeds therefrom:
o the term loans under the Tranche A Facility have been fully repaid;
and
o the principal amount of term loans outstanding under the Tranche B
Facility is $131 million, all of the scheduled principal payments of
which are due in 2007.
We are generally required to make mandatory prepayments in the amount
of:
o Either 75% or 50% (depending on our leverage ratio, which is the ratio
of our net debt to our EBITDA) of excess cash flow. The obligation to
make these prepayments, if any, arises after the end of each year with
respect to adjusted excess cash flow during the prior year;
o 100% of the net proceeds of certain asset sales or incurrence of
certain indebtedness; and
o 50% of the net proceeds of the issuance of certain GTI equity
securities.
We may make voluntary prepayments under the Senior Facilities. There is
no penalty or premium due in connection with prepayments (whether voluntary or
mandatory).
UCAR Finance has made and may make secured and guaranteed intercompany
loans of the net proceeds of borrowings under the Senior Facilities to UCAR
Global's subsidiaries. The obligations of UCAR Finance under the Senior
Facilities are secured, with certain exceptions, by first priority security
interests in all of these intercompany loans (including the related security
interests and guarantees). We used the proceeds from the issuance of the Senior
Notes in February 2002 to finance the repayment of all of these intercompany
loans which were outstanding at that time, except for intercompany revolving
loans to UCAR Carbon and our Swiss subsidiary.
GTI unconditionally and irrevocably guarantees the obligations of UCAR
Finance under the Senior Facilities. This guarantee is secured, with certain
exceptions, by first priority
16
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
security interests in all of the outstanding capital stock of UCAR Global and
UCAR Finance, all of the intercompany debt owed to GTI and GTI's interest in the
lawsuit initiated by us against our former parents.
GTI, UCAR Global and each of UCAR Global's subsidiaries guarantees,
with certain exceptions, the obligations of UCAR Global's subsidiaries under the
intercompany loans, except that our foreign subsidiaries do not guarantee the
intercompany loan obligations of our U.S. subsidiaries.
The obligations of UCAR Global's subsidiaries under the intercompany
loans as well as these guarantees are secured, with certain exceptions, by first
priority security interests in substantially all of our assets, except that no
more than 65% of the capital stock or other equity interests in our foreign
subsidiaries held directly by our U.S. subsidiaries and no other foreign assets
secure obligations or guarantees of our U.S. subsidiaries.
The interest rates applicable to the Tranche A Facility, prior to
repayment of all term loans thereunder, were, and the interest rates applicable
to the Revolving Facility are, at our option, either euro LIBOR plus a margin
ranging from 1.375% to 3.375% (depending on our leverage ratio) or the alternate
base rate plus a margin ranging from 0.375% to 2.375% (depending on our leverage
ratio). The interest rate applicable to the Tranche B Facility is, at our
option, either euro LIBOR plus a margin ranging from 2.875% to 3.625% (depending
on our leverage ratio) or the alternate base rate plus a margin ranging from
1.875% to 2.625% (depending on our leverage ratio). The alternate base rate is
the higher of the prime rate announced by JP Morgan Chase Bank or the federal
funds effective rate, plus 0.50%. UCAR Finance pays a per annum fee ranging from
0.375% to 0.500% (depending on our leverage ratio) on the undrawn portion of the
commitments under the Revolving Facility. At March 31, 2002, the interest rates
on outstanding debt under the Senior Facilities were: Tranche A euro Facility,
6.8%; Tranche B Facility, 5.6%; and Revolving Facility, 5.3%. The weighted
average interest rate on the Senior Facilities was 5.6% during the 2002 first
quarter.
The Senior Facilities contain a number of significant covenants that,
among other things, significantly restrict our ability to sell assets, incur
additional debt, repay or refinance other debt or amend other debt instruments,
create liens on assets, enter into sale and lease back transactions, make
investments or acquisitions, engage in mergers or consolidations, make capital
expenditures, make intercompany dividend payments to GTI, pay intercompany debt
owed to GTI, engage in transactions with affiliates, pay dividends to
stockholders of GTI or make other restricted payments and that otherwise
significantly restrict corporate activities. In addition, we are required to
comply with specified minimum interest coverage and maximum leverage ratios,
which become more restrictive over time, beginning September 30, 2003.
Under the Senior Facilities, GTI is permitted to pay dividends on, and
repurchase, common stock in an aggregate annual amount of $25 million, plus up
to an additional $25 million if certain leverage ratio and excess cash flow
requirements are satisfied. We are also permitted to repurchase common stock
from present or former directors, officers or employees in
17
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
an aggregate amount of up to the lesser of $5 million per year (with unused
amounts permitted to be carried forward) or $25 million on a cumulative basis
since February 22, 2000.
In addition to the failure to pay principal, interest and fees when
due, events of default under the Senior Facilities include: failure to comply
with applicable covenants; failure to pay when due, or other defaults permitting
acceleration of, other indebtedness exceeding $7.5 million; judgment defaults in
excess of $7.5 million to the extent not covered by insurance; certain events of
bankruptcy; and certain changes in control.
AMENDMENTS TO SENIOR FACILITIES
In April 2001, the Senior Facilities were amended to, among other
things, exclude certain expenses incurred in connection with the lawsuit
initiated by us against our former parents (up to a maximum of $20 million, but
not more than $3 million in any quarter) and certain charges and payments in
connection with antitrust fines, settlements and expenses from the calculation
of financial covenants. Charges (over and above the $340 million charge recorded
in 1997) recorded on or before June 30, 2002 (or during the term of the Senior
Facilities, after effectiveness of the amendment described below which became
effective in February 2002) for antitrust fines, settlements and expenses are
excluded from the calculation of financial covenants (until paid) up to a
maximum of $130 million (or $75 million, after effectiveness of the amendment
described in Note 10), reduced by the amount of certain debt (other than the
Senior Notes) incurred by us that is not incurred under the Senior Facilities
($24 million of which debt was outstanding at March 31, 2002). The fine assessed
by the EU Competition Authority, as well as the additional $10 million charge
recorded in July 2001 and any payments related to such fine (including payments
within the $340 million charge recorded in 1997), are excluded from the
calculation of financial covenants through June 30, 2002 (or for the term of the
Senior Facilities, after the effectiveness of the amendment described below
which became effective in February 2002).
In July 2001, the Senior Facilities were amended to, among other
things, change our financial covenants so that they were less restrictive
through 2006 than would otherwise have been the case. In connection therewith,
we agreed that our investments in Graftech and any of our other unrestricted
subsidiaries after this amendment will be made in the form of secured loans,
which will be pledged to secure the Senior Facilities, and the maximum amount of
capital expenditures permitted under the Senior Facilities would be reduced in
2001 and 2002. We do not expect that our capital expenditures would exceed such
maximums. In connection therewith, we paid an amendment fee of $2 million and
the margin which is added to either euro LIBOR or the alternate base rate in
order to determine the interest rate payable thereunder increased by 25 basis
points.
In December 2001, the Senior Facilities were amended to, among other
things, permit the corporate realignment of our subsidiaries. In connection
therewith, we paid an amendment fee of $1 million.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
In February 2002, the Senior Facilities were amended to, among other
things, permit us to issue up to $400 million aggregate principal amount of
Senior Notes, to pledge certain unsecured intercompany term notes and unsecured
guarantees of those notes to secure the Senior Notes, to have certain U.S.
subsidiaries holding a majority of our U.S. assets guarantee the Senior Notes
and to have those U.S. subsidiaries pledge shares of Graftech to secure such
guarantees. Furthermore, the amendment permitted the net proceeds from the sale
of such senior notes to be applied to repay term loans under the Tranche A and B
Facilities and reduce the outstanding balance under the Revolving Facility.
In connection with this amendment, our maximum permitted leverage ratio
was substantially increased and our minimum required interest coverage ratio was
substantially decreased while maintaining full availability of the Revolving
Facility. The amendment also changed the manner in which net debt and EBITDA are
calculated to exclude certain fees, costs and expenses (including fees of
counsel and experts) in connection with the lawsuit initiated by us against our
former parents as well as any letter of credit issued to secure payment of the
antitrust fine assessed against us by the EU Competition Commission. In
addition, the amendment expanded our ability to make certain investments,
including investments in Graftech, and eliminate provisions relating to a
spin-off of Graftech. In connection therewith, we paid an amendment fee of $1
million and the margin which is added to either euro LIBOR or the alternate base
rate in order to determine the interest rate payable thereunder increased by
37.5 basis points.
In May 2002, the Senior Facilities were amended as described in
Note 10.
INTEREST RATE MANAGEMENT
We implement interest rate management initiatives to seek to minimize
our interest expense and optimize our portfolio of fixed and variable interest
rate obligations. Use of these initiatives is allowed under the Senior Notes and
the Senior Facilities. In April 2002, we entered into a ten-year interest rate
swap for a notional amount of $200 million to effectively convert that amount of
fixed rate debt to variable rate debt.
LEVERAGE
We are highly leveraged and, as discussed in Note 7, have substantial
obligations in connection with antitrust investigations, lawsuits and claims (in
respect of which we have an unfunded reserve totaling $101 million). We had
total debt of $696 million and a stockholders' deficit of $343 million at March
31, 2002. A substantial portion of our debt has variable interest rates or has
been effectively converted from a fixed rate obligation to a variable rate
obligation pursuant to interest rate management initiatives. We typically
discount or factor a portion of our accounts receivable. In the 2001 first
quarter, certain of our subsidiaries sold receivables totaling $42 million. In
addition, if we are required to pay or issue a letter of credit to secure
payment of the fine assessed by the EU Competition Authority pending resolution
of our appeal regarding the amount of the fine, the payment would be financed by
borrowing under, or the letter of credit
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
would constitute a borrowing under, the Revolving Facility. Our leverage and
obligations, as well as changes in conditions affecting our industry, changes in
global and regional economic conditions and other factors, have adversely
impacted our recent operating results.
We use, and are dependent on, funds available under the Revolving
Facility, including continued compliance with the financial covenants under the
Senior Facilities, as well as monthly or quarterly cash flow from operations as
our primary sources of liquidity.
Our high leverage and substantial obligations in connection with
antitrust investigations, lawsuits and claims could have a material impact on
our liquidity. Cash flow from operations services payment of our debt and these
obligations, thereby reducing funds available to us for other purposes. Our
leverage and these obligations make us more vulnerable to economic downturns or
in the event that these obligations are greater or timing of payment is sooner
than expected.
Our ability to service our debt, as it comes due, including maintaining
compliance with the covenants under the Senior Facilities, and to meet these and
other obligations as they come due is dependent on our future financial and
operating performance. This performance, in turn, is subject to various factors,
including certain factors beyond our control, such as changes in conditions
affecting our industry, changes in global and regional economic conditions,
changes in interest and currency exchange rates, developments in antitrust
investigations, lawsuits and claims involving us and inflation in raw material,
energy and other costs.
Even if we are able to meet our debt service and other obligations when
due, we may not be able to comply with the financial covenants under the Senior
Facilities. A failure to so comply, unless waived by the lenders thereunder,
would be a default thereunder. This would permit the lenders to accelerate the
maturity of the Senior Facilities. It would also permit them to terminate their
commitments to extend credit under the Revolving Facility. This would have an
immediate material adverse effect on our liquidity. An acceleration of maturity
of the Senior Facilities would permit the holders of the Senior Notes to
accelerate the maturity of the Senior Notes. A breach of the covenants contained
in the Senior Notes would also permit the holders of the Senior Notes to
accelerate the maturity of the Senior Notes. Acceleration of maturity of the
Senior Notes would permit the lenders to accelerate the maturity of the Senior
Facilities and terminate their commitments to extend credit under the Revolving
Facility. If we were unable to repay our debt to the lenders and holders or
otherwise obtain a waiver from the lenders and holders, the lenders and holders
could proceed against the collateral securing the Senior Facilities and the
Senior Notes, respectively, and exercise all other rights available to them.
EXTRAORDINARY ITEM
In February 2002, we recorded an extraordinary charge of $3 million ($2
million after tax) for write-off of capitalized fees associated with the term
loans under Tranche A and B Facilities repaid with the net proceeds from the
issuance of the Senior Notes.
20
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(6) FINANCIAL INSTRUMENTS
Certain of our subsidiaries sold receivables totaling $42 million in
the 2002 first quarter and $61 million in the 2001 first quarter. None of the
receivables sold were recorded on the Consolidated Balance Sheets at March 31,
2002 or December 31, 2001, respectively.
(7) CONTINGENCIES
ANTITRUST INVESTIGATIONS
In April 1998, pursuant to a plea agreement between the U.S. Department
of Justice (the "DOJ") and GTI, GTI pled guilty to a one count charge of
violating U.S. federal antitrust law in connection with the sale of graphite
electrodes and was sentenced to pay a non-interest-bearing fine in the aggregate
amount of $110 million, payable in six annual installments of $20 million, $15
million, $15 million, $18 million, $21 million and $21 million, commencing July
23, 1998. The plea agreement was approved by the court and, as a result, under
the plea agreement, we will not be subject to prosecution by the DOJ with
respect to any other violations of U.S. federal antitrust law occurring prior to
April 1998. At our request, in January 2001, the due date of each of the
remaining three payments was deferred by one year and, at our request, in
January 2002, the payment schedule for the $60 million unpaid balanced
outstanding at that time was revised to require a $2.5 million payment in April
2002, a $5.0 million payment in April 2003 and, beginning in April 2004,
quarterly payments ranging from $3.25 million to $5.375 million, through January
2007. Beginning in 2004, the DOJ may ask the court to accelerate the payment
schedule based on a change in our ability to make such payments. Interest will
begin to accrue on the unpaid balance, commencing in April 2004, at the
statutory rate of interest then in effect. In January 2002, the statutory rate
of interest was 2.13% per annum. Accrued interest will be payable together with
each quarterly payment. The revised payment schedule has been approved by the
court. All payments due have been timely made.
In March 1999, pursuant to a plea agreement between our Canadian
subsidiary and the Canadian Competition Bureau, our Canadian subsidiary pled
guilty to a one count charge of violating Canadian antitrust law in connection
with the sale of graphite electrodes and was sentenced to pay a fine of Cdn. $11
million. The relevant Canadian court approved the plea agreement and, as a
result, under the plea agreement we will not be subject to prosecution by the
Canadian Competition Bureau with respect to any other violations of Canadian
antitrust law occurring prior to the date of the plea agreement. The fine was
timely paid.
In October 1999, we became aware that the Korean antitrust authority
had commenced an investigation as to whether there had been any violation of
Korean antitrust law by producers and distributors of graphite electrodes. In
March 2002, we were advised that it had, after holding a hearing, assessed a
fine against us in the amount of 676 million KRW (approximately $510,000, based
on currency exchange rates in effect on March 31, 2002). Five other graphite
electrode producers were also fined by it in amounts ranging up to 4,396 million
KRW (approximately $3.3 million based on currency exchange rates in effect on
March 31, 2002). Our fine
21
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
represented 0.5% of our graphite electrode sales in Korea during the relevant
time period. In May 2002, we appealed the decision. Notwithstanding our appeal,
we are required to pay this fine by June 9, 2002.
In January 2000, the antitrust enforcement authority of the European
Union (the "EU Competition Authority") issued a statement of objections
initiating proceedings against us and other producers of graphite electrodes.
The statement alleges that we and other producers violated European antitrust
law in connection with the sale of graphite electrodes. In July 2001, the EU
Competition Authority issued its decision regarding the allegations. Under the
decision, it assessed a fine of [euro]50.4 million (about $46 million, based on
currency exchange rates in effect at March 31, 2002) against us. Seven other
graphite electrode producers were also fined, with fines ranging up to
[euro]80.2 million. From the initiation of its investigation, we have cooperated
with the EU Competition Authority. It is the policy of the EU Competition
Authority to negotiate appropriate terms of payment of antitrust fines,
including extended payment terms. We have had discussions regarding payment
terms. After an in-depth analysis of the decision, in October 2001, we filed an
appeal to the court challenging the amount of the fine. Appeals of this type may
take two years or longer to be decided and the fine or collateral security
therefor would typically be required to be paid or provided at about the time
the appeal was filed. We are currently in discussions with the EU Competition
Authority regarding the appropriate form of collateral security during the
pendency of the appeal. If the results of these discussions are not acceptable
to us, we may file an interim appeal with the court to waive the requirement for
collateral security or to allow us to provide alternative security for payment.
We cannot predict how or when the court would rule on such interim appeal.
In the 2001 second quarter, we became aware that the Brazilian
antitrust authority had requested written information from various steelmakers
in Brazil. In April 2002, our Brazilian subsidiary received a request for
information from that authority. We intend to provide that information.
Except as described above, antitrust investigations against us in the
U.S., Canada, the European Union, Japan and Korea have been resolved. We are
continuing to cooperate with some of these antitrust authorities in their
continuing investigations of others. In October 1997, we were served with
subpoenas by the DOJ to produce documents relating to, among other things, our
carbon electrode and bulk graphite businesses. It is possible that antitrust
investigations seeking, among other things, to impose fines and penalties could
be initiated by antitrust authorities in Brazil or other jurisdictions.
The guilty pleas and decisions described above make it more difficult
for us to defend against other investigations as well as civil lawsuits and
claims. We have been vigorously protecting, and intend to continue to vigorously
protect, our interests in connection with the investigations described above. We
may, however, at any time settle any possible unresolved charges.
22
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
ANTITRUST LAWSUITS
Through March 31, 2002, except as described in the following
paragraphs, we have settled or obtained dismissal of all of the civil antitrust
lawsuits (including class action lawsuits) previously pending against us,
certain threatened civil antitrust lawsuits threatened against us and certain
possible civil antitrust claims against us by certain customers who negotiated
directly with us. The settlements cover, among other things, virtually all of
the actual and potential claims against us by customers in the U.S. and Canada
arising out of alleged antitrust violations occurring prior to the date of the
relevant settlement in connection with the sale of graphite electrodes. One of
the settlements also covers the actual and potential claims against us by
certain foreign customers arising out of alleged antitrust violations occurring
prior to the date of that settlement in connection with the sale of graphite
electrodes sourced from the U.S. Although each settlement is unique, in the
aggregate they consist primarily of current and deferred cash payments with some
product credits and discounts. All settlement payments due have been timely
made.
In 1999, 2000 and 2002, we and other producers of graphite electrodes
were served with four complaints commencing four separate civil antitrust
lawsuits (the "FOREIGN CUSTOMER LAWSUITS"). The complaints were filed by an
aggregate of 37 steelmakers and related parties, all but one of whom are located
outside the U.S. In each complaint, the plaintiffs allege that the defendants
violated U.S. federal antitrust law in connection with the sale of graphite
electrodes sold or sourced from the U.S. and those sold and sourced outside the
U.S. The plaintiffs seek, among other things, an award of treble damages
resulting from such alleged antitrust violations. We believe that we have strong
defenses against claims alleging that purchases of graphite electrodes outside
the U.S. are actionable under U.S. federal antitrust law. We filed motions to
dismiss the first and second complaints. In June 2001, our motions to dismiss
the first and second complaints were granted with respect to substantially all
of the plaintiffs' claims. Appeals have been filed by the plaintiffs and the
defendants with regard to these dismissals. The third complaint was dismissed
without prejudice to refile pending the resolution of such appeals. The fourth
complaint was filed in March 2002 and also names Mitsubishi Corporation as a
defendant. We filed a motion to stay the lawsuit commenced by the fourth
complaint pending the resolution of such appeals.
In 1999 and 2000, we were served with three complaints commencing three
civil antitrust lawsuits (the "CARBON ELECTRODE LAWSUITS"). The complaints were
filed by an aggregate of three companies and the estate of a bankrupt company.
Other producers of carbon electrodes are named as defendants in two of the
complaints. In the complaints, the plaintiffs allege that the defendants
violated U.S. federal antitrust law in connection with the sale of carbon
electrodes and seek, among other things, an award of treble damages resulting
from such alleged violations. We filed motions to dismiss the second and third
complaints. In May 2001, our motion to dismiss the second complaint was denied.
In October 2001, we settled the lawsuit commenced by the third complaint. The
guilty pleas and decisions described above do not relate to carbon electrodes.
23
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The foreign customer lawsuits and two of the three carbon electrode
lawsuits are still in their early stages. We have been vigorously defending, and
intend to continue to vigorously defend, against these remaining lawsuits as
well as all threatened lawsuits and possible unasserted claims. We may at any
time, however, settle these lawsuits as well as any threatened lawsuits and
possible claims. It is possible that additional civil antitrust lawsuits
seeking, among other things, to recover damages could be commenced against us in
the U.S. and in other jurisdictions.
1997 AND 2001 SECOND QUARTER ANTITRUST EARNINGS CHARGES
We recorded a pre-tax charge of $340 million against results of
operations for 1997 and, as a result of the assessment of a fine by the EU
Competition Authority, we recorded a pre-tax charge of an additional $10 million
against results of operations for the 2001 second quarter, as a reserve for
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims. The aggregate reserve of $350 million is
calculated on a basis net of, among other things, imputed interest on
installment payments of the fine payable to the DOJ. Actual aggregate
liabilities and expenses (including settled investigations, lawsuits and claims
as well as continuing investigations, pending appeals and unsettled pending,
threatened and possible lawsuits and claims mentioned above) could be materially
higher than $350 million and the timing of payment thereof could be sooner than
anticipated. In the aggregate (including the assessment of the fines by the EU
Competition Authority, and the Korean antitrust authority and the additional $10
million charge), the fines and net settlements and expenses are within the
amounts we used to evaluate the aggregate charge of $350 million. To the extent
that aggregate liabilities and expenses, net, are known or reasonably estimable,
at March 31, 2002, $350 million represents our estimate of these liabilities and
expenses. Our insurance has not and will not materially cover liabilities that
have or may become due in connection with antitrust investigations or related
lawsuits or claims.
Through March 31, 2002, we have paid an aggregate of $249 million of
fines and net settlement and expense payments and $11 million of imputed
interest. At March 31, 2002, $101 million remained in the reserve. The balance
of the reserve is available for the fine payable to the DOJ, the fines assessed
by the EU Competition Authority and the Korean antitrust authority and other
matters. The aggregate amount of remaining committed payments payable to the DOJ
for imputed interest at March 31, 2002 was about $9 million.
OTHER PROCEEDINGS AGAINST US
We are involved in various other investigations, lawsuits, claims and
other legal proceedings incidental to the conduct of our business. While it is
not possible to determine the ultimate disposition of each of them, we do not
believe that their ultimate disposition will have a material adverse effect on
us.
24
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
LAWSUIT INITIATED BY US AGAINST OUR FORMER PARENTS
In February 2000, we commenced a lawsuit against our former parents,
Mitsubishi Corporation and Union Carbide Corporation. In the lawsuit, we allege,
among other things, that certain payments made to our former parents in
connection with our leveraged equity recapitalization in January 1995 were
unlawful under the General Corporation Law of the State of Delaware, that our
former parents were unjustly enriched by receipts from their investments in us
and that our former parents aided and abetted breaches of fiduciary duties owed
to us by our former senior management in connection with illegal graphite
electrode price fixing activities. The defendants have filed motions to dismiss
this lawsuit and a motion to disqualify certain of our counsel from representing
us in this lawsuit. We are vigorously opposing those motions. Oral hearings were
held on those motions in the 2001 first and second quarters. No decision on
those motions has been rendered. Through March 31, 2002, we had incurred about
$4 million of these legal expenses. This lawsuit is in its earliest stages. The
ultimate outcome of this lawsuit is subject to many uncertainties. We may at any
time settle this lawsuit.
(8) OTHER TRANSACTIONS
In January 2002, we announced a new major cost savings plan. The key
elements of the 2002 plan include:
o the rationalization of graphite electrode manufacturing capacity
at our higher cost facilities including the mothballing of our
graphite electrode plant in Caserta, Italy, which was completed
in the 2002 first quarter, and the incremental expansion of
capacity at our lower cost facilities;
o the redesign and implementation of changes in our U.S. benefit
plans for active and retired employees, which was completed in
the 2002 first quarter;
o the implementation of work process changes, including
consolidating and streamlining order fulfillment, purchasing,
finance and accounting, and human resource processes, along with
the identification and implementation of outsourcing
opportunities;
o the implementation of additional plant and corporate overhead
cost reductions; and
o the corporate realignment of our subsidiaries, consistent with
the operational realignment of our divisions, to generate
significant tax savings, which is expected to be substantially
completed in the 2002 first half.
We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years. These non-strategic
businesses contributed net sales of about $25 million in 2001.
25
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(9) FINANCIAL INFORMATION ABOUT THE PARENT, THE ISSUER, THE GUARANTORS AND THE
SUBSIDIARIES WHOSE SECURITIES SECURE THE SENIOR NOTES AND RELATED
GUARANTEES
On February 15, 2002, UCAR Finance (the "ISSUER") issued $400 million
aggregate principal amount of Senior Notes. As described in Note 10, on May 6,
2002, the Issuer issued $150 million aggregate principal amount of additional
Senior Notes. The Senior Notes have been guaranteed on a senior basis by GTI
(the "PARENT") and UCAR Global, UCAR Carbon and other subsidiaries holding a
substantial majority of our U.S. assets, which subsidiaries are UCAR
International Holdings Inc., UCAR International Trading Inc., UCAR Carbon
Technology LLC, UCAR Composites Inc. and UCAR Holdings III Inc. The guarantors
(other than the Parent) are collectively called the "U.S. GUARANTORS." The
guarantees of the U.S. Guarantors are unsecured, except that the guarantee of
UCAR Carbon has been secured by a pledge of all of our shares of Graftech, but
in no event will the value of the pledged portion of such shares exceed 19.99%
of the principal amount of the then outstanding Senior Notes. All of the
guarantees are full, unconditional and joint and several and the Issuer and each
of the U.S. Guarantors are 100% owned by the Parent. Graftech and our other
subsidiaries which are not guarantors are called the "NON-GUARANTORS." The
following table sets forth condensed consolidating balance sheets at March 31,
2002 and December 31, 2001 and condensed consolidating statements of operations
and cash flows for the three months ended March 31, 2002 and 2001 of the Parent,
the Issuer, the U.S. Guarantors and the Non-Guarantors. Provisions in the Senior
Facilities restrict the payment of dividends by our subsidiaries to the Parent.
At March 31, 2002, retained earnings of our Subsidiaries subject to such
restrictions were approximately $569 million. Investments in subsidiary
companies are recorded on the equity basis.
26
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2002
--------------
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ - $ - $ 1 $ 32 $ - $ 33
Notes and accounts receivable................. - 780 444 192 (1,319) 97
Inventories:
Raw materials and supplies................ - - 3 33 (2) 34
Work in process........................... - - 38 66 1 105
Finished goods............................ - - 8 24 - 32
-------- ---------- ---------- --------- --------- -------
- - 49 123 (1) 171
Prepaid expenses and deferred income taxes.... - - 9 10 - 19
-------- ---------- ---------- --------- --------- -------
Total current assets...................... - - 503 357 (1,320) 320
-------- ---------- ---------- --------- --------- -------
Property, plant and equipment.................... - - 309 631 (4) 936
Less: accumulated depreciation................... - - (257) (383) (15) (655)
-------- ---------- ---------- -------- --------- -------
Net fixed assets.............................. - - 52 248 (19) 281
-------- ---------- ---------- -------- --------- -------
Deferred income taxes and other assets........... 50 24 113 97 (68) 216
-------- ---------- ---------- --------- --------- -------
Total assets.................................. $ 50 $ 804 $ 668 $ 702 $ (1,407) $ 817
======== ========== ========== ========= ========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................. $ 10 $ 10 $ 46 $ 66 $ (64) $ 68
Short-term debt............................... 400 103 321 428 (1,244) 8
Accrued income and other taxes................ (17) (1) 37 28 - 47
Other accrued liabilities..................... - - 29 39 (10) 58
-------- ---------- ---------- --------- --------- -------
Total current liabilities................. 393 112 433 561 (1,318) 181
-------- ---------- ---------- --------- --------- -------
Long-term debt................................... - 682 - 6 - 688
Other long-term obligations...................... - (1) 195 32 2 228
Deferred income taxes............................ - - 1 39 (2) 38
Minority stockholders' equity in consolidated
entities....................................... - - - 25 - 25
Stockholders' equity (deficit)................... (343) 11 39 39 (89) (343)
-------- ---------- ---------- --------- --------- -------
Total liabilities and stockholders' equity $ 50 $ 804 $ 668 $ 702 $ (1,407) $ 817
(deficit)................................... ======== ========== ========== ========= ========= =======
27
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
--------------
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ - $ 16 $ 8 $ 14 $ - $ 38
Notes and accounts receivable................. - 885 442 365 (1,597) 95
Inventories:
Raw materials and supplies................ - - 3 32 (2) 33
Work in process........................... - - 45 66 - 111
Finished goods............................ - - 8 26 (1) 33
-------- -------- -------- --------- --------- ---------
- - 56 124 (3) 177
Prepaid expenses and deferred income taxes.... - - 7 5 - 12
-------- -------- -------- --------- --------- ---------
Total current assets...................... - 901 513 508 (1,600) 322
-------- -------- -------- --------- --------- ---------
Property, plant and equipment.................... - - 308 627 (4) 931
Less: accumulated depreciation................... - - (256) (394) - (650)
-------- -------- -------- --------- --------- ---------
Net fixed assets.............................. - - 52 233 (4) 281
-------- -------- -------- --------- ---------
Other assets..................................... 58 29 216 74 (183) 194
-------- -------- -------- --------- --------- ---------
Total assets.................................. $ 58 $ 930 $ 781 $ 815 $ (1,787) 797
======== ======== ======== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................. $ 8 $ 13 $ 50 $ 92 $ (62) $ 101
Short-term debt............................... 397 274 407 450 (1,521) 7
Accrued income and other taxes................ (15) - 42 18 - 45
Other accrued liabilities..................... - - 39 33 (15) 57
-------- -------- -------- --------- --------- ---------
Total current liabilities................. 390 287 538 593 (1,598) 210
-------- -------- -------- --------- --------- ---------
Long-term debt................................... - 626 - 21 (16) 631
Other long-term obligations...................... - - 197 34 - 231
Deferred income taxes............................ - - 5 32 (5) 32
Minority stockholders' equity in consolidated
entities....................................... - - - 23 2 25
Stockholders' equity (deficit)................... (332) 17 41 112 (170) (332)
-------- -------- -------- --------- --------- --------
Total liabilities and stockholders' equity $ 58 $ 930 $ 781 $ 815 $ (1,787) $ 797
(deficit)................................... ======== ======== ======== ========= ========= ========
28
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net sales........................................... $ - $ - $ 53 $ 119 $ (34) $ 138
Cost of sales....................................... - - 45 92 (30) 107
-------- ------- ---------- --------- --------- --------
Gross profit..................................... - - 8 27 (4) 31
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets and other expenses... - (3) (11) 20 18 24
-------- ------- ---------- --------- --------- --------
Operating profit (loss).......................... - 3 19 7 (22) 7
Interest income..................................... - (12) (6) (4) 22 -
Interest expense.................................... 6 16 5 8 (22) 13
-------- ------- ---------- --------- --------- --------
Income (loss) before provision for income taxes.. (6) (1) 20 3 (22) (6)
Provision for (benefit from) income taxes........... (2) - (12) 9 - (5)
-------- ------- ---------- --------- --------- --------
Income (loss) of consolidated entities........... (4) (1) 32 (6) (22) (1)
Minority stockholders' share of income.............. - - - 1 - 1
Equity in earnings of subsidiaries.................. - - 29 - (29) -
-------- ------- ---------- --------- --------- --------
Income (loss) before extraordinary item.......... (4) (1) 3 (7) 7 (2)
Extraordinary item, net of tax...................... - 2 - - - 2
-------- ------- ---------- --------- --------- --------
Net income (loss)............................. $ (4) $ (3) $ 3 $ (7) $ 7 $ (4)
======== ======= ========== ========= ========= ========
THREE MONTHS ENDED MARCH 31, 2001
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net sales........................................... $ - $ - $ 68 $ 139 $ (36) $ 171
Cost of sales....................................... - - 55 98 (31) 122
-------- ---------- ---------- --------- --------- ------
Gross profit..................................... - - 13 41 (5) 49
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets and other expenses... - - 12 12 - 24
-------- ---------- ---------- --------- --------- ------
Operating profit (loss).......................... - - 1 29 (5) 25
Interest income..................................... - (21) - (5) 26 -
Interest expense.................................... 10 21 7 7 (26) 19
-------- ---------- ---------- --------- --------- ------
Income (loss) before provision for income taxes.. (10) - (6) 27 (5) 6
Provision for (benefit from) income taxes........... (4) - (2) 8 - 2
-------- ---------- ---------- --------- --------- ------
Income (loss) of consolidated entries............ (6) - (4) 19 (5) 4
Minority stockholders' share of income.............. - - - 1 - 1
Equity in earnings of subsidiaries.................. (14) - (18) - 32 -
-------- ---------- ---------- --------- --------- ------
Net income (loss)............................. $ 8 $ - $ 14 $ 18 $ (37) $ 3
======== ========== ========== ========= ========= ======
29
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net cash provided by (used in) operating activities. $ (4) $ (4) $ - $ (123) $ 84 $ (47)
Net cash provided by (used in) investing activities. - 110 79 163 (361) (9)
Net cash provided by (used in) financing activities. 4 (122) (86) (22) 277 51
-------- ---------- ---------- --------- --------- ------
Net increase (decrease) in cash and cash equivalents - (16) (7) 18 - (5)
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - - - -
Cash and cash equivalents at beginning of period.... - 16 8 14 - 38
-------- ---------- ---------- --------- --------- ------
Cash and cash equivalents at end of period.......... $ - $ - $ 1 $ 32 $ - $ 33
======== ========== ========== ========= ========= ======
THREE MONTHS ENDED MARCH 31, 2001
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net cash provided by (used in) operating activities. $ - $ (17) $ (10) $ 29 $ 9 $ 11
Net cash provided by (used in) investing activities. - 4 8 (2) (14) (4)
Net cash provided by (used in) financing activities. - (7) 8 (2) 5 4
-------- ---------- ---------- --------- --------- ------
Net increase in cash and cash equivalents........... - (20) 6 25 - 11
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - (2) - (2)
Cash and cash equivalents at beginning of period.... - 31 7 9 - 47
-------- ---------- ---------- --------- --------- ------
Cash and cash equivalents at end of period.......... $ - $ 11 $ 13 $ 32 $ - $ 56
======== ========== ========== ========= ========= ======
30
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Unsecured intercompany term notes in an aggregate principal amount, at
March 31, 2002, equal to $382 million (based on currency exchange rates in
effect at March 31, 2002), and guarantees of those unsecured intercompany term
notes, issued to UCAR Finance by certain of our foreign subsidiaries have been
pledged by UCAR Finance to secure the Senior Notes, subject to the limitation
that at no time will the combined value of the pledged portion of any foreign
subsidiary's unsecured intercompany term note and unsecured guarantee of
unsecured intercompany term notes issued by other foreign subsidiaries exceed
19.99% of the principal amount of the then outstanding Senior Notes.
As described above, the guarantee of the Senior Notes by UCAR Carbon
has been secured by a pledge of all of our shares of Graftech, but at no time
will the value of the pledged portion of such shares exceed 19.99% of the
principal amount of the then outstanding Senior Notes.
Rule 3-16 of Regulation S-X adopted by the SEC provides that, for each
of the registrant's affiliates whose securities constitute a "substantial"
portion of the collateral for registered securities, financial statements (that
would be required to be filed if the affiliate were a registrant) must be filed
with this Report. Under Rule 3-16(b), securities of a person will be deemed to
constitute a "substantial" portion of the collateral if the aggregate principal
amount, par value, or book value of securities as carried by the registrant, or
the market value of such securities, whichever is the greatest, equals 20% or
more of the principal amount of the registered securities. In this case, the
pledges of common stock of Graftech and the intercompany notes and related
guarantees have been limited such that they will never be more than 19.99% of
the principal amount of the outstanding Senior Notes. Therefore, no such
financial statements are required to be included in this Report.
(10) SUBSEQUENT EVENTS
On May 6, 2002, UCAR Finance issued $150 million aggregate principal
amount of additional Senior Notes (the "NEW NOTES") at a purchase price of
104.5% of principal amount, plus accrued interest from February 15, 2002. The
New Notes were issued under the same Indenture pursuant to which UCAR Finance
issued $400 million aggregate principal amount of Senior Notes in February 2002
(the "INITIAL NOTES"). The Initial Notes and the New Notes constitute a single
class of debt securities under the Indenture and are called collectively the
"SENIOR NOTES." We obtained consent from the holders of the Initial Notes to
amend the Indenture so as to waive the requirement to use the gross proceeds
from the issuance of the New Notes to make intercompany loans to our foreign
subsidiaries and, on April 30, 2002, entered into a Supplemental Indenture to
give effect to such amendment.
The net proceeds (excluding such accrued interest) from the sale of the
New Notes were $151 million. $75 of the net proceeds were used to reduce the
outstanding balance under the Revolving Facility and the balance was used to
repay term loans under Tranche A and B Facilities.
31
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The $7 million premium received upon issuance of the New Notes will be
added to the principal amount of the New Notes shown on the Consolidated Balance
Sheets and amortized (as a credit to interest expense) over the term of the New
Notes.
In connection with the issuance of the New Notes, the Senior Facilities
were amended to, among other things, permit us to issue the New Notes on the
same terms as those relating to the Initial Notes. In connection with this
amendment, our maximum permitted leverage ratio was changed to measure the ratio
of net senior secured debt to EBITDA as against new specified amounts. Our
interest coverage ratio was also changed. We believe that these changed ratios
provide us with greater flexibility. In addition, the amendment reduced the
maximum amount available under the Revolving Facility to [euro]200 million from
[euro]250 million ([euro]25 million of which can only be used to pay or secure
payment of the fine assessed by the EU Competition Commission) and reduced the
basket for certain debt incurred by us that is not incurred under the Senior
Facilities to $75 million from $130 million ($24 million of which debt was
outstanding at March 31, 2002).
In connection with the amendment and the consent, we paid fees and
costs of $1 million.
In April 2002, we entered into a ten-year interest rate swap for a
national amount of $200 million to effectively convert that amount of fixed rate
debt to variable rate debt.
32
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1
IMPORTANT TERMS
We use the following terms to identify various companies or groups of
companies or other matters. These terms help to simplify the presentation of
information in this Report.
"GTI" refers to GrafTech International Ltd. only. GTI is our public
parent company and the issuer of the publicly traded common stock covered by
this Report. GTI is a guarantor of the Senior Notes. Prior to our Annual Meeting
of Stockholders for 2002, GTI was named UCAR International Inc.
"UCAR GLOBAL" refers to UCAR Global Enterprises Inc. only. UCAR Global
is a direct, wholly owned subsidiary of GTI and the direct or indirect holding
company for all of our operating subsidiaries. UCAR Global is a guarantor of the
Senior Notes.
"UCAR CARBON" refers to UCAR Carbon Company Inc. only. UCAR Carbon is
our wholly owned subsidiary through which we conduct most of our U.S.
operations. In connection with the corporate realignment of our subsidiaries as
described below, UCAR Carbon will change its name to UCAR Technology Company
Inc. and transfer its businesses to one or more newly formed wholly owned U.S.
subsidiaries. UCAR Carbon is a guarantor of the Senior Notes.
"UCAR FINANCE" refers to UCAR Finance Inc. only. UCAR Finance is a
direct, wholly owned special purpose finance subsidiary of GTI and the borrower
under our senior secured bank credit facilities (as amended, the "SENIOR
FACILITIES"). UCAR Finance is the issuer of our 10.25% senior notes due 2012
(the "SENIOR NOTES").
"GRAFTECH" refers to Graftech Inc. only. Graftech is our 97.5% owned
(wholly owned, prior to June 2001) subsidiary engaged in the development,
manufacture and sale of natural graphite-based products. In connection with the
corporate realignment of our subsidiaries as described below, Graftech will
change its name to Graftech Technology Company Inc. and transfer its business to
a newly formed 100% owned U.S. subsidiary (to be named Graftech Inc.).
"CARBONE SAVOIE" refers to Carbone Savoie S.A.S. and its subsidiaries.
Carbone Savoie is our 70% owned subsidiary engaged in the development,
manufacture and sale of graphite and carbon cathodes.
"SUBSIDIARIES" refer to those companies which, at the relevant time,
are or were majority owned or wholly owned directly or indirectly by GTI or its
predecessors to the extent that those predecessors' activities related to the
graphite and carbon business. All of GTI's subsidiaries have been wholly owned
(with de minimis exceptions in the case of certain foreign subsidiaries) from at
least January 1, 1999 through March 31, 2002, except for:
33
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o our German subsidiary, which was acquired in early 1997 and
70% owned until early 1999, when it became wholly owned in
order to facilitate its liquidation;
o Carbone Savoie, which has been and is 70% owned; and
o Graftech, which was 100% owned until it became 97.5% owned in
June 2001.
Our 100% owned Brazilian cathode manufacturing operations were contributed to
Carbone Savoie and, as a result, became 70% owned on March 31, 2001.
"WE," "US" or "OUR" refers to GTI and its subsidiaries collectively or,
if the context so requires, GTI, UCAR Global or UCAR Finance, individually.
PRESENTATION OF FINANCIAL, MARKET AND LEGAL DATA
We present our financial information on a consolidated basis. This
means that we consolidate financial information for all subsidiaries where our
ownership is greater than 50%. We use the equity method to account for 50% or
less owned interests, such as our planned 25% owned manufacturing joint venture
with Jilin Carbon Joint Stock Company, Ltd. (together with its affiliates,
"JILIN") in China, and we do not restate financial information for periods prior
to the acquisition of subsidiaries. This means that the financial information
for Carbone Savoie is consolidated, since its acquisition, on each line of the
Consolidated Financial Statements and the equity of the other 30% owner is
reflected on the lines entitled "minority stockholders' equity in consolidated
entities" and "minority stockholders' share of income."
Unless otherwise stated, when we refer to "EBITDA" we mean operating
profit (loss), plus depreciation, amortization, impairment losses on long-lived
and other assets, inventory write-downs and that portion of restructuring
charges (credits) applicable to non-cash asset write-offs. "ADJUSTED EBITDA"
means EBITDA plus the cash portion of restructuring charges (credits), charges
(credits) for estimated potential liabilities and expenses in connection with
antitrust investigations and related lawsuits and claims, securities class
actions and stockholder derivative lawsuits, corporate realignment of our
subsidiaries and related expenses and the charge related to the withdrawn public
offering of Graftech. The amount of restructuring charges (credits) applicable
to non-cash asset write-offs was a charge of $4 million in 2001 and nil for the
2002 first quarter. We believe that EBITDA and Adjusted EBITDA are generally
accepted as providing useful information regarding a company's ability to incur
and service debt. EBITDA and Adjusted EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from continuing
operations or other consolidated income or cash flow data prepared in accordance
with generally accepted accounting principles or as a measure of a company's
profitability or liquidity. Our method for calculating EBITDA and Adjusted
EBITDA may not be comparable to methods used by other companies and is not the
same as the method for calculating EBITDA under the Senior Facilities or the
Senior Notes.
34
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
References to cost in the context of our low-cost supplier strategy do
not include the impact of special or non-recurring charges or credits, such as
those related to investigations, lawsuits or claims, restructurings, impairment
losses, inventory write-downs or expenses incurred in connection with lawsuits
initiated by us, or the impact of accounting changes.
All historical cost savings and reductions are estimates based on a
comparison, with respect to provision for income taxes, to costs in 1998 or, for
all other costs, to costs in the 1998 fourth quarter (annualized). All cost
savings and reductions targeted or estimated under our new major cost savings
plan announced in January 2002 are based on a comparison to costs in 2001.
Estimates of savings in interest expense resulting from the 2002 plan do not
give effect to the increase in interest expense resulting from the issuance of
the Senior Notes.
Neither any statement made in this Report nor any charge taken by us
relating to any legal proceedings constitutes an admission as to any wrongdoing.
Unless otherwise specifically noted, market and market share data in
this Report are our own estimates. Market data relating to the steel industry,
our general expectations concerning such industry and our market position and
market share within such industry, both domestically and internationally, are
derived from publications by the International Iron and Steel Institute and
other industry sources as well as assumptions made by us, based on such data and
our knowledge of the industry. Market data relating to the fuel cell power
generation industry, our general expectations concerning such industry and our
market position and market share within such industry, both domestically and
internationally, are derived from publications by securities analysts relating
to Ballard Power Systems Inc., other industry sources and public filings, press
releases and other public documents of Ballard Power Systems as well as
assumptions made by us, based on such data and our knowledge of the industry.
Market and market share data relating to the graphite and carbon industry as
well as cost information relating to our competitors, our general expectations
concerning such industry and our market position and market share within such
industry, both domestically and internationally, are derived from the sources
described above and public filings, press releases and other public documents of
our competitors as well as assumptions made by us, based on such data and our
knowledge of the industry. Our estimates involve risks and uncertainties and are
subject to change based on various factors, including those discussed under
"Risk Factors" and "Forward-Looking Statements" in this Report and the Annual
Report. We cannot guarantee the accuracy or completeness of this data and have
not independently verified it. None of the sources mentioned above has consented
to the disclosure or use of data in this Report.
Unless otherwise noted, when we refer to dollars, we mean U.S. dollars.
Unless otherwise noted, references to "MARKET SHARES" are based on unit
volumes in 2001. As used herein, references to "MAJOR PRODUCT LINES" mean
graphite and carbon electrodes and cathodes and flexible graphite.
35
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The GRAFTECH logo, GRAFCELL(R), eGraf(TM), GRAFOIL(R), GRAFGUARD(R) and
GRAFSHIELD(R), are our trademarks and trade names. This Report also contains
trademarks and trade names belonging to other parties.
We maintain a Web site at http://www.graftechinternational.com, our
subsidiary Graftech maintains a Web site at and our High Tech High Temp ("HT2")
business unit maintains a Web site at http://www.HT2.com. The information
contained on these Web sites is not part of this Report.
Reference is made to our Annual Report on Form 10-K for the year ended
December 31, 2001, filed under GTI's former name, UCAR International Inc. (the
"ANNUAL REPORT"), for background information on various risks and contingencies
and other matters related to circumstances affecting us and our industry.
FORWARD LOOKING STATEMENTS AND RISKS
This Report contains forward looking statements. In addition, from time
to time, we or our representatives have made or may make forward looking
statements orally or in writing. These include statements about such matters as:
future production and sales of steel, aluminum, fuel cells, electronic devices
and other products that incorporate our products or that are produced using our
products; future prices and sales of and demand for graphite electrodes and our
other products; future operational and financial performance of various
businesses; strategic plans and programs; impacts of regional and global
economic conditions; restructuring, realignment, strategic alliance, supply
chain, technology development and collaboration, investment, acquisition, joint
venture, operating, integration, tax planning, rationalization, financial and
capital projects; legal matters and related costs; consulting fees and related
projects; potential offerings, sales and other actions regarding debt or equity
securities of us or our subsidiaries; and future costs, working capital,
revenue, business opportunities, values, debt levels, cash flow, cost savings
and reductions, margins, earnings and growth. The words "will," "may," "plan,"
"estimate," "project," "believe," "anticipate," "intend," "expect," "should,"
"target," "goal" and similar expressions identify some of these statements.
Actual future events and circumstances (including future performance,
results and trends) could differ materially from those set forth in these
statements due to various factors. These factors include:
o the possibility that global or regional economic conditions
affecting our products may not improve or may worsen;
o the possibility that announced or anticipated additions to
capacity for producing steel in electric arc furnaces, or
announced or anticipated reductions in graphite electrode
manufacturing capacity, may not occur;
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o the possibility that increased production of steel in electric
arc furnaces or reductions in graphite electrode manufacturing
capacity may not result in stable or increased demand for or
prices or sales volume of graphite electrodes;
o the possibility that economic or technological developments
may adversely affect growth in the use of graphite cathodes in
lieu of carbon cathodes in the aluminum smelting process;
o the possibility of delays in or failure to achieve widespread
commercialization of proton exchange membrane fuel cells which
use natural graphite materials and components and the
possibility that manufacturers of proton exchange membrane
fuel cells using those materials or components may obtain
those materials or components or the natural graphite used in
them from other sources;
o the possibility of delays in or failure to achieve successful
development and commercialization of new or improved
electronic thermal management or other products;
o the possibility of delays in meeting or failure to meet
contractually specified development objectives and the
possible inability to fund and successfully complete expansion
of manufacturing capacity to meet growth in demand for new or
improved products, if any;
o the possibility that we may not be able to protect our
intellectual property or that intellectual property used by us
infringes the rights of others;
o the occurrence of unanticipated events or circumstances
relating to pending antitrust investigations, lawsuits or
claims;
o the commencement of new investigations, lawsuits or claims
relating to the same subject matter as the pending
investigations, lawsuits or claims;
o the possibility that the lawsuit against our former parents
initiated by us could be dismissed or settled, our theories of
liabilities or damages could be rejected, material
counterclaims could be asserted against us, legal expenses and
distraction of management could be greater than anticipated,
or unanticipated events or circumstances may occur;
o the possibility that expected cost savings from our 2002 new
major cost savings plan, including our Power of One initiative
and the shutdown of certain of our facilities or other cost
savings efforts, will not be fully realized;
o the possibility that anticipated benefits from the realignment
of our businesses into two new divisions may be delayed or may
not occur;
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o the possibility that the corporate realignment of our
subsidiaries may not be completed when anticipated or at all
and that, as a result, the anticipated benefits therefrom may
not be achieved when anticipated or at all; o the possibility
that we may incur unanticipated health, safety or
environmental compliance, remediation or other costs or
experience unanticipated raw material or energy supply,
manufacturing operation or labor difficulties;
o the occurrence of unanticipated events or circumstances
relating to strategic plans or programs or relating to
corporate realignment, restructuring, strategic alliance,
supply chain, technology development, investment, acquisition,
joint venture, operating, integration, tax planning,
rationalization, financial or capital projects;
o changes in interest or currency exchange rates, changes in
competitive conditions, changes in inflation affecting our raw
material, energy or other costs, development by others of
substitutes for some of our products and other technological
developments;
o the possibility that changes in financial performance may
affect our compliance with financial covenants or the amount
of funds available for borrowing under the Senior Facilities;
and
o other risks and uncertainties, including those described
elsewhere or incorporated by reference in this Report.
Occurrence of any of the events or circumstances described above could
also have a material adverse effect on our business, financial condition,
results of operations or cash flows.
No assurance can be given that any future transaction about which
forward looking statements may be made will be completed or as to the timing or
terms of any such transaction.
All subsequent written and oral forward looking statements by or
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these factors. Except as otherwise required to be disclosed in
periodic reports required to be filed by public companies with the SEC pursuant
to the SEC's rules, we have no duty to update these statements.
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are one of the world's largest manufacturers and providers of high
quality natural and synthetic graphite- and carbon-based products and services,
offering energy solutions to industry-leading customers worldwide. We
manufacture graphite and carbon electrodes and cathodes, used primarily in
electric arc furnace steel production and aluminum smelting. We also manufacture
other natural and synthetic graphite and carbon products used in, and provide
services to, the fuel cell power generation, electronics, semiconductor and
transportation markets. We believe that we have the leading market share in all
of our major product lines. We have over 100 years of experience in the research
and development of graphite and carbon technology, and currently hold numerous
patents related to this technology.
We are a global business, selling our products and engineering and
technical services in more than 70 countries. We have 13 manufacturing
facilities strategically located in Brazil, Mexico, South Africa, France, Spain,
Russia and the U.S., and a planned joint venture manufacturing facility located
in China, which, subject to receipt of required Chinese governmental approvals
and satisfaction of other conditions, is expected to commence operations in
2003. Our customers include industry leaders such as Nucor Corporation and
Arcelor in steel, Alcoa Inc. and Pechiney in aluminum, Ballard Power Systems in
fuel cells, Intel Corporation in electronics, MEMC Electronic Materials, Inc. in
semiconductors and The Boeing Company in transportation.
REALIGNMENT AND NAME CHANGE
In early 2001, we launched a strategic initiative to strengthen our
competitive position and to change our corporate vision from an industrial
products company to an energy solutions company. In connection with this
initiative, we have realigned our company and management around two new
operating divisions, our Graphite Power Systems Division and our Advanced Energy
Technology Division. We believe that this realignment is enabling us to develop
and implement strategies uniquely designed to maximize the value of each of our
businesses. We may also adopt compensation plans designed to incentivize
management of each division on a basis consistent with its particular
strategies. In addition, we believe that this transparent, unified divisional
focus has and will continue to better enable us to structure and enter into
strategic alliances beneficial to each respective division.
To reflect our new emphasis on graphite and carbon technology, our new
corporate vision, we changed the name of UCAR International Inc. to GrafTech
International Ltd. at our Annual Stockholders Meeting for 2002. Our new trading
symbol on the NYSE is "GTI."
We are also realigning the corporate organizational structure of our
subsidiaries. Upon completion of this corporate realignment, most of the
businesses of each division will be
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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
segregated into separate companies along divisional lines. In addition, because
most of the operations, net sales and growth opportunities of our Graphite Power
Systems Division are located outside the U.S., most of its operations will be
held by our Swiss subsidiary or its subsidiaries. Most of our technology will
continue to be held by our U.S. subsidiaries.
As part of our new major cost savings plan announced in January 2002,
we are using opportunities created by this corporate organizational realignment
to change our U.S. benefit plans, improve cash management, intellectual property
management and corporate services delivery, reduce associated costs, reduce
taxes and reallocate intercompany debt. This reallocation of intercompany debt
will better match intercompany debt with cash flow from operations. Debt service
on our intercompany debt provides an important source of funds to repay our debt
to third parties, including the Senior Facilities and the Senior Notes.
OUR DIVISIONS
Our Graphite Power Systems Division manufactures and delivers high
quality graphite and carbon electrodes and cathodes and related services that
are key components of the conductive power systems used to produce steel,
aluminum and other non-ferrous metals. Graphite electrodes are consumed in the
production of steel in electric arc furnaces, the steel making technology used
by all "mini-mills." Mini-mills constitute the higher long-term growth sector of
the steel industry. Graphite electrodes are also consumed in refining steel in
ladle furnaces and in other smelting processes. Our graphite electrodes
accounted for about 79% of this division's net sales during 2001. Carbon
electrodes are used in the production of silicon metal, a raw material primarily
used in the manufacture of aluminum. Graphite and carbon cathodes are used in
aluminum smelting.
Because of its strong competitive position, we believe that this
division is well positioned to benefit from the expected cyclical recovery in
production of steel and other metals. To maintain its strong competitive
position, we have instituted a number of strategic initiatives to improve the
cost structure, increase the revenues and maximize the cash flow generated by
this division. These strategic initiatives include pursuing cost savings,
leveraging our global presence with industry leading customers, expanding
value-driven enterprise selling, delivering exceptional and consistent quality,
and providing superior technical service.
Our Advanced Energy Technology Division develops, manufactures and
sells high quality, highly engineered natural and synthetic graphite- and
carbon-based energy technologies, products and services for both established and
high-growth-potential markets. We currently sell these products primarily to the
transportation, chemical, petrochemical, fuel cell power generation and
electronic thermal management markets. In addition, we provide cost effective
technical services to a broad range of markets and license our proprietary
technology in markets where we do not anticipate engaging in manufacturing
ourselves. We believe that this division will be successful because of our
patented and proprietary technologies related to graphite and carbon materials
science and our processing and manufacturing technology.
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Natural graphite-based products, including flexible graphite, are
developed and manufactured by our subsidiary, Graftech. We are the world's
leading manufacturer of natural graphite-based products, including flexible
graphite. Flexible graphite is an excellent gasket and sealing material that to
date has been used primarily in high temperature and corrosive environments in
the automotive, chemical and petrochemical markets. Advanced flexible graphite
can be used in the production of materials, components and products for proton
exchange membrane fuel cells and fuel cell systems, electronic thermal
management applications, industrial thermal management applications, and battery
and supercapacitor power storage applications. Our synthetic graphite- and
carbon-based products are developed and manufactured by our Advanced Graphite
Materials and Advanced Carbon Materials business units, respectively. Their
products range from established products, such as graphite and carbon
refractories, graphite molds and rocket nozzles and cones, to new carbon
composites used in fuel cell power generation and electronic thermal management
markets. Our technology licensing and technical services are marketed and sold
by our HT2 business unit.
We are focused on leveraging our strengths to build the value of this
division through the development and commercialization of our technologies into
high-growth potential markets. These strengths include:
o developing intellectual property;
o developing and commercializing prototype and next generation
products and services; and
o establishing strategic alliances with leading customers and
suppliers as well as key technology focused companies.
We seek to identify technologies where this division's products and
services offer advantages in performance or cost as compared to competitive
technologies, materials, products or services.
We filed 11 new patent applications during the 2002 first quarter, a
25% increase over our filing rate in 2001.
COST REDUCTION PLANS
OVERVIEW. GTI's Board of Directors adopted a global restructuring and
rationalization plan in September 1998 and we launched additional initiatives to
enhance the plan in October 1999. The 1998 plan is now completed. By the end of
2001, we delivered recurring annualized run rate cost savings of $132 million.
In January 2002, we announced a new major cost savings plan. Like the 1998 plan,
we believe that the 2002 plan is by far the most aggressive major cost reduction
plan being implemented in the graphite and carbon industry.
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
2002 PLAN. In January 2002, we announced a new major cost savings plan
designed to generate cost savings to strengthen our balance sheet. The key
elements of the 2002 plan consist of:
o the rationalization of graphite electrode manufacturing
capacity at our higher cost facilities and the incremental
expansion of capacity at our lower cost facilities;
o the redesign and implementation of changes in our U.S. benefit
plans for active and retired employees, which was completed in
the 2002 first quarter;
o the implementation of work process changes, including
consolidating and streamlining order fulfillment, purchasing,
finance and accounting, and human resource processes, along
with the identification and implementation of outsourcing
opportunities;
o the implementation of additional plant and corporate overhead
cost reduction projects; and
o the corporate realignment of our subsidiaries, consistent with
the operational realignment of our businesses into two
operating divisions, to generate significant tax savings.
As part of the 2002 plan, we mothballed our graphite electrode
manufacturing operations in Caserta, Italy during the 2002 first quarter, ahead
of schedule. These operations had the capacity to manufacture 26,000 metric tons
of graphite electrodes annually. After the shutdown of our graphite electrode
manufacturing operations in Clarksville and Columbia, Tennessee in the 2001
third quarter, these operations were our highest cost graphite electrode
manufacturing operations. We expect to further incrementally expand graphite
electrode manufacturing capacity at our facilities in Mexico, France and Spain
over the next nine to twelve months. After the mothballing and incremental
expansion, our total annual graphite electrode manufacturing capacity will
remain about 210,000 metric tons.
We have identified a number of additional plant and overhead cost
reduction projects. One of the major projects is employee benefit plan redesign.
We have redesigned and implemented changes in our retiree medical insurance plan
and our U.S. retirement and savings plans for active and retired employees.
These benefit plan changes resulted in annual cost savings of $2 million in 2001
and will result in annual cost savings of more than $12 million in 2002 and
thereafter. We expect that about half of the other plant and overhead cost
reduction projects will be completed in 2002.
The corporate realignment of our subsidiaries is expected to be
substantially completed in the 2002 first half and result in substantial tax
savings. As a result of the corporate realignment of our subsidiaries, the
effective income tax rate for 2002, excluding non-recurring charges or benefits
associated with the corporate realignment of our subsidiaries, is expected to be
35%.
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PART I (CONT'D)
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We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years. We anticipate that the
aggregate estimated pre-tax, cash proceeds from these sales will total $75
million by the end of 2003. These non-strategic businesses contributed net sales
of about $25 million in 2001. We believe that satisfactory progress is being
made on the planned asset sales, and that successful completion of those asset
sales will strengthen our balance sheet.
We estimate that the 2002 plan will generate cumulative cost savings of
about $45 million by the end of 2002, $120 million by the end of 2003 and $200
million by the end of 2004, and recurring annual cost savings of $80 million by
the end of 2004. These savings are additive to those which we achieved by the
end of 2001 under the 1998 plan that is now completed. The following table
summarizes the targeted savings under the 2002 plan:
SUMMARY OF TARGETED ANNUAL COST SAVINGS
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004 CUMULATIVE
---- ---- ---- ----------
(PRE-TAX DOLLARS IN MILLIONS)
Cost of sales:
Graphite Power Systems Division................... $ 24 $ 43 $ 43 $ 110
Advanced Energy Technology Division............... 4 4 4 12
----- ----- ----- -------
Total cost of sales............................ 28 47 47 122
Overhead costs........................................ 9 10 11 30
----- ----- ----- -------
Total cost of sales and overhead costs......... 37 57 58 152
Interest expense savings due to the 2002 plan......... 2 8 12 22
Tax expense........................................... 6 10 10 26
----- ----- ----- -------
Total savings.................................. $ 45 $ 75 $ 80 $ 200
===== ===== ===== =======
We achieved cost savings of about $7 million in the 2002 first quarter,
despite an estimated $2 million of unanticipated higher graphite electrode
production costs associated with our rationalization activities as well as low
operating levels and low sales volumes. We expect to meet our targeted annual
costs target of $45 million for 2002. The following table summarizes our cost
savings for the 2002 first quarter.
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PART I (CONT'D)
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THREE
MONTHS
ENDED ANNUAL
MARCH 31, TARGET
2002 FOR 2002 BASIS OF MEASUREMENT
---- -------- --------------------
(PRE-TAX DOLLARS IN MILLIONS)
Cost of sales:
2001 average graphite electrode
Graphite Power Systems Division......... $ 2 $ 24 production cost per metric ton
of $1,691
Advanced Energy Technology Division..... 1 4 Cost reduction initiatives
---- -----
Total cost of sales................. 3 28
Overhead costs.............................. 1 9 2001 SG&A expenses of $78 million
---- -----
Total cost of sales and overhead costs. 4 37
Interest expense savings due to the 2002 Assumed interest expense on cash
plan..................................... - 2 savings from cost savings plan
Tax expense................................. 3 6 45 percent effective tax rate
before legal and tax restructuring
---- -----
Total savings......................... $ 7 $ 45
==== =====
We believe that the 2002 plan will:
o further strengthen our position and our competitive advantage
as a low cost supplier to the steel and other metals
industries;
o better enable us to largely maintain our gross profit margin
and operating margin during the current global economic
downturn;
o rationalize our capacity to manufacture both higher value
added "supersize" ultra-high power graphite electrodes as well
as cost competitive high power small diameter graphite
electrodes for ladle furnaces;
o further improve our position to benefit, in terms of
operations, earnings and cash flow from operations, from the
expected cyclical recovery in electric arc furnace steel
production; and
o enable us to further reduce total debt, which should result in
reductions in interest expense (interest expense reductions do
not take into account higher interest expense resulting from
the sale of the Senior Notes).
We believe that implementation of the 2002 plan will require about $20
million of cash exit costs, of which about $5 million was recorded in the 2001
fourth quarter and $5 million was
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PART I (CONT'D)
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recorded in the 2002 first quarter. The 2002 plan resulted in about $29 million
of non-cash restructuring charges and impairment losses on long-lived assets, of
which about $24 million was recorded in the 2001 fourth quarter. These costs are
additive to the $3 million of cash exit costs and $57 million of non-cash
restructuring charges and impairment losses on long-lived assets related to the
shutdown of our graphite electrode manufacturing operations in Tennessee.
The mothballing of our graphite electrode operations in Italy will
enable us to avoid annually an average of $2 million of otherwise necessary
capital expenditures. We expect to make the planned incremental expansions of
graphite electrode manufacturing capacity for capital expenditures of $15
million and complete such expansion within the next nine to twelve months.
1998 PLAN. The key elements of our global restructuring and
rationalization plan announced in September 1998 and enhanced in October 1999
included:
o the shutdown of our graphite electrode manufacturing
operations at our facilities in Canada and Germany; and
o the consolidation of administrative functions with the
relocation of our corporate headquarters to Tennessee (which
have subsequently been relocated to Delaware) and our European
headquarters to Switzerland.
We also downsized our graphite electrode manufacturing operations at
our facilities in Russia. As a result of the 1998 plan and other cost savings
initiatives, we have reduced our average graphite electrode production cost per
metric ton by the end of 2001 by 15% since the 1998 fourth quarter.
OTHER COST REDUCTION ACTIVITIES. Since 1998, we have initiated other
cost reduction activities. Some of these activities will continue while the 2002
plan is being implemented.
We have evaluated every aspect of our supply chain and improved and
continue to improve performance through realignment and standardization of
critical business processes, standardization of enterprise wide systems, and
improvement of information technology infrastructures and interfaces with
trading partners. We reduced inventory levels from 1998 by about 33%, or to
about $180 million, by the end of 2001 and reduced our cash cycle time, as
compared to 1998, by about 25% by the end of 2001.
In the 2001 second quarter, we recorded a $58 million charge for
restructuring and impairment loss on long-lived assets related to the shutdown
of our graphite electrode manufacturing operations at our facilities in
Clarksville and Columbia, Tennessee. In 2000, these operations were our highest
cost graphite electrode manufacturing operations. We expect that the shutdown
will result in total annual cost savings of $18 million and will enable us to
avoid about $9 million in otherwise necessary capital expenditures. Certain of
these cost savings were realized in 2001 and the balance will be delivered in
2002. The shutdown was completed on
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schedule near the end of the 2001 third quarter. We incrementally expanded
graphite electrode manufacturing capacity at our facilities in Mexico, Spain and
South Africa for a capital investment of about $3 million.
In the 2001 third quarter, we recorded a $2 million charge for
restructuring and impairment loss on long-lived assets related to the
realignment of our businesses into our Advanced Energy Technology Division and
Graphite Power Systems Division, the relocation of our corporate headquarters
and the shutdown of our coal calcining operations located in Niagara Falls, New
York. We shut down our coal calcining operations primarily because we entered
into a five-year agreement to purchase calcined coal from a third party at a
lower net effective cost than we can produce it for ourselves. The shutdown was
completed at the end of 2001. As part of the business realignment, we have
centralized management functions of our Advanced Energy Technology Division in
Cleveland, Ohio, and management functions of our Graphite Power Systems Division
in Etoy, Switzerland. On December 21, 2001, we relocated our corporate
headquarters, consisting of about 10 employees, from Nashville, Tennessee, to
Wilmington, Delaware. The charge relates primarily to a workforce reduction of
24 employees.
In the 2001 third quarter, we reversed $2 million of prior
restructuring charges based on revised lower estimates of workforce reductions
and plant closure costs and we reclassified $4 million of prior restructuring
charges related to on-site waste disposal post monitoring costs to the other
long-term obligations.
In the 2001 fourth quarter, we recorded an impairment loss on
long-lived and other assets of $27 million, $24 million of which was associated
with the mothballing of our Italian graphite electrode operations. We also
recorded a $7 million non-cash restructuring charge, $5 million of which was
associated with our Italian operations and $2 million of which was associated
with the shutdown of our U.S. graphite electrode operations in addition to the
charge recorded in the 2001 second quarter.
POWER OF ONE BUSINESS TRANSFORMATION INITIATIVE
We began to implement in 2000 and we are continuing to implement a
global business transformation initiative entitled POWER OF ONE. POWER OF ONE is
a coordinated global self-assessment and business process rationalization and
transformation initiative driving one consistent theme throughout our
organization: "BECOMING THE BEST." We believe that the initiative is
accelerating development and implementation of business opportunities and
developing leadership skills more broadly within all management levels as well
as supporting our efforts to reduce costs and working capital needs, improve
efficiencies and product quality, shorten cycle times and achieve "BEST IN
CLASS" performance. Through March 31, 2002, our investment in the initiative
included about $4 million of consulting fees and $3 million of capital
expenditures, primarily for advanced planning and scheduling supply chain
software and global treasury management systems. We believe that most of the
future investment for this initiative will be funded from realized cost savings.
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Effective April 2001, we entered into a ten year service contract with
CGI Group Inc. pursuant to which CGI became the delivery arm for our global
information technology service requirements, including the design and
implementation of our global information and advanced manufacturing and demand
planning processes, using J.D. Edwards software. Through this contract, we are
seeking to transform our information technology service capability into an
efficient, high quality enabler for our global supply chain initiatives as well
as a contributor to our cost reduction objectives. Under the outsourcing
provisions of this contract, CGI manages our data center services, networks,
desktops, telecommunications and legacy systems. Through this contract, we
believe that we will be able to leverage the resources of CGI to assist us in
achieving our information technology goals and our target cost savings.
As part of the 2002 plan, we are also implementing global work process
changes, including consolidating and streamlining our order fulfillment,
purchasing, finance and accounting and human resource processes, along with the
identification and implementation of outsourcing opportunities, targeted for
completion by the end of 2003.
STRATEGIC ALLIANCES
We are pursuing strategic alliances that enhance or complement our
existing or related businesses and have the potential to generate strong cash
flow. Strategic alliances may be in the form of joint venture, licensing, supply
or other arrangements that leverage our strengths to achieve cost savings,
improve margins and cash flow, and increase net sales and earnings growth.
We have developed a strategic relationship with Conoco. In December
2000, we entered into a license and technical services agreement with Conoco to
license our proprietary technology for use at the carbon fiber manufacturing
facility that Conoco is building in Ponca City, Oklahoma. We also will continue
to provide a wide variety of technical services to Conoco. Under a separate
manufacturing tolling agreement entered into February 2001, we are providing
manufacturing services to Conoco at our facility in Clarksburg, West Virginia
for carbon fibers. Under the three-year manufacturing tolling agreement, we are
using raw materials provided by Conoco to manufacture carbon fibers. Conoco's
new carbon fiber technology could be used in portable power applications, such
as batteries for personal computers and cell phones, as well as a wide range of
other electronic devices and automotive applications. We are working with Conoco
to expand our strategic relationship in supply chain and other areas.
We have developed a strategic alliance in the cathode business with
Pechiney, the world's recognized leader in aluminum smelting technology. To
broaden our alliance, in March 2001, we contributed our Brazilian cathode
manufacturing operations to Carbone Savoie. Pechiney, the 30% minority owner of
Carbone Savoie, contributed approximately $9 million in cash to Carbone Savoie
as part of this transaction. The cash contribution was used to upgrade
manufacturing operations in Brazil and France, which was completed by the end of
the 2002 first quarter. Ownership in Carbone Savoie remains 70% by us and 30% by
Pechiney. Under our now broadened alliance, Carbone Savoie holds our entire
cathode manufacturing capacity.
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In April 2001, we entered into a joint venture agreement with Jilin to
produce and sell high-quality graphite electrodes in China, which we believe to
be the largest market for graphite electrodes in the world. The joint venture is
expected to utilize renovated capacity at Jilin's main facility in Jilin City
and complete additions at another facility in Changchun that were begun by
Jilin. The joint venture facilities are expected to commence operations in 2003.
We are required to make capital contributions of $6 million of cash ($2 million
of which has been contributed to date) plus technical assistance (a substantial
portion of which has already been contributed) for our 25% ownership interest in
the joint venture. The completion of the parties' capital contributions to the
joint venture is subject to the receipt of required Chinese governmental
approvals and satisfaction of other conditions.
We have been working with Ballard Power Systems since 1992 on
developing natural graphite-based materials for use in Ballard Power Systems
fuel cells for power generation. In June 2001, our subsidiary, Graftech, entered
into a new exclusive development and collaboration agreement and a new exclusive
long-term supply agreement with Ballard Power Systems, which significantly
expand the scope and term of the prior agreements. In addition, Ballard Power
Systems became a strategic investor in Graftech, investing $5 million in shares
of Ballard Power Systems common stock for a 2.5% equity ownership interest, to
support the development and commercialization of natural graphite-based
materials and components for proton exchange membrane fuel cells.
The scope of the new exclusive development and collaboration agreement
includes natural graphite-based materials and components, including flow field
plates and gas diffusion layers, for use in proton exchange membrane fuel cells
and fuel cell systems for transportation, stationary and portable applications.
The initial term of this agreement extends through 2011. Under the new supply
agreement, we will be the exclusive manufacturer and supplier of natural
graphite-based materials for Ballard Power Systems fuel cells and fuel cell
systems. We will also be the exclusive manufacturer of natural graphite-based
components, other than those components that Ballard Power Systems manufactures
for itself. The initial term of this agreement, which contains customary terms
and conditions, extends through 2016. We have the right to manufacture and sell,
after agreed upon release dates, natural graphite-based materials and components
for use in proton exchange membrane fuel cells to other parties in the fuel cell
industry.
GLOBAL ECONOMIC CONDITIONS AND OUTLOOK
We are impacted in varying degrees, both positively and negatively, as
global, regional or country conditions affecting the markets for our products
fluctuate.
Beginning in mid-2000, economic conditions began to weaken in North
America, becoming more severe in the 2000 fourth quarter. Even with this
weakening, worldwide electric arc furnace steel production was 285 million
metric tons in 2000 (about 34% of total steel production).
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The economic weakening in North America continued and became more
severe in 2001. More than 24 steel companies in the U.S. filed for protection
under the U.S. Bankruptcy Code since January 1, 2000. Moreover, notwithstanding
a substantial decrease in steel production in the U.S., steel inventories,
particularly those held by steel service centers, remain high relative to
shipments. In March 2002, President Bush announced his decision to impose
tariffs of up to 30% on most imported steel as part of a broader plan to rescue
the nation's financially troubled steel industry. We believe that this decision
is having a modest positive impact on electric arc furnace steel production and,
in turn, demand for graphite electrodes in the U.S. We cannot predict, however,
whether and to what extent this development will impact our global business over
the long-term.
The impact of the economic weakness in North America on other regional
economies became more severe during 2001. Steel production declined in Brazil in
the 2001 second and third quarters by about 10% as compared to the 2000 second
and third quarters. This decline was caused both by shortages of electricity
brought on by a drought that reduced hydroelectric power generation (although
Brazil is now beginning to experience some relief from the drought) as well as
by the weakening in global economic conditions. Brazil may also be impacted by
the recent currency crisis occurring in Argentina (which could impact both our
net sales and collections of accounts receivable in both of those countries).
There was also a weakening in the demand for steel in Asia (except for China
where electric arc furnace steel production has remained relatively stable).
This global economic weakness was exacerbated by the impact on economic
conditions of the terrorist acts in the U.S. in September 2001. We believe that
worldwide electric arc furnace steel production increased by about 3% in 2001 as
compared to 1999, but declined by about 2% in 2001 (to a total of about 279
million metric tons, about 33% of total steel production) as compared to 2000.
These fluctuations in electric arc furnace steel production resulted in
corresponding fluctuations (to a greater or lesser extent, depending on economic
conditions affecting, and decisions by, electric arc furnace steel producers) in
demand for graphite electrodes. We estimate that worldwide graphite electrode
demand increased by about 4% in 2000 as compared to 1999, but declined by about
10% in 2001 as compared to 2000. Overall pricing worldwide was weak throughout
most of this period. However, we implemented increases in local currency selling
prices of our graphite electrodes in 2000 and early 2001 in Europe, the Asia
Pacific region, the Middle East and South Africa. Recently, we have not been
able to maintain all of these price increases. We continue to face pricing
pressures worldwide.
We are experiencing intense competition in the graphite electrode
industry. One of our U.S. competitors, The Carbide/Graphite Group, Inc., filed
for protection under the U.S. Bankruptcy Code in October 2001. In order to seek
to minimize our credit risks, we have reduced our sales of, or refused to sell
(except for cash on delivery), graphite electrodes to some customers and
potential customers in the U.S. and, to a limited extent, elsewhere. Our unpaid
49
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trade receivables from steel companies in the U.S. that have filed for
protection under the U.S. Bankruptcy Code since January 1, 2000 have aggregated
only 1.4% of net sales of graphite electrodes in the U.S. during the same
period. Our volume of graphite electrodes sold increased by 5% in 2000 as
compared to 1999, but declined by about 20% in 2001 as compared to 2000. The
decline in our volume of graphite electrodes sold in 2001 as compared to 2000
was due primarily to the decline in electric arc furnace steel production as
well as our efforts to implement and maintain local currency selling price
increases and our efforts to seek to minimize credit risks.
Demand and prices for most of our other products sold to the metals and
transportation industries are affected by the same global and regional economic
conditions that affect graphite electrodes. During 2000, demand for most of
these products as a group was relatively stable. Overall pricing did not
strengthen. The global and regional economic conditions that have impacted
demand and prices for graphite electrodes since mid-2000 have also similarly
impacted demand and prices for most of these products (other than graphite
cathodes). Demand and prices for graphite cathodes has remained relatively
strong since 1999 primarily due to construction of new aluminum smelters using
graphite cathodes, even as old smelters using carbon cathodes are removed from
service.
We believe that business conditions for most of our products (other
than cathodes) will remain challenging through 2002 and that a strong recovery
in the steel, metals and transportation industries will not occur until the 2002
second half, at the earliest. We expect an increase in our volume of graphite
electrodes sold during the remainder of 2002 primarily due to improving
conditions in the steel industry and an increase in our market share as we
continue to implement our enterprise selling and other strategies. Our graphite
electrode order book has strengthened significantly since the middle of the 2002
first quarter, and for the remainder of 2002 is now 85% full. We expect to
deliver an increase of approximately 17% to 20% in graphite electrode sales
volume during the 2002 second quarter over the 2002 first quarter and to have
graphite electrode capacity utilization rates at or greater than 95% for the
remainder of 2002 and into the beginning of 2003. Our cathode order book is
virtually full for the remainder of 2002 and into the beginning of 2003. In the
Advanced Energy Technology Division, we believe that our core businesses have
bottomed and expect to deliver new product development and commercialization
milestones in the coming quarters.
We expect our cost reductions to largely mitigate the impact on gross
profit of pressure on net sales. We expect to achieve an average graphite
electrode production cost per metric ton of $1,550 for 2002 and $1,400 by the
end of 2003. Although conditions are improving for graphite electrode price
increases over the long-term, we do not expect graphite electrode prices to
strengthen in 2002. Under current global and regional economic conditions, we
cannot assure you that we will have the same success in minimizing our credit
risks in the future that we have had in the U.S. relating to sales of graphite
electrodes in the past.
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PART I (CONT'D)
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We maintain our aggressive net debt goal of $500 million by the end of
2004 and have a nearer term target of $600 million by the end of 2003 or
earlier, assuming completion of planned asset sales and full implementation of
the 2002 plan.
In addition, as previously announced, we are implementing interest rate
management initiatives to seek to minimize our interest expense and optimize our
portfolio of fixed and variable interest rate obligations. In connection with
those initiatives, we recently entered into a ten year interest rate swap for a
notional amount of $200 million to effectively convert that amount of fixed rate
debt to variable rate debt. We are targeting interest expense of $60 million for
2002, essentially the same as 2001.
Our outlook could be significantly impacted by changes in interest
rates by the U.S. Federal Reserve Board and the European Central Bank, changes
in tax and fiscal policies by the U.S. and other governments, the occurrence of
further terrorist acts and developments (including increases in security,
insurance, data back-up, transportation and other costs, transportation delays
and continuing or increased economic uncertainty and weakness) resulting from
terrorist acts and the war on terrorism, and changes in global and regional
economic conditions.
FINANCING TRANSACTIONS
2002 PRIVATE SENIOR NOTE OFFERINGS. On February 15, 2002, we completed
a private offering of $400 million aggregate principal amount of Senior Notes at
a price of 100% of principal amount. On May 6, 2002, we completed a private
offering of $150 million aggregate principal amount of additional Senior Notes
at a price of 104.5% of principal amount, plus accrued interest from February
15, 2002. The Senior Notes bear interest at an annual rate of 10.25% and mature
in 2012.
We believe that these offerings together with the repayment of term
loans under the Senior Facilities, the reduction in the outstanding balance
under our revolving credit facility and other amendments to the Senior
Facilities have strengthened our balance sheet and enhanced our flexibility to
implement our business strategies.
The net proceeds from the offering completed in February 2002 were $387
million. We used net proceeds from the first $250 million of Senior Notes sold
and 50% of the net proceeds from the balance of the Senior Notes sold to repay
term loans under the Senior Facilities. We used the balance of the net proceeds
to reduce amounts outstanding under our revolving credit facility. The net
proceeds (excluding accrued interest paid by the purchasers of the Senior Notes)
from the offering completed in May 2002 were $151 million. We used 50% of the
net proceeds to reduce the balance outstanding under our revolving credit
facility and the balance to repay term loans under the Senior Facilities. We
paid approximately $13 million of debt issuance costs related to the Senior
Notes sold in February 2002 and $6 million related to the Senior Notes sold in
May 2002. These debt costs are being amortized over the term of the Senior
Notes.
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The $7 million premium received upon issuance of the additional Senior
Notes issued in May 2002 will be added to the principal amount of the Senior
Notes shown on the Consolidated Balance Sheets and amortized (as a credit to
interest expense) over the term of the additional Senior Notes. As a result of
our receipt of such premium, the effective annual interest rate on the
additional Senior Notes is about 9.5%.
At March 31, 2002, on an as adjusted basis after giving effect to the
offering completed in May 2002, the application of the net proceeds and the
corporate realignment of our subsidiaries:
o the Senior Facilities constituted $131 million of our total
debt of $702 million;
o the term loans under the Tranche A Facility have been fully
repaid; and
o the principal amount of the term loans outstanding under the
Tranche B Facility was $131 million, all of the scheduled
principal payments of which are due in 2007.
We obtained consent from the holders of the Senior Notes issued in
February 2002 to amend the Indenture so as to waive the requirement to use the
gross proceeds from the issuance of the additional Senior Notes issued in May
2002 to make intercompany loans to our foreign subsidiaries and, on April 30,
2002, entered into a Supplemental Indenture to give effect to such amendment.
In February 2002, we recorded an extraordinary charge of $3 million ($2
million after tax) for write-off of capitalized fees associated with the term
loans under Tranche A and B Facilities repaid with the net proceeds from the
issuance of the Senior Notes in February 2002.
We expect to record an extraordinary charge in the 2002 second quarter
of $1 million ($1 million after tax) for write-off of capitalized fees
associated with the term loans under Tranche A and B Facilities repaid with the
net proceeds from the issuance of the additional Senior Notes in May 2002.
2001 PUBLIC EQUITY OFFERING. In July 2001, we completed a public
offering of 10,350,000 shares of common stock at a public offering price of
$9.50 per share. The net proceeds from that offering were $91 million. 60% of
the net proceeds were used to repay term loans under the Senior Facilities. The
balance of the net proceeds will be used to fund growth and expansion of our
Advanced Energy Technology Division, including growth through acquisitions, and,
pending such use, has been applied to reduce outstanding balance under our
revolving credit facility.
2000 DEBT RECAPITALIZATION. In February 2000, we completed a debt
recapitalization and obtained the Senior Facilities.
In the 2000 third quarter, pursuant to our debt recapitalization in
February 2000, our Italian subsidiary entered into a [euro]17 million (about $15
million, based on currency exchange rates
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PART I (CONT'D)
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in effect at December 31, 2001) long-term debt arrangement with a third party
lender. We also placed on deposit with the third party lender funds in the same
amount, which secure the debt. Since we had the legal right to set-off, and the
intent to do so, such amounts had been netted and were not reflected separately
in the Consolidated Balance Sheets. In February 2002, in connection with the
corporate realignment of our subsidiaries, we exercised our right of set-off and
retired the debt arrangement.
In April 2001, the Senior Facilities were amended to, among other
things, exclude certain expenses incurred in connection with the lawsuit
initiated by us against our former parents (up to a maximum of $20 million, but
not more than $3 million in any quarter) and certain charges and payments in
connection with antitrust fines, settlements and expenses from the calculation
of financial covenants. Charges (over and above $340 million charge recorded in
1997) recorded on or before June 30, 2002 (or during the term of the Senior
Facilities, after effectiveness of the amendment described below which became
effective in February 2002) for antitrust fines, settlements and expenses are
excluded from the calculation of financial covenants (until paid) up to a
maximum of $130 million (or $75 million, after effectiveness of the amendment
described in Note 10), reduced by the amount of certain debt (other than the
Senior Notes) incurred by us that is not incurred under the Senior Facilities
($24 million of which debt was outstanding at March 31, 2002). The fine assessed
by the antitrust authority of the European Union, as well as the additional $10
million charge recorded in July 2001 and any payments related to such fine
(including payments within the $340 million charge recorded in 1997), are
excluded from the calculation of financial covenants through June 30, 2002 (or
for the term of the Senior Facilities, after the effectiveness of the amendment
described below which became effective in February 2002).
In July 2001, the Senior Facilities were amended to, among other
things, change our financial covenants so that they were less restrictive
through 2006 than would otherwise have been the case. In connection therewith,
we agreed that our investments in Graftech and any of our other unrestricted
subsidiaries after this amendment will be made in the form of secured loans,
which will be pledged to secure the Senior Facilities, and that the maximum
amount of capital expenditures permitted under the Senior Facilities would be
reduced in 2001 and 2002. We do not expect that our capital expenditures would
exceed such maximums. In connection therewith, we paid an amendment fee of $2
million and the margin which is added to either euro LIBOR or the alternate base
rate in order to determine the interest rate payable thereunder increased by 25
basis points.
In December 2001, the Senior Facilities were amended to, among other
things, permit the corporate realignment of our subsidiaries. In connection
therewith, we paid an amendment fee of $1 million.
In February 2002, the Senior Facilities were amended to, among other
things, permit us to issue up to $400 million aggregate principal amount of
Senior Notes, to pledge certain unsecured intercompany term notes and unsecured
guarantees of those notes to secure the Senior Notes, to
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
have certain U.S. subsidiaries holding a substantial majority of our U.S. assets
guarantee the Senior Notes and to have those U.S. subsidiaries pledge shares of
Graftech to secure such guarantees.
In connection with this amendment, our maximum permitted leverage ratio
was substantially increased and our minimum required interest coverage ratio was
substantially decreased while maintaining full availability of our revolving
credit facility. The amendment also changed the manner in which net debt and
EBITDA are calculated to exclude certain fees, costs and expenses (including
fees of counsel and experts) in connection with the lawsuit initiated by us
against our former parents as well as any letter of credit issued to secure
payment of the antitrust fine assessed against us by the antitrust authority of
the European Union. In addition, the amendment expanded our ability to make
certain investments, including investments in Graftech, and eliminated
provisions relating to a spin-off of Graftech. In connection therewith, we paid
an amendment fee of $1 million and the margin which is added to either euro
LIBOR or the alternate base rate in order to determine the interest rate payable
thereunder increased by 37.5 basis points.
In connection with issuance of additional Senior Notes in May 2002, the
Senior Facilities were amended to, among other things, permit us to issue the
additional Senior Notes on the same terms as those relating to the Senior Notes
issued in February 2002. In connection with this amendment, our maximum
permitted leverage ratio was changed to measure the ratio of net senior secured
debt to EBITDA as against new specified amounts. Our interest coverage ratio was
also changed. We believe that these changed ratios will provide us with greater
flexibility. In addition, the amendment reduced the maximum amount available
under our revolving credit facility to [euro] 200 million from [euro] 250
million ([euro] 25 million of which can only be used to pay or secure payment of
the fine assessed by the antitrust authority of the European Union) and reduced
the basket for certain debt incurred by us that is not incurred under the Senior
Facilities to $75 million from $130 million ($24 million of which debt was
outstanding at March 31, 2002). In connection therewith, we paid fees and costs
of $1 million.
LITIGATION AGAINST OUR FORMER PARENT COMPANIES INITIATED BY US
In February 2000, we commenced a lawsuit against our former parents,
Mitsubishi Corporation and Union Carbide Corporation. In the lawsuit, we allege,
among other things, that certain payments made to our former parents in
connection with our leveraged equity recapitalization in January 1995 were
unlawful under the General Corporation Law of the State of Delaware, that our
former parents were unjustly enriched by receipts from their investments in GTI
and that our former parents aided and abetted breaches of fiduciary duties owed
to us by our former senior management in connection with illegal graphite
electrode price fixing activities. We are seeking to recover more than $1.5
billion in damages, including interest. Some of our claims provide for joint and
several liability; however, damages from our various claims would not generally
be additive to each other. The defendants have filed motions to dismiss this
lawsuit and a motion to disqualify certain of our counsel from representing us
in this lawsuit. We are
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
vigorously opposing those motions. Oral hearings were held on those motions in
the 2001 first and second quarters. No decision on those motions has been
rendered. Litigation such as this lawsuit is complex. Complex litigation can be
lengthy and expensive. We expect to incur $10 million to $20 million for legal
expenses to pursue this lawsuit from the date of filing the complaint through
trial. Through March 31, 2002, we had incurred about $4 million of these legal
expenses. This lawsuit is in its earliest stages. The ultimate outcome of this
lawsuit is subject to many uncertainties. We may at any time settle this
lawsuit.
ANTITRUST AND OTHER LITIGATION AGAINST US
Since 1997, we have been subject to antitrust investigations by
antitrust authorities in the U.S., the European Union, Canada, Japan and Korea.
In addition, civil antitrust lawsuits have been commenced and threatened against
us and other producers and distributors of graphite and carbon products in the
U.S., Canada and elsewhere. We recorded a pre-tax charge against results of
operations for 1997 in the amount of $340 million as a reserve for estimated
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims.
In April 1998, GTI pled guilty to a one count charge of violating U.S.
federal antitrust law in connection with the sale of graphite electrodes and was
sentenced to pay a non-interest-bearing fine in the aggregate amount of $110
million, payable in six annual installments of $20 million, $15 million, $15
million, $18 million, $21 million and $21 million, commencing July 23, 1998. In
January 2001, at our request, the due date of each of the remaining three
payments was deferred by one year and, at our request, in January 2002, the
payment schedule for the $60 million unpaid balance outstanding at that time was
revised to $2.5 million payment in April 2002, a $5.0 million payment in April
2003 and, beginning in April 2004, quarterly payments ranging from $3.25 million
to $5.375 million through January 2007. Beginning in 2004, the U.S. Department
of Justice may ask the court to accelerate the payment schedule based on a
change in our ability to make such payments. Interest will begin to accrue on
the unpaid balance, commencing in April 2004, at the statutory rate of interest
then in effect. In January 2002, the statutory rate of interest was 2.13% per
annum. Of the $110 million, $90 million is treated as a fine and $20 million is
treated as imputed interest for accounting purposes. In March 1999, our Canadian
subsidiary pled guilty to a one count charge of violating Canadian antitrust law
in connection with the sale of graphite electrodes and was sentenced to pay a
fine of Cdn. $11 million. All payments due have been timely made.
In October 1999, we became aware that the Korean antitrust authority
had commenced an investigation as to whether there had been any violation of
Korean antitrust law by producers and distributors of graphite electrodes. In
March 2002, we were advised that it had, after holding a hearing, assessed a
fine against us in the amount of 676 million KRW (approximately $510,000, based
on currency exchange rates in effect on March 31, 2002). Five other graphite
electrode producers were also fined by it in amounts ranging up to 4,396 million
KRW (approximately $3.3 million, based on currency exchange rates in effect on
March 31, 2002). Our fine, which
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
represented 0.5% of our graphite electrode sales in Korea during the relevant
time period and was the lowest fine as a percentage of sales imposed, reflected
a substantial reduction as a result of our cooperation with that authority
during its investigation. In May 2002, we appealed the decision. Notwithstanding
our appeal, we are required to pay this fine by June 9, 2002
In January 2000, the antitrust authority of the European Union issued a
statement of objections initiating proceedings against us and other producers of
graphite electrodes. The statement alleged that we and other producers violated
European antitrust law in connection with the sale of graphite electrodes. In
July 2001, that authority issued its decision. Under the decision, it assessed a
fine of [euro] 50.4 million ($46 million, based on currency exchange rates in
effect at March 31, 2002) against GTI resulting from the role of our former
management in a graphite electrode price fixing cartel. Seven other graphite
electrode producers were also fined, with fines ranging up to [euro] 80.2
million. As a result of the assessment of the fine against us, we recorded a
pre-tax charge of $10 million against results of operations in the 2001 second
quarter as an additional reserve for potential liabilities and expenses in
connection with antitrust investigations and related lawsuits and claims. This
decision has brought to a conclusion our last major antitrust liability. From
the initiation of its investigation, we have cooperated with the antitrust
authority of the European Union. As a result of our cooperation, our fine
reflects a substantial reduction from the amount that otherwise would have been
assessed. It is the policy of that authority to negotiate appropriate terms of
payment of antitrust fines, including extended payment terms. We have had
discussions regarding payment terms. After an in-depth analysis of the decision,
in October 2001, we filed an appeal to the court challenging the amount of the
fine. The fine or collateral security therefor would typically be required to be
paid or provided at about the time the appeal was filed. We are currently in
discussions with that authority regarding the appropriate form of collateral
security during the pendency of the appeal. If the results of these discussions
are not acceptable to us, we may file an interim appeal to the court to waive
the requirement for collateral security or to allow us to provide alternative
security for payment. We cannot predict how or when the court would rule on such
interim appeal.
In the 2001 second quarter, we became aware that the Brazilian
antitrust authority had requested written information from various steelmakers
in Brazil. In April 2002, our Brazilian subsidiary received a request for
information from that authority. We intend to provide that information.
We are continuing to cooperate with the U.S. and Canadian antitrust
authorities in their continuing investigations of others. It is possible that
antitrust investigations seeking, among other things, to impose fines and
penalties could be initiated against us by authorities in Brazil or other
jurisdictions.
We have settled, among others, virtually all of the actual and
potential claims against us by customers in the U.S. and Canada arising out of
alleged antitrust violations occurring prior to the date of the relevant
settlement in connection with the sale of graphite electrodes. All settlement
payments due have been timely made. None of the settlement or plea agreements
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PART I (CONT'D)
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contain restrictions on future prices of our graphite electrodes. There remain,
however, certain pending claims as well as pending lawsuits in the U.S. relating
to the sale of carbon electrodes and carbon cathodes as well as graphite
electrodes sold to foreign customers. It is also possible that additional
antitrust lawsuits and claims could be asserted against us in the U.S. or other
jurisdictions.
Through March 31, 2001, we have paid an aggregate of $249 million of
fines and net settlement and expense payments and $11 million of imputed
interest. At March 31, 2001, $101 million remained in the reserve. The balance
of the reserve is available for the balance of the fine payable by us to the
U.S. Department of Justice (excluding imputed interest thereon), the fines
assessed against us by the antitrust authorities of the European Union and
Korean and other matters. The aggregate amount of remaining committed payments
payable to the U.S. Department of Justice for imputed interest at March 31, 2001
was about $9 million.
We cannot assure you that remaining liabilities and expenses in
connection with antitrust investigations, lawsuits and claims will not
materially exceed the remaining uncommitted balance of the reserve or that the
timing of payment thereof will not be sooner than anticipated. In the aggregate
(including the assessment of fines by the antitrust authorities of the European
Union and Korea and the additional $10 million charge), the fines and net
settlements and expenses are within the amounts we used to evaluate the $350
million charge. To the extent that aggregate liabilities and expenses, net, are
known or reasonably estimable, $350 million represents our estimate of these
liabilities and expenses. The guilty pleas and the decision by the antitrust
authority of the European Union make it more difficult to defend against other
investigations, lawsuits and claims. Our insurance has not and will not
materially cover liabilities that have or may become due in connection with
antitrust investigations or related lawsuits or claims.
CURRENCY MATTERS
We incur manufacturing costs and sell our products in multiple
currencies. As a result, in general, our results of operations, cash flows and
financial condition are affected by changes in currency exchange rates as well
as by inflation in countries with highly inflationary economies where we have
manufacturing facilities. To manage certain exposures to risks caused by changes
in currency exchange rates, we use various off-balance sheet financial
instruments. To account for translation of foreign currencies into dollars for
consolidation and reporting purposes, we record foreign currency translation
adjustments in accumulated other comprehensive income (loss) as part of
stockholders' equity in the Consolidated Balance Sheets, except in the case of
operations in highly inflationary economies (or which use the dollar as their
functional currency) where we record foreign currency translation gains and
losses as part of other (income) expense, net in the Consolidated Statement of
Operations. We also record foreign currency transaction gains and losses as part
of other (income) expense, net.
During 2001 and 2002 first quarter, many of the foreign countries in
which we have a manufacturing facility have been subject to significant economic
pressures, which have impacted
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PART I (CONT'D)
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inflation and currency exchange rates affecting those countries. As a result,
many of the currencies in which we manufacture and sell our products weakened
again the dollar. During 2001, the euro declined about 5%, the Brazilian real
declined about 16% and the South African rand declined about 36%. In the 2002
first quarter, the South African rand and the euro weakened about 18% and 3%,
respectively, while the Brazilian real strengthened about 11%.
RESULTS OF OPERATIONS
HIGHLIGHTS OF 2002 FIRST QUARTER AS COMPARED TO 2001 FOURTH QUARTER.
Net sales of $138 million in the 2002 first quarter represented a $17 million,
or 12%, decrease from net sales of $155 million in the 2001 fourth quarter.
Gross profit of $31 million in the 2002 first quarter represented an $11
million, or 26%, decrease from gross profit of $42 million in the 2001 fourth
quarter. Gross margin declined to 22.3% of net sales in 2002 first quarter from
26.9% in 2001 fourth quarter. This decline was primarily due to the decline in
net sales experienced by both of our divisions. Our 2002 first quarter earnings,
before previously announced restructuring charges and impairment losses on
long-lived and other assets, tax benefits associated with the 2002 plan and a
non-cash extraordinary charge associated with our successful private offering of
Senior Notes in February 2002, was a net loss of $1 million, or $0.02 per
diluted share, and, after those charges and benefits, was a net loss of $4
million, or $0.06 per diluted share. The following table summarizes the impact
of those non-recurring charges and benefits.
THREE MONTHS ENDED
MARCH 31, 2002
----------------------
(DOLLARS IN MILLIONS)
Net loss............................................. $ (4)
Charges:
Restructuring charges (including global
realignment and related expenses) and
impairment loss on long-lived and other
assets, net of tax............................ 6
Extraordinary item, net of tax.................. 2
Tax benefit related to legal and tax restructuring (5)
-----
Net loss before non-recurring charges and
benefits...................................... $ (1)
======
The legal and tax restructuring and global realignment mentioned in the
preceding table and in our Consolidated Financial Statements are part of the
corporate realignment of our subsidiaries. The tax benefits from the corporate
realignment (which are referred to as tax benefits from legal and tax
restructuring) have been recorded separately from expenses to implement the
corporate realignment (which are referred to as global realignment and related
expenses). The activities relating to our legal and tax restructuring that would
be expected to
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impact tax benefits and expense were substantially completed in
the 2002 first quarter. We recorded global realignment and related expenses of
$2 million in 2001 fourth quarter and $1 million in 2002 first quarter.
GRAPHITE POWER SYSTEMS DIVISION. Net sales decreased to $111 million in
the 2002 first quarter from $126 million in the 2001 fourth quarter, primarily
due to the lower volume and lower average sales revenue per metric ton of
graphite electrodes sold. The decline was primarily due to seasonal factors,
continued weakness in demand through January and February due to economic
conditions and limited availability of finished graphite electrode inventories
to meet increased demand in March. The volume of graphite electrodes sold was
38,500 metric tons, 9 percent lower than in the 2001 fourth quarter. The lower
volume of graphite electrodes sold represented a decrease of $9 million in net
sales. Average sales revenue per metric ton of graphite electrodes in the 2002
first quarter was $2,083, a decrease of 7% from the average in the 2001 fourth
quarter of $2,251. The lower average sales revenue per metric ton represented a
decrease of $6 million in net sales. Of the 7%, changes in currency exchange
rates accounted for approximately 3%.
We exceeded our expectations for cost reductions. Average graphite
electrode production cost per metric ton in the 2002 first quarter was $1,638,
about $13 lower than in the 2001 fourth quarter despite low operating levels and
low sales volumes. Low operating levels were due to both reductions in
production in response to weakness in economic conditions that continued into
the middle of the 2002 first quarter as well as reductions in production
associated with the mothballing of our Italian graphite electrode plant as part
of the 2002 plan and furnace maintenance at our Brazilian graphite electrode
plant.
We completed the mothballing of our Italian graphite electrode plant
during the 2002 first quarter, more than two months ahead of schedule. We
believe that the accelerated mothballing as well as other actions will allow us
to accelerate achievement of our cost savings targets under the 2002 plan. We
also undertook extensive furnace maintenance, which resulted in extended
production down time, at our Brazilian graphite electrode plant in preparation
for higher operating levels during the remainder of 2002 and into 2003. We
estimate that these activities resulted in higher than anticipated graphite
electrode production costs of approximately $2 million.
Gross profit in the 2002 first quarter was $25 million (22.3% of net
sales), a decrease from gross profit in the 2001 fourth quarter of $35 million
(27.3% of net sales). The decrease in gross profit was largely due to the
decrease in net sales.
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales decreased to $27 million
in the 2002 first quarter from $29 million in the 2001 fourth quarter, primarily
due to due to weakness in the industrial end markets served, particularly the
semiconductor and automotive markets. We believe that the core businesses in
this division bottomed during the 2002 first quarter. New product development
and commercialization efforts continue to progress successfully. During the 2002
first quarter, IBM Corporation, Hitachi, Ltd. and Agilent Technologies Inc.
approved and
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purchased eGraf(TM) thermal interface products for computer,
consumer electronic and telecommunication applications. Gross profit in the 2002
first quarter declined to $6 million (22.3% of net sales) as compared to gross
profit in the 2001 fourth quarter of $7 million (25.3% of net sales). The
decrease in gross margin was primarily due to the decrease in net sales.
OTHER ITEMS. Selling, administrative and other expenses were $18
million in the 2002 first quarter, a decline of $1 million, or 5%, from the 2001
fourth quarter, primarily due to a reduction in franchise and other taxes. We
recorded other income, net, of $3 million for the 2002 first quarter, primarily
due to a currency exchange gain on euro denominated debt. This other income,
net, essentially offsets the estimated $2 million of higher graphite electrode
production costs during the 2002 first quarter. Adjusted EBITDA for the 2002
first quarter was approximately $20 million. Interest expense was $13 million in
the 2002 first quarter, an increase of $2 million from the 2001 fourth quarter.
The increase resulted from higher average annual interest rates and higher
average total debt outstanding.
NET DEBT AND WORKING CAPITAL. Net debt (total debt less cash, cash
equivalents and short-term investments) increased during the 2002 first quarter
as expected and as previously announced. At March 31, 2002, net debt was $663
million and total debt was $696 million, including $70 million under our
revolving credit facility and $212 million of term loans, as net cash from
operations declined primarily due to lower sales and working capital
requirements, primarily accounts payable. The use of cash to settle payables in
the 2002 first quarter increased primarily due to seasonal payable patterns and
higher obligations related to preparations at facilities globally to accommodate
the mothballing of our Italian graphite electrode plant. In addition, in the
2002 first quarter, we incurred $14 million of cash costs associated with the
issuance of Senior Notes in February 2002 and related amendment fees. These
costs were capitalized and will be amortized over the term of the Senior Notes.
THREE MONTHS ENDED MARCH 31, 2002 AS COMPARED TO THREE MONTHS ENDED
MARCH 31 2001. Net sales of $138 million in the 2002 first quarter represented a
$33 million, or 19%, decrease from net sales of $171 million in the 2001 first
quarter. Gross profit of $31 million in the 2002 first quarter represented an
$18 million, or 37%, decrease from gross profit of $49 million in the 2001 first
quarter. Gross margin declined to 22.3% of net sales in 2002 first quarter from
28.5% in 2001 first quarter. The decrease in net sales and gross profit was
primarily due to lower volume of graphite electrodes sold. Cost of sales
declined primarily due to lower volumes of most products sold.
GRAPHITE POWER SYSTEMS DIVISION. Net sales decreased to $111 million in
the 2002 first quarter from $136 million in the 2001 first quarter, primarily
due to the lower volume of graphite electrodes sold and lower average graphite
electrode sales revenue per metric ton. Volume of graphite electrodes sold was
38,500 metric tons in the 2002 first quarter as compared to 43,000 metric tons
in the 2001 first quarter. The lower volume of graphite electrodes sold
represented a decrease of $11 million in net sales. The decrease was primarily a
result of a decline in North American electric arc furnace steel production,
weaker demand in Europe and Russia, actions
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taken by us to manage credit risk and limited availability of finished graphite
electrode inventories to meet increased demand in March 2002. Average sales
revenue per metric ton of graphite electrodes in the 2002 first quarter was
$2,083 as compared to the average in the 2001 first quarter of $2,419. The lower
average sales revenue per metric ton represented a decrease of $13 million in
net sales. Unfavorable changes in currency exchange rates represented $4 million
of the $13 million decrease in net sales of graphite electrodes. Net sales of
cathodes increased in the 2002 first quarter by 2% from the 2001 first quarter.
Cost of sales decreased to $86 million in the 2002 first quarter from
$98 million in the 2001 first quarter. The decrease was primarily due to lower
operating levels. Cost of sales per metric ton of graphite electrodes benefited
from improved productivity, head-count reductions, plant cost reductions, lower
costs due to the strengthening of the dollar and lower maintenance spending as
compared to the 2001 first quarter, partially offset by higher than anticipated
graphite electrode production costs of approximately $2 million resulting from
activities associated with the accelerated mothballing of our Italian graphite
electrode plant and extensive furnace maintenance, which resulted in extended
production down time, at our Brazilian graphite electrode plant in preparation
for higher operating levels during the remainder of 2002 and into 2003. Average
cost of sales per metric ton of graphite electrodes was $1,638 per metric ton in
the 2002 first quarter, a decline of $127, or about 7%, as compared to the 2001
first quarter, despite lower operating levels and lower sales volumes. Low
operating levels were due to both reductions in production in response to
weakness in economic conditions that continued into the middle of the 2002 first
quarter as well as reductions in production associated with the mothballing of
our Italian graphite electrode plant as part of the 2002 plan and furnace
maintenance at our Brazilian graphite electrode plant. Gross profit in the 2002
first quarter was $25 million (22.3% of net sales), a decrease from gross profit
in the 2001 first quarter of $38 million (27.4% of net sales).
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales decreased to $27 million
in the 2002 first quarter from $35 million in the 2001 first quarter, primarily
due to decreases in volume of refractories sold, in new business sales, in
volume of flexible graphite sold for gasket applications due to lower demand
from the automotive industry and in products sold to customers in the
semiconductor and industrial sectors, particularly in Europe, partially offset
by an increase in sales of products to customers in the aerospace industry. We
believe that the core businesses in this division bottomed during the 2002 first
quarter. New product development and commercialization efforts continue to
progress successfully. During the 2002 first quarter, IBM, Hitachi and Agilent
approved and purchased eGraf(TM) thermal interface products for computer,
consumer electronic and telecommunication applications. Cost of sales was $21
million in the 2002 first quarter as compared to $24 million in the 2001 first
quarter. The decrease was primarily due to lower operating levels. Gross profit
in the 2002 first quarter was $6 million (22.3% of net sales) as compared to
gross profit in the 2001 first quarter of $11 million (32.0% of net sales).
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OPERATING PROFIT FOR US AS A WHOLE. Operating profit in the 2002 first
quarter was $6 million, or 4.6% of net sales, as compared to operating profit in
the 2001 first quarter of $25 million, or 14.6% of net sales. Operating profit
in the 2002 first quarter was impacted by a restructuring charge and impairment
loss on long-lived and other assets of $6 million that related primarily to the
mothballing of our graphite electrode plant in Italy and a charge of $1 million
related to the corporate realignment of our subsidiaries. Excluding these
non-recurring charges, operating profit in the 2002 first quarter would have
been $12 million, or 8.7% of net sales.
Selling, administrative and other expenses were $18 million in the 2002
first quarter, a decline of $3 million, or 14%, from 2001 first quarter. The
decline was primarily due to a reduction in franchise and other taxes.
Other income, expense, net was income of $3 million in 2002 first
quarter as compared to nil in 2001 first quarter. This change was primarily
associated with a currency exchange gain on euro denominated debt. This other
income essentially offsets the estimated $2 million of higher than anticipated
graphite electrode production costs during the 2002 first quarter.
OTHER ITEMS AFFECTING US AS A WHOLE. Interest expense was $13 million
in the 2002 first quarter, a decrease of $6 million from the 2001 first quarter.
The decrease resulted from lower average annual interest rates and lower average
total debt outstanding. Average outstanding total debt was $663 million in the
2002 first quarter as compared to $729 million in the 2001 first quarter. The
decrease in average debt outstanding was primarily due to use of net proceeds
from our public offering of common stock in July 2001 to reduce debt. The
average annual interest rate was 7.6% in 2002 first quarter as compared to 8.8%
in the 2001 first quarter. These average annual rates excluded inputed interest
of the fine payable to the DOJ.
Provision for income taxes was a $6 million benefit in the 2002 first
quarter as compared to a $2 million expense in the 2001 first quarter. Excluding
the benefit of $6 million, which was related to the corporate realignment of our
subsidiaries, the provision for income taxes for the 2002 first quarter would
have been nil. No tax benefit was provided on the restructuring charge and
impairment loss on long-lived and other assets of $6 million related to the
mothballing of our graphite electrode plant in Italy.
The effective income tax rate, before non-recurring charges and
impairment losses that related to the mothballing of our Italian graphite
electrode plant and the corporate realignment of our subsidiaries, was 35% in
the 2002 first quarter as compared to 40% in 2001 first quarter. The effective
income tax rate for the 2001 first quarter was higher than the U.S. federal
statutory income tax rate of 35% primarily as the result of the fact that a
substantial percentage of our earnings was derived from higher tax
jurisdictions.
In the 2002 first quarter, we recorded an extraordinary item, net of
tax, of $2 million in connection with the write-off of capitalized fees
associated with the Tranche A and B Term Loans repaid with the net proceeds from
the issuance of the Senior Notes.
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As a result of the changes described above, net loss was $4 million in
the 2002 first quarter as compared to net income of $3 million in the 2001 first
quarter. Net loss per diluted share, before non-recurring charges and tax
benefits and extraordinary charges, was $0.02 for the 2002 first quarter as
compared to earnings per diluted share of $0.07 in the 2001 first quarter. Net
loss per diluted share, after non-recurring charges and tax benefits and
extraordinary charges, was $0.06 for the 2002 first quarter.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of funds have consisted principally of invested capital,
cash flow from operations, debt financing and, since July 2001, net proceeds
from our public offering of common stock. Our uses of those funds (other than
for operations) have consisted principally of debt reduction, capital
expenditures, payment of fines, liabilities and expenses in connection with
investigations, lawsuits and claims and payment of restructuring costs.
We are highly leveraged and have substantial obligations in connection
with antitrust investigations, lawsuits and claims (in respect of which we have
an unfunded reserve totaling $101 million). We had total debt of $696 million
and a stockholders' deficit of $343 million at March 31, 2002 as compared to
total debt of $638 million and a stockholders' deficit of $332 million at
December 31, 2001. A substantial portion of our debt has variable interest rates
or has been effectively converted from a fixed rate obligation to a variable
rate obligation pursuant to interest rate management initiatives. We typically
discount or factor a portion of our accounts receivable. In the 2001 first
quarter, certain of our subsidiaries sold receivables totaling $42 million. In
addition, if we are required to pay or issue a letter of credit to secure
payment of the fine assessed by the antitrust authority of the European Union
pending resolution of our appeal regarding the amount of the fine, the payment
would be financed by borrowing under (or secured by a letter of credit that
would constitute a borrowing under) our revolving credit facility. Our leverage
and obligations, as well as changes in conditions affecting our industry,
changes in global and regional economic conditions and other factors, have
adversely impacted our recent operating results.
Cash and cash equivalents were $33 million at March 31, 2002 as
compared to $38 million at December 31, 2001. Net debt (which is total debt, net
of cash, cash equivalents and short-term investments) was $663 million at March
31, 2002 as compared to $600 million at March 31, 2001.
As a result of our high leverage and substantial obligations in
connection with antitrust investigations, lawsuits and claims, changes in
conditions affecting our industry, changes in global and regional economic
conditions and other factors, we have placed high priority on efforts to manage
cash and reduce debt.
CASH FLOW AND PLANS TO MANAGE LIQUIDITY. For at least the past five
years, we have had positive annual cash flow from operations, excluding payments
in connection with restructurings and investigations, lawsuits and claims.
Typically, the first quarter of each year results in neutral
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or negative cash
flow from operations (after deducting cash used for capital expenditures and
excluding payments in connection with restructurings and investigations,
lawsuits and claims and payment of interest on our previously outstanding senior
subordinated notes (which have since been redeemed)) due to various factors.
These factors include customer order patterns, customer buy-ins in advance of
annual price increases, fluctuations in working capital requirements and payment
of variable compensation with respect to the immediately preceding year.
Typically, the other three quarters result in significant positive cash flow
from operations (before deducting cash used for capital expenditures). The third
quarter tends to produce relatively less positive cash flow primarily as a
result of scheduled plant shutdowns by our customers for vacations. Following a
recovery in the steel and other metals and transportation industries, we believe
that our cash flow would follow this historical pattern.
We use, and are dependent on, funds available under our revolving
credit facility, including continued compliance with the financial covenants
under the Senior Facilities, as well as monthly or quarterly cash flow from
operations as our primary sources of liquidity. We believe that our cost savings
initiatives will, over the next one to two years, continue to improve our cash
flow from operations for a given level of net sales. Improvements in cash flow
from operations resulting from these initiatives are being partially offset by
associated cash implementation costs, while they are being implemented.
Our high leverage and substantial obligations in connection with
antitrust investigations, lawsuits and claims could have a material impact on
our liquidity. Cash flow from operations services payment of our debt and these
obligations, thereby reducing funds available to us for other purposes. Our
leverage and these obligations make us more vulnerable to economic downturns or
in the event that these obligations are greater or timing of payment is sooner
than expected.
Our ability to service our debt as it comes due is dependent on our
future financial and operating performance. Our ability to maintain compliance
with the covenants under the Senior Facilities is also dependent on our future
financial and operating performance. This performance, in turn, is subject to
various factors, including certain factors beyond our control, such as changes
in conditions affecting our industry, changes in global and regional economic
conditions, changes in interest and currency exchange rates, developments in
antitrust investigations, lawsuits and claims involving us and inflation in raw
material, energy and other costs.
We cannot assure you that our cash flow from operations and capital
resources will be sufficient to enable us to meet our debt service and other
obligations when due. Even if we are able to meet our debt service and other
obligations when due, we may not be able to comply with the financial covenants
under the Senior Facilities. A failure to comply with any of the covenants under
the Senior Facilities, unless waived by the lenders, would be a default under
the Senior Facilities. This would permit the lenders to accelerate the maturity
of the Senior Facilities. It would also permit the lenders to terminate their
commitments to extend credit under our revolving credit facility. This would
have an immediate material adverse effect on our liquidity.
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An acceleration of maturity of the Senior Facilities or a breach of the
covenants contained in the Senior Notes would permit the holders of the Senior
Notes to accelerate the maturity of the Senior Notes. Acceleration of maturity
of the Senior Notes would permit the lenders to accelerate the maturity of the
Senior Facilities and terminate their commitments to extend credit under our
revolving credit facility. If we were unable to repay our debt to the lenders or
holders, the lenders and holders could proceed against the collateral securing
the Senior Facilities and the Senior Notes, respectively, and exercise all other
rights available to them. If we were unable to repay our debt to the lenders or
the holders, or otherwise obtain a waiver from the lenders or the holders, we
could be required to limit or discontinue, temporarily or permanently, certain
of our business plans, activities or operations, reduce or delay certain capital
expenditures, sell certain of our assets or businesses, restructure or refinance
some or all of our debt or incur additional debt, or sell additional common
stock or other securities. We cannot assure you that we would be able to obtain
any such waiver or take any of such actions on favorable terms or at all.
As described above, we are dependent on our revolving credit facility
and continuing compliance with the financial covenants under the Senior
Facilities for liquidity. The Senior Facilities require us to, among other
things, comply with specified minimum interest coverage and maximum leverage
ratios that become more restrictive over time. At March 31, 2002, on an actual
basis and as adjusted to give effect to the issuance of additional Senior Notes
in May 2002, we were in compliance with the financial covenants under the Senior
Facilities. If we were to believe that we would not continue to comply with such
covenants, we would seek an appropriate waiver or amendment from the lenders
thereunder. There can be no assurance that we would be able to obtain such
waiver or amendment on acceptable terms or at all.
While our revolving credit facility provides for maximum borrowings of
up to [euro] 200 million ($174 million, based on currency exchange rates in
effect at March 31, 2002), our ability to borrow under this facility may
effectively be less because of the impact of additional borrowings upon our
compliance with the maximum leverage ratio permitted under the Senior
Facilities. At March 31, 2002, on an actual basis and as adjusted to give effect
to issuance of additional Senior Notes in May 2002, we had full availability
under our revolving credit facility. In addition, payment of the fine or
issuance of a letter of credit to secure payment of the fine assessed by the
antitrust authority of the European Union would significantly reduce remaining
funds available under our revolving credit facility for operating and other
purposes.
We believe that the long-term fundamentals of our business continue to
be sound. Accordingly, although we cannot assure you that such will be the case,
we believe that, based on our expected cash flow from operations, our expected
resolution of our remaining obligations in connection with antitrust
investigations, lawsuits and claims, and existing capital resources, and taking
into account our efforts to reduce costs and working capital needs, improve
efficiencies and product quality, generate growth and earnings and maximize
funds available to meet our debt service and other obligations, we will be able
to manage our working capital and cash flow to permit us to service our debt and
meet our obligations when due.
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CASH FLOW USED IN OR PROVIDED BY OPERATING ACTIVITIES. Cash flow used
in operating activities was $47 million in the 2002 first quarter as compared to
cash flow provided by operating activities of $11 million in the 2001 first
quarter. The decreased generation of cash flow of $58 million resulted primarily
from a reduction in gross profit and an increase in working capital, primarily
due to a reduction in accounts payable. The use of cash to settle payables in
the 2002 first quarter increased primarily due to seasonal payable patterns,
higher obligations related to preparations at facilities globally to accommodate
the mothballing of our Italian graphite electrode plant and the shut down of our
graphite manufacturing operations in Tennessee, and reduced spending because of
lower operating levels. In addition, in the 2002 first quarter, we incurred $13
million of cash costs associated with the issuance of Senior Notes. These costs
were capitalized and will be amortized over the term of the Senior Notes. Our
average days payable outstanding decreased by about 18 days and our days sales
outstanding increased by about 12 days at the end of the 2002 first quarter as
compared to the end of the 2001 first quarter. Careful management of credit risk
allowed us to avoid significant accounts receivable losses in light of the poor
financial condition of many of our potential and existing customers. In light of
current global and regional economic conditions, we cannot assure that we will
not be materially adversely affected by accounts receivable losses in the
future.
CASH FLOW USED IN INVESTING ACTIVITIES. We used $9 million of cash flow
for investing activities during the 2002 first quarter as compared to $4 million
during the 2001 first quarter. This increase of $5 million was primarily due to
a higher use of capital expenditures for expansion in the 2002 first quarter
compared to a reduced level of capital expenditures in the 2001 first quarter.
CASH FLOW PROVIDED BY FINANCING ACTIVITIES. Cash flow provided by
financing activities was $51 million in the 2002 first quarter as compared to
cash provided by financing activities of $4 million in the 2001 first quarter.
The increase was due to additional borrowings in the 2002 first quarter to fund
working capital needs and expenses in connection with our private offering of
Senior Notes in February 2002. During the 2001 first quarter, we received $9
million from an additional minority investment in connection with the broadening
of our strategic alliance in the cathode business with Pechiney. During the 2002
first quarter, we completed a private offering of $400 million of Senior Notes.
Net proceeds were $387 million which were used to repay term loans under the
Senior Facilities and reduce the outstanding balance under our revolving credit
facility.
ACCOUNTING CHANGES
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, excluding
goodwill and other intangible assets not being amortized pursuant to SFAS No.
142, and certain other assets. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. We adopted
SFAS No.
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144 effective January 1, 2002. The adoption of SFAS No. 144 did not have a
significant impact on our consolidated financial position or results of
operations.
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. SFAS
No. 143 will be effective for financial statements issued for fiscal years
beginning after June 15, 2002. We anticipate that the adoption of SFAS No. 143
will not have a significant impact on our consolidated financial position or
results of operations.
In July 2001, FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets," both of which are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. SFAS No. 141 and SFAS No. 142 establish accounting and
reporting standards for business combinations, goodwill and intangible assets.
We adopted SFAS No. 141 and SFAS No. 142 effective January 1, 2002. The adoption
of SFAS No. 141 and SFAS No. 142 did not have a significant impact on our
consolidated financial position or results of operations, except that we no
longer amortize goodwill.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risks primarily from changes in interest rates
and currency exchange rates. To manage our exposure to these changes, we
routinely enter into various transactions that have been authorized according to
documented policies and procedures. We do not use derivatives for trading or
speculative purposes or to generate income, and we do not use leveraged
derivatives.
We implement interest rate management initiatives to seek to minimize
our interest expense and optimize our portfolio of fixed and variable interest
rate obligations. Our exposure to changes in interest rates results primarily
from floating rate long-term debt (or derivatives that effectively convert fixed
rate debt to variable rate debt) tied to LIBOR or euro LIBOR. We enter into
agreements with financial institutions, which are intended to limit, or cap, our
exposure to the incurrence of additional interest expense with respect to a
portion of such debt (or derivatives) due to increases in variable interest
rates. At March 31, 2002, we had outstanding interest rate caps of $100 million
limiting our floating interest rate factor on related debt to a weighted-average
rate of 5.0% (where the interest on the debt is based on LIBOR) through June
2002. We recently entered into a ten year interest rate swap for a notional
amount of $200 million to effectively convert that amount of fixed rate debt to
variable rate debt. Fees related to these agreements or swaps are charged to
interest expense over the term of relevant agreement or swap.
Our exposure to changes in currency exchange rates results primarily
from:
o investments in our foreign subsidiaries and in our share of
the earnings of those subsidiaries, which are denominated in
local currencies;
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o raw material purchases made by our foreign subsidiaries in a
currency other than the local currency; and
o export sales made by our subsidiaries in a currency other than
the local currency.
When we deem it appropriate, we may attempt to limit our risks
associated with changes in currency exchange rates through both operational and
financial market activities. Financial instruments are used to attempt to hedge
existing exposures, firm commitments and, potentially, anticipated transactions.
We use forward, option and swap contracts to reduce risk by essentially creating
offsetting currency exposures. We held contracts for the purpose of hedging
against these risks with an aggregate notional amount of about $37 million at
December 31, 2001 and $34 million at March 31, 2002. All of our contracts mature
within one year. All of our contracts are marked-to-market monthly and,
accordingly, transaction gains and losses are reflected in the Consolidated
Statements of Operations. Unrealized gains and losses on our outstanding
contracts were nil at December 31, 2001 and March 31, 2002.
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ITEM 1. LEGAL PROCEEDINGS
ANTITRUST INVESTIGATIONS
In April 1998, pursuant to a plea agreement between the Antitrust
Division of the U.S. Department of Justice (the "DOJ") and GTI, GTI pled guilty
to a one count charge of violating U.S. federal antitrust law in connection with
the sale of graphite electrodes and was sentenced to pay a non-interest-bearing
fine in the aggregate amount of $110 million, payable in six annual installments
of $20 million, $15 million, $15 million, $18 million, $21 million and $21
million, commencing July 23, 1998. The plea agreement was approved by the U.S.
District Court for the Eastern District of Pennsylvania (the "DISTRICT COURT")
and, as a result, under the plea agreement, we will not be subject to
prosecution by the DOJ with respect to any other violations of U.S. federal
antitrust law occurring prior to April 1998. At our request, in January 2001,
the due date of each of the remaining three payments was deferred by one year
and, at our request, in January 2002, the payment schedule for the $60 million
unpaid balance outstanding at that time was revised to require a $2.5 million
payment in April 2002, a $5.0 million payment in April 2003 and, beginning in
April 2004, quarterly payments ranging from $3.25 million to $5.375 million,
through January 2007. Beginning in 2004, the DOJ may ask the District Court to
accelerate the payment schedule based on a change in our ability to make such
payments. Interest will begin to accrue on the unpaid balance, commencing in
April 2004, at the statutory rate of interest then in effect. In January 2002,
the statutory rate of interest was 2.13% per annum. Accrued interest will be
payable together with each quarterly payment. The revised payment schedule has
been approved by the District Court. All payments due have been timely paid.
In March 1999, pursuant to a plea agreement between our Canadian
subsidiary and the Canadian Competition Bureau, our Canadian subsidiary pled
guilty to a one count charge of violating Canadian antitrust law in connection
with the sale of graphite electrodes and was sentenced to pay a fine of Cdn. $11
million. The relevant Canadian court approved the plea agreement and, as a
result, under the plea agreement we will not be subject to prosecution by the
Canadian Competition Bureau with respect to any other violations of Canadian
antitrust law occurring prior to the date of the plea agreement. The fine was
timely paid.
In October 1999, we became aware that the Korean antitrust authority
had commenced an investigation as to whether there had been any violation of
Korean antitrust law by producers and distributors of graphite electrodes. In
March 2002, we were advised that the Korean antitrust authority, after holding a
hearing on this matter, assessed a fine against us in the amount of 676 million
KRW (approximately $510,000, based on currency exchange rates in effect on March
31, 2002). Five other graphite electrode producers were also fined by the Korean
antitrust authority in amounts ranging up to 4,396 million KRW (approximately
$3.3 million, based on currency exchange rates in effect on March 31, 2002). Our
fine, which represented 0.5% of our graphite electrode sales in Korea during the
relevant time period and was the lowest fine as a percentage of sales imposed by
the Korean antitrust authority, reflected a substantial reduction as a result of
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our cooperation with that authority during its investigation. In May 2002, we
appealed the decision. Notwithstanding our appeal, we are required to pay this
fine by June 9, 2002.
In January 2000, the Directorate General-Competition of the Commission
of the European Communities, the antitrust enforcement authority of the European
Union (the "EU COMPETITION AUTHORITY"), issued a statement of objections
initiating proceedings against us and other producers of graphite electrodes.
The statement alleges that we and other producers violated antitrust laws of the
European Community and the European Economic Area in connection with the sale of
graphite electrodes. On July 18, 2001, the EU Competition Authority issued its
decision regarding the allegations. Under the decision, the EU Competition
Authority assessed a fine of [euro]50.4 million (about $46 million, based on
exchange rates in effect at March 31, 2002) against us. Seven other graphite
electrode producers were also fined under the decision, with fines ranging up to
[euro]80.2 million. From the initiation of its investigation, we have cooperated
with the EU Competition Authority. As a result of our cooperation, our fine
reflects a substantial reduction from the amount that otherwise would have been
assessed. It is the policy of the EU Competition Authority to negotiate
appropriate terms of payment of antitrust fines, including extended payment
terms. We have had discussions regarding payment terms with the EU Competition
Authority. After an in-depth analysis of the decision, in October 2001, we filed
an appeal to the Court of First Instance of the European Communities in
Luxembourg challenging the amount of the fine. Appeals of this type may take two
years or longer to be decided and the fine or collateral security therefor would
typically be required to be paid or provided at about the time the appeal was
filed. We are currently in discussions with the EU Competition Authority
regarding the appropriate form of collateral security during the pendency of the
appeal. If the results of these discussions are not acceptable to us, we may
file an interim appeal to the Court to waive the requirement for collateral
security or to allow us to provide alternative security for payment. We cannot
predict how or when the Court would rule on such interim appeal.
In the 2001 second quarter, we became aware that the Brazilian
antitrust authority had requested written information from various steelmakers
in Brazil. In April 2002, our Brazilian subsidiary received a request for
information from that authority. We intend to provide that information.
Except as described above, the antitrust investigations against us in
the U.S., Canada, the European Union, Japan and Korea have been resolved. We are
continuing to cooperate with the DOJ and the Canadian Competition Bureau in
their continuing investigations of others. In October 1997, we were served with
subpoenas by the DOJ to produce documents relating to, among other things, our
carbon electrode and bulk graphite businesses. It is possible that antitrust
investigations seeking, among other things, to impose fines and penalties could
be initiated against us by antitrust authorities in Brazil or other
jurisdictions.
The guilty pleas and decisions described above make it more difficult
for us to defend against other investigations as well as civil lawsuits and
claims. We have been vigorously
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protecting, and intend to continue to vigorously protect, our interests in
connection with the investigations described above. We may, however, at any time
settle any possible unresolved charges.
ANTITRUST LAWSUITS
Through March 31, 2002, except as described in the following
paragraphs, we have settled or obtained dismissal of all of the civil antitrust
lawsuits (including class action lawsuits) previously pending against us,
certain civil antitrust lawsuits threatened against us and certain possible
civil antitrust claims against us by certain customers who negotiated directly
with us. The settlements cover, among other things, virtually all of the actual
and potential claims against us by customers in the U.S. and Canada arising out
of alleged antitrust violations occurring prior to the date of the relevant
settlements in connection with the sale of graphite electrodes. One of the
settlements also covers the actual and respective potential claims against us by
certain foreign customers arising out of alleged antitrust violations occurring
prior to the date of that settlement in connection with the sale of graphite
electrodes sourced from the U.S. Although each settlement is unique, in the
aggregate they consist primarily of current and deferred cash payments with some
product credits and discounts. All settlement payments due thereunder have been
timely made.
In 1999 and 2000, we and other producers of graphite electrodes were
served with three complaints commencing three separate civil antitrust lawsuits
in the District Court. In March 2002, we were served with another complaint
commencing a separate civil antitrust lawsuit in the District Court. These
lawsuits are collectively called the "FOREIGN CUSTOMER LAWSUITS". The first
complaint, entitled FERROMIN INTERNATIONAL TRADE CORPORATION, ET AL. V. UCAR
INTERNATIONAL INC., ET AL. was filed by 27 steelmakers and related parties, all
but one of whom are located outside the U.S. The second complaint, entitled BHP
NEW ZEALAND LTD. ET AL. V. UCAR INTERNATIONAL INC., ET AL. was filed by 4
steelmakers, all of whom are located outside the U.S. The third complaint,
entitled SAUDI IRON AND STEEL COMPANY V. UCAR INTERNATIONAL INC., ET AL., was
filed by a steelmaker who is located outside the U.S. The fourth complaint,
entitled ARBED, S.A., ET AL. V. MITSUBISHI CORPORATION, ET AL., was filed by 5
steelmakers, all of whom were located outside the U.S. In each complaint, the
plaintiffs allege that the defendants violated U.S. federal antitrust law in
connection with the sale of graphite electrodes sold or sourced from the U.S.
and those sold and sourced outside the U.S. The plaintiffs seek, among other
things, an award of treble damages resulting from such alleged antitrust
violations. We believe that we have strong defenses against claims alleging that
purchases of graphite electrodes outside the U.S. are actionable under U.S.
federal antitrust law. We filed motions to dismiss the first and second
complaints. In June 2001, our motions to dismiss the first and second complaints
were granted with respect to substantially all of the plaintiffs' claims.
Appeals have been filed by the plaintiffs and the defendants with the Third
Circuit Court of Appeals with regard to these dismissals. The third complaint
was dismissed without prejudice to refile pending the resolution of such
appeals. We have filed a motion to stay the lawsuit commenced by the fourth
complaint pending resolution of appeals in the other foreign customer lawsuits.
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In 1999 and 2000, we were served with three complaints commencing three
civil antitrust lawsuits (the "CARBON ELECTRODE LAWSUITS"). The first complaint,
filed in the District Court, is entitled GLOBE METALLURGICAL, INC. V. UCAR
INTERNATIONAL INC., ET AL. The second complaint, filed in the U.S. Bankruptcy
Court for the Northern District of Ohio, is entitled IN RE SIMETCO, INC. The
third complaint, filed in the U.S. District Court for the Southern District of
West Virginia, is entitled ELKEM METALS COMPANY INC and ELKEM METALS COMPANY
ALLOY LLP V. UCAR CARBON COMPANY INC., ET AL. SGL Carbon AG is also named as a
defendant in the first complaint and SGL Carbon Corporation is also named as a
defendant in the first and third complaints. In the complaints, the plaintiffs
allege that the defendants violated U.S. federal antitrust law in connection
with the sale of carbon electrodes and seek, among other things, an award of
treble damages resulting from such alleged violations. We filed motions to
dismiss the second and third complaints. In May 2001, our motion to dismiss the
second complaint was denied. In October 2001, we settled the lawsuit commenced
by the third complaint. The guilty pleas and decisions described above do not
relate to carbon electrodes.
The foreign customer lawsuits and two of the three carbon electrode
lawsuits are still in their early stages. We have been vigorously defending, and
intend to continue to vigorously defend, against these remaining lawsuits as
well as all threatened lawsuits and possible unasserted claims. We may at any
time, however, settle these lawsuits as well as any threatened lawsuits and
possible claims. It is possible that additional civil antitrust lawsuits
seeking, among other things, to recover damages could be commenced against us in
the U.S. and in other jurisdictions.
1997 AND 2001 SECOND QUARTER ANTITRUST EARNINGS CHARGES
We recorded a pre-tax charge of $340 million against results of
operations for 1997 and, as a result of the assessment of a fine by the EU
Competition Authority, we recorded a pre-tax charge of an additional $10 million
against results of operations for the 2001 second quarter, as a reserve for
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims. The aggregate reserve of $350 million is
calculated on a basis net of, among other things, imputed interest on
installment payments of the DOJ fine. Actual aggregate liabilities and expenses
(including settled investigations, lawsuits and claims as well as continuing
investigations, pending appeals and unsettled pending, threatened and possible
lawsuits and claims mentioned above) could be materially higher than $350
million and the timing of payment thereof could be sooner than anticipated. In
the aggregate (including the assessment of the fine by the EU Competition
Authority, the assessment of the fine by the Korean antitrust authority and the
additional $10 million charge), the fines and net settlements and expenses are
within the amounts we used to evaluate the aggregate charge of $350 million. To
the extent that aggregate liabilities and expenses, net, are known or reasonably
estimable, at March 31, 2002, $350 million represents our estimate of these
liabilities and expenses. Our insurance has not and will not materially cover
liabilities that have or may become due in connection with antitrust
investigations or related lawsuits or claims.
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Through March 31, 2002, we have paid an aggregate of $249 million of
fines and net settlement and expense payments and $11 million of imputed
interest. At March 31, 2002, $101 million remained in the reserve. The balance
of the reserve is available for the fine payable to the DOJ (excluding imputed
interest thereon), the fines assessed by the EU Competition Authority and the
Korean antitrust authority and other matters. The aggregate amount of remaining
committed payments payable to the DOJ for imputed interest at March 31, 2002 was
about $9 million.
OTHER PROCEEDINGS AGAINST US
We are involved in various other investigations, lawsuits, claims and
other legal proceedings incidental to the conduct of our business. While it is
not possible to determine the ultimate disposition of each of them, we do not
believe that their ultimate disposition will have a material adverse effect on
us.
LAWSUIT INITIATED BY US AGAINST OUR FORMER PARENTS
In February 2000, at the direction of a special committee of
independent directors of GTI's Board of Directors, we commenced a lawsuit in the
U.S. District Court for the Southern District of New York against our former
parents, Mitsubishi and Union Carbide. The other defendants named in the lawsuit
include two of the respective representatives of Mitsubishi and Union Carbide
who served on GTI's Board of Directors at the time of our 1995 leveraged equity
recapitalization, Hiroshi Kawamura and Robert D. Kennedy. Mr. Kennedy, who was a
director of GTI at the time the lawsuit was commenced, resigned as such on March
14, 2000.
In the lawsuit, we allege, among other things, that, in January 1995,
Mitsubishi and Union Carbide had knowledge of facts indicating that GTI had
engaged in illegal graphite electrode price fixing activities and that any
determination of GTI's statutory capital surplus would be overstated as a result
of those activities. We also allege that certain of their representatives knew
or should have known about those activities. In January 2000, Mitsubishi was
indicted by the DOJ on a one count charge of aiding and abetting violations of
U.S. federal antitrust law in connection with the sale of graphite electrodes.
Mitsubishi entered a plea of not guilty. In February 2001, a jury found
Mitsubishi guilty of the charge. Mitsubishi entered into a sentencing agreement
with the DOJ, which was approved by the District Court, pursuant to which
Mitsubishi agreed to pay a fine of $134 million and not appeal its conviction.
Mitsubishi has also been named as a defendant in several civil antitrust
lawsuits commenced by electric arc furnace steel producers with respect to its
alleged participation in those activities. In addition, we allege that, in
January 1995, GTI did not have the statutory capital surplus required to
lawfully authorize the payments that GTI made to its former parents. We also
allege that Mitsubishi and Union Carbide were unjustly enriched by receipts from
their investments in GTI and that they knowingly induced or actively and
substantially assisted former senior management of GTI to engage in illegal
graphite electrode price fixing activities in breach of their fiduciary duties
to GTI.
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Based on the allegations summarized above, we are seeking to recover
from Mitsubishi and Union Carbide more than $1.5 billion in damages, including
interest. Some of our claims provide for joint and several liability; however,
damages from our various claims would not generally be additive to each other.
The defendants have filed motions to dismiss this lawsuit and a motion
to disqualify certain of our counsel from representing us in this lawsuit. We
are vigorously opposing those motions. Oral hearings were held on those motions
in the 2001 first and second quarters. No decision on those motions has been
rendered.
We expect to incur $10 million to $20 million for legal expenses to
pursue this lawsuit from the date of filing the complaint through trial. Through
March 31, 2002, we had incurred about $4 million of these legal expenses. This
lawsuit is in its earliest stages. The ultimate outcome of this lawsuit is
subject to many uncertainties. We may at any time settle this lawsuit.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
(A) EXHIBITS
The exhibits listed in the following table have been filed as part of
this Quarterly Report on Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.1* - Amended and Restated Certificate of Incorporation of
GrafTech International Ltd. (formerly known as UCAR
International Inc.).
3.1(b) - Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of GrafTech International
Ltd. (formerly known as UCAR International Inc.).
4.5 - First Supplemental Indenture, dated as of April 30, 2002,
among UCAR Finance Inc., GrafTech International Ltd.
(formerly known as UCAR International Inc.), UCAR
Global Enterprises Inc., UCAR Carbon Company Inc., UCAR
Composites Inc., UCAR Carbon Technology LLC, UCAR
Holdings III Inc. and UCAR International Trading Inc.
and State Street Bank and Trust Company.
4.6 - Registration Rights Agreement, dated as of May 6, 2002,
among GrafTech International Ltd. (formerly known as UCAR
International Inc.), each of the Subsidiaries
listed therein, Credit Suisse First Boston Corporation
and J.P. Morgan Securities Inc.
10.14 - Sixth Amendment to Credit Agreement, dated as of
February 22, 2000, among GrafTech International Ltd.
(formerly known as UCAR International Inc.), UCAR
Global Enterprises Inc., UCAR Finance Inc., the LC
Subsidiaries from time to time party hereto, the Lenders
from time to time party thereto, and Morgan Guaranty
Trust Company of New York.
10.15 - Reaffirmation Agreement, dated as of May 6, 2002, among
UCAR Finance Inc., GrafTech International Ltd. (formerly
known as UCAR International Inc.), UCAR Global
Enterprises Inc., UCAR Carbon Company Inc., UCAR
Composites Inc., UCAR Technology LLC, UCAR Holdings III
Inc. and UCAR International Trading Inc. and State Street
Bank and Trust Company.
* Incorporated by reference to the Registration Statement of the
registrant on Form S-1 (Registration No. 33-94698)
(B) REPORTS ON FORM 8-K
The following Reports on Form 8-K were filed during the quarter ended
March 31, 2002:
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(i) Report on Form 8-K dated January 28, 2002 as filed by UCAR
International Inc., filing a press release dated January 28,
2002 announcing the launch of a private offering of $250
million aggregate principal amount of senior notes of UCAR
Finance Inc.
No financial statements were filed with such Report on Form
8-K.
(ii) Report on Form 8-K dated February 8, 2002 as filed by UCAR
International Inc., filing a press release dated February 8,
2002 announcing the pricing of the private offering of senior
notes of UCAR Finance Inc. and the increase in the aggregate
principal amount of such notes to $400 million.
No financial statements were filed with such Report on Form
8-K.
(iii) Report on Form 8-K dated February 15, 2002 as filed by UCAR
International Inc., filing a press release dated February 15,
2002 announcing the closing of the private offering of $400
million aggregate principal amount of senior notes of UCAR
Finance Inc.
No financial statements were filed with such Report on Form
8-K.
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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.
GRAFTECH INTERNATIONAL LTD.
Date: May 13, 2002 By: /s/ CORRADO F. DE GASPERIS
-----------------------------
Corrado F. De Gasperis
VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND
CHIEF INFORMATION OFFICER
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INDEX TO EXHIBITS
-----------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------- -----------------------
3.1(b) - Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of GrafTech International
Ltd. (formerly known as UCAR International Inc.).
4.5 - First Supplemental Indenture, dated as of April 30, 2002,
among UCAR Finance Inc., GrafTech International Ltd.
(formerly known as UCAR International Inc.), UCAR
Global Enterprises Inc., UCAR Carbon Company Inc., UCAR
Composites Inc., UCAR Carbon Technology LLC, UCAR
Holdings III Inc. and UCAR International Trading Inc.
and State Street Bank and Trust Company.
4.6 - Registration Rights Agreement, dated as of May 6, 2002,
among GrafTech International Ltd. (formerly known as UCAR
International Inc.), each of the Subsidiaries
listed therein, Credit Suisse First Boston Corporation
and J.P. Morgan Securities Inc.
10.14 - Sixth Amendment to Credit Agreement, dated as of
February 22, 2000, among GrafTech International Ltd.
(formerly known as UCAR International Inc.), UCAR
Global Enterprises Inc., UCAR Finance Inc., the LC
Subsidiaries from time to time party thereto, the Lenders
from time to time party thereto, and Morgan Guaranty
Trust Company of New York.
10.15 - Reaffirmation Agreement, dated as of May 6, 2002, among
UCAR Finance Inc., GrafTech International Ltd. (formerly
known as UCAR International Inc.), UCAR Global
Enterprises Inc., UCAR Carbon Company Inc., UCAR
Composites Inc., UCAR Technology LLC, UCAR Holdings III
Inc. and UCAR International Trading Inc. and State Street
Bank and Trust Company.
78