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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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
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
Wilmington, Delaware 19803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (302) 778-8227
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
The aggregate market value of our outstanding common stock held by
non-affiliates, computed by reference to the closing price of our common stock
on June 30, 2002, was approximately $566 million. On February 28, 2003,
56,207,875 shares of our common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required under Part III is incorporated by reference from
the GrafTech International Ltd. Proxy Statement for the Annual Meeting of
Stockholders to be held on May 28, 2003, which will be filed on or about April
15, 2003.
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TABLE OF CONTENTS
PAGE
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PART I...........................................................................................................1
Preliminary Notes.......................................................................................1
Important Terms.........................................................................................1
Presentation of Financial, Market and Legal Data........................................................2
Item 1. Business........................................................................................4
Introduction...................................................................................4
Business Strategies............................................................................5
Our Lines of Business..........................................................................9
Planning, Production and Distribution.........................................................20
Sales and Customer Service....................................................................24
Technology....................................................................................24
Strategic Alliances...........................................................................27
Competition...................................................................................29
Environmental Matters.........................................................................30
Insurance.....................................................................................31
Employees.....................................................................................32
Corporate History.............................................................................32
Risk Factors and Forward Looking Statements...................................................34
Item 2. Properties....................................................................................53
Item 3. Legal Proceedings.............................................................................54
Antitrust Investigations......................................................................54
Antitrust Lawsuits............................................................................55
Antitrust Earnings Charges....................................................................57
Other Proceedings Against Us..................................................................58
Lawsuit Initiated by Us Against Our Former Parents............................................58
Item 4. Submission of Matters to a Vote of Security Holders...........................................59
PART II.........................................................................................................60
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.........................60
Market Information............................................................................60
Dividend Policies and Restrictions............................................................61
Recent Sales of Unregistered Securities and Other Issuances...................................62
Item 6. Selected Financial Data.......................................................................63
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........66
General.......................................................................................67
Cost Reduction Plans..........................................................................69
Strategic Alliances...........................................................................70
Global Economic Conditions and Outlook........................................................71
Financing Transactions........................................................................74
Litigation Against Our Former Parent Companies Initiated by Us................................75
Antitrust and Other Litigation Against Us.....................................................75
Customer Base.................................................................................77
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TABLE OF CONTENTS
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Financial Effects of Organizational Changes...................................................78
Results of Operations.........................................................................78
Effects of Inflation..........................................................................85
Effects of Changes in Currency Exchange Rates.................................................86
Liquidity and Capital Resources...............................................................87
Restrictions on Dividends and Stock Repurchases...............................................99
Critical Accounting Policies..................................................................99
Recent Accounting Pronouncements.............................................................101
Costs Relating to Protection of the Environment..............................................103
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................103
Item 8. Financial Statements and Supplementary Data..................................................105
INDEPENDENT AUDITORS' REPORT.................................................................106
INDEPENDENT AUDITORS' REPORT.................................................................107
CONSOLIDATED BALANCE SHEETS..................................................................108
CONSOLIDATED STATEMENTS OF OPERATIONS........................................................109
CONSOLIDATED STATEMENTS OF CASH FLOWS........................................................110
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)....................................111
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......112
(1) Discussion of Business and Structure................................................112
(2) Summary of Significant Accounting Policies..........................................115
(3) Financial Instruments...............................................................121
(4) Segment Reporting...................................................................122
(5) Long-Term Debt and Liquidity........................................................123
(6) Income Taxes........................................................................131
(7) Other (Income) Expense, Net.........................................................133
(8) Interest Expense....................................................................134
(9) Supplementary Balance Sheet Detail..................................................135
(10) Leases and Other Long Term Obligations..............................................136
(11) Benefit Plans.......................................................................137
(12) Restructuring and Impairment Charges................................................140
(13) Management Compensation and Incentive Plans.........................................142
(14) Contingencies.......................................................................146
(15) Earnings Per Share..................................................................151
(16) Stockholder Rights Plan.............................................................151
(17) Financial Information About the Parent, the Issuer, the Guarantors and the
Subsidiaries Whose Securities Secure the Senior Notes and Related Guarantees........152
(18) Subsequent Events...................................................................158
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........159
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PART III.......................................................................................................160
Items 10 to 13 (inclusive)............................................................................160
Executive Officers and Directors......................................................................160
Item 14. Controls and Procedures......................................................................163
PART IV........................................................................................................163
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................163
SIGNATURES.....................................................................................................171
CERTIFICATIONS.................................................................................................173
EXHIBIT INDEX..................................................................................................177
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PART I
PRELIMINARY NOTES
IMPORTANT TERMS
We use the following terms to identify various companies or groups of
companies 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 the
Consolidated Financial Statements. GTI is a guarantor of the Senior Notes and
the Senior Facilities. Prior to our Annual Meeting of Stockholders for 2002, GTI
was named UCAR International Inc.
"GRAFTECH GLOBAL" refers to GrafTech Global Enterprises Inc. only.
GrafTech Global is a direct, wholly owned subsidiary of GTI and the direct or
indirect holding company for all of our operating subsidiaries. GrafTech Global
is a guarantor of the Senior Notes and the Senior Facilities. Prior to June 7,
2002, GrafTech Global was named UCAR Global Enterprises Inc.
"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. UCAR Carbon is a guarantor of the Senior Notes and the Senior
Facilities.
"GRAFTECH FINANCE" refers to GrafTech Finance Inc. only. GrafTech
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"). GrafTech Finance is the issuer of our 10.25% senior notes
due 2012 (the "SENIOR NOTES"). The Senior Notes were issued under an Indenture
dated February 15, 2002, as supplemented on April 30, 2002 (as supplemented, the
"INDENTURE"). Prior to June 7, 2002, GrafTech Finance was named UCAR Finance
Inc.
"AET" refers to Advanced Energy Technology Inc. only. AET is our 97.5%
owned subsidiary engaged in the development, manufacture and sale of natural
graphite-based products. Prior to January 1, 2003, AET was 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 cathodes.
"SUBSIDIARIES" refers to those companies that, at the relevant time,
are or were majority owned or wholly owned directly or indirectly by GTI. 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, 2000 through
December 31, 2002, except for:
o Carbone Savoie, which has been and is 70% owned; and
o AET, 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. In 2002, we
substantially completed a corporate realignment of our foreign subsidiaries.
Most of the operations and net
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sales of our synthetic graphite line of business are located outside the U.S.
and are held by our Swiss subsidiary or its subsidiaries. Most of our technology
is held by our U.S. subsidiaries. We may in the future realign the corporate
organizational structure of our U.S. subsidiaries.
"WE," "US" or "OUR" refers to GTI and its subsidiaries collectively or,
if the context so requires, GTI, GrafTech Global or GrafTech 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%. This means that the financial information for
Carbone Savoie and AET is consolidated on each line of the Consolidated
Financial Statements and the equity of the other owners in those subsidiaries is
reflected on the lines entitled "minority stockholders' equity in consolidated
entities" and "minority stockholders' share of income." We use the equity method
to account for 50% or less owned interests. This means that the only financial
information for our 25% owned joint venture with Jilin Carbon Co. Ltd. (together
with its affiliates, "JILIN") in China recorded in the Consolidated Balance
Sheet relates to our net investment in, contributions to and distributions from
the joint venture.
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 or expenses incurred in connection with lawsuits initiated by us, or the
impact of accounting changes.
All cost savings and reductions relating to our 1998 enhanced global
restructuring and rationalization plan 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 relating to our 2002 major cost savings plan are estimates or targets
based on a comparison to costs in 2001 (and assuming no change in currency
exchange rates from the average rates we used to prepare the Consolidated
Financial Statements at and for the year ended December 31, 2001 and no change
in annual graphite electrode production volume). For these purposes, our average
graphite electrode production cost per metric ton was determined based on annual
graphite electrode production volume of about 180,000 metric tons, our annual
overhead costs were $78 million and our effective income tax rate was 45% before
taking into account the corporate realignment of our subsidiaries. Estimates and
targets 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 or interest rate management initiatives related thereto.
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
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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. Although we are not aware of any
misstatements regarding any industry or market share data, our estimates involve
risks and uncertainties and are subject to change based on various factors,
including those discussed under "Risk Factors." We cannot guarantee the accuracy
or completeness of this market and market share 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
sales volumes in 2002. As used herein, references to "MAJOR PRODUCT LINES" mean
graphite electrodes, cathodes and natural graphite.
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.
See Note 4 to the Consolidated Financial Statements for certain
financial information regarding our reportable segments.
We make available free of charge on or through our Web site copies of
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or
furnish them to, the SEC. A copy of our Code of Conduct and Ethics is also
available on or through our Web site. We maintain a Web site at
http://www.graftech.com. The information contained on this Web site is not part
of this Report.
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ITEM 1. BUSINESS
INTRODUCTION
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 and deliver high quality 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, transportation, chemical and petrochemical markets.
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 believe that our graphite electrode and cathode businesses have the
leading market shares in the world. 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. Our customers include industry
leaders such as Nucor Corporation and Arcelor in steel, Alcoa Inc. and Pechiney
in aluminum, Ballard Power Systems Inc. in fuel cells, Intel Corporation in
electronics, MEMC Electronic Materials in semiconductors and The Boeing Company
in transportation.
Our core competencies include graphite and carbon material sciences and
high temperature processing know-how. We believe that we operate industry
leading research, development and testing facilities. We also have strategic
alliances with Pechiney, the world leader in aluminum smelting technology,
Ballard Power Systems, the world leader in PEM fuel cell technology, and leaders
in the electronic thermal management and other industries.
In 2002, our businesses were organized around two operating divisions,
our Graphite Power Systems Division, which included our graphite electrode and
cathode businesses, and our Advanced Energy Technology Division, which included
our natural graphite, advanced synthetic graphite and advanced carbon materials
businesses. In 2003, we further refined the organization of our businesses into
three lines of business:
o a synthetic graphite line of business called Graphite Power
Systems, which primarily serves the steel, aluminum, semiconductor
and transportation industries and includes graphite electrodes,
cathodes and other advanced synthetic graphite materials;
o a natural graphite line of business called Advanced Energy
Technology, which primarily serves the transportation, power
generation, electronics and chemical industries and includes fuel
cell, electronic thermal management and sealant products and
services; and
o a carbon materials line of business called Advanced Carbon
Materials, which primarily serves the silicon metal and
ferro-alloy industries and includes carbon electrodes and
refractories.
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 long term growth sector of the steel industry. We believe there
is currently no commercially viable substitute for
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graphite electrodes in electric arc steel production furnaces. Graphite
electrodes are also used for refining steel in ladle furnaces and in other
smelting processes. Cathodes are used in aluminum smelting. Our advanced
synthetic graphite products and materials include primary and specialty products
for a wide variety of markets, including the transportation and semiconductor
markets. Our natural graphite products include flexible graphite, which is used
primarily as gasket and sealing material in high temperature and corrosive
environments in the automotive and chemical markets. Advanced natural graphite
can be used in the production of materials, components and products for
high-growth potential markets such as proton exchange membrane ("PEM") fuel cell
and electronic thermal management applications. Carbon electrodes are used in
the production of silicon metal, a raw material primarily used in the
manufacture of aluminum. Carbon refractories are used primarily as chemical
industry tank and reactor linings and blast furnace and submerged arc furnace
hearth walls.
We believe that the barriers to entry in the graphite and carbon
electrode, cathode and refractory industries are high. There have been no
significant entrants in the graphite electrode industry since 1950. We estimate
that our average capital investment to incrementally increase our annual
graphite electrode manufacturing capacity would be about 20% of the initial
investment for "greenfield" capacity. We also believe that production of these
materials requires a significant amount of expertise and know-how, which we
believe would be difficult for entrants to replicate in order to compete
effectively.
Our management team has actively repositioned our manufacturing
network, improved product quality, reduced costs, reduced debt and other
obligations, and managed antitrust liabilities. We have also implemented an
enterprise-wide risk management process whereby we assess the business risks to
our goal of maximizing cash flow, using a structured and disciplined approach.
This approach seeks to align our people and processes with our critical
strategic uncertainties so that our management team and GTI's Board of Directors
may better evaluate and manage those uncertainties. See Part III, Executive
Officers and Directors, for information about our current management team.
We believe that our new organizational structure better aligns our
advantaged manufacturing platform with market opportunities and enables
accelerated decision-making to respond to those opportunities. Under this
organizational structure, we have begun to further streamline our operations. We
are implementing voluntary and selective severance programs and revising our
compensation programs to strengthen our business strategies. A main component of
our compensation programs is a direct link between cash incentive compensation
and cash profitability of our businesses.
BUSINESS STRATEGIES
Our goal is to create stockholder value by maximizing cash flow,
primarily to reduce leverage, through pursuit of the following strategies:
o pursuing cost savings;
o leveraging our global presence with industry leading customers;
o expanding value-driven enterprise selling;
o delivering exceptional and consistent quality;
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o providing superior technical service;
o accelerating commercialization of advantaged technologies; and
o establishing strategic alliances with leading customers and
suppliers as well as key technology focused companies.
PURSUING COST SAVINGS. We continue to reduce costs by seeking to
increase productivity at our facilities, maximize capacity utilization,
streamline activities and improve operational efficiencies. Under our 2002 major
cost savings plan, we achieved $14 million of recurring savings in 2002. We
believe that we will deliver $80 million of annual recurring costs savings by
2005. We have targeted $30 million of recurring annual pre-tax cost savings by
the end of 2003, $16 million more than in 2002.
We have aggressively reduced our graphite electrode production and
other costs by closing higher cost facilities and redeploying much of that
capacity to our larger, lower cost, strategically located facilities. Completed
actions include the shutdown of graphite electrode manufacturing capacity in
Canada, Germany, the U.S. and Italy, coupled with incremental expansion of
graphite electrode manufacturing capacity in Mexico, South Africa and Spain. We
believe that our graphite electrode production cost structure is the lowest of
all major producers.
In the 2002 fourth quarter, we successfully completed the first phase
of capacity expansion at our low cost manufacturing facility in Mexico. We
intend to complete the expansion of this facility to 60,000 metric tons of
annual graphite electrode manufacturing capacity by the end of the 2003 first
quarter. We believe that, upon completion, this facility will be the largest
graphite electrode manufacturing facility in the world. We also intend to expand
our capacity for manufacturing graphite electrodes and other products at other
lower cost facilities. Our low cost facility in Brazil, for example, is the only
manufacturer of graphite electrodes in South America and the only non-captive
manufacturer of cathodes in the Western Hemisphere.
We are also continuing to implement global work process changes,
including consolidating and streamlining our order fulfillment, purchasing,
finance and accounting and human resource processes, and identification and
implementation of outsourcing opportunities. These activities are targeted for
completion by the middle of 2004.
We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years.
LEVERAGING OUR GLOBAL PRESENCE WITH INDUSTRY LEADING CUSTOMERS. Our
strategic competitive advantages include:
o our advantaged manufacturing platform;
o our leading market share in our graphite electrode and cathode
businesses;
o our high quality products and industry leading technical and
customer service;
o our strong technology and industry leading research, development
and testing capabilities; and
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o our customer driven focus on optimization of supply chain,
capacity utilization, quality, product mix, service and delivery.
The major markets that we serve have experienced significant
consolidation in recent years, and this trend is expected to continue. This
consolidation has led to the creation of fewer but larger global customers, each
of which has unique operational and business needs.
We believe that we are the manufacturer best positioned to supply
graphite electrodes and cathodes to the leading global steel and aluminum
producers. We are one of only two global producers of graphite electrodes and
cathodes. We believe that our graphite electrode and cathode businesses have the
leading market shares in the world and that, in 2002, our worldwide market share
was:
o about 19% in graphite electrodes;
o about 28% in carbon electrodes; and
o about 16% in cathodes.
We sell these products in every major geographic market. Sales of these products
outside the U.S. accounted for about 81% of our net sales in 2002. No single
customer or group of affiliated customers accounted for more than 6% of our
total net sales in 2002.
We believe that our global graphite electrode business is competitively
advantaged because of our unique manufacturing platform. We have a network of
state-of-the-art manufacturing facilities located on four continents, Europe,
North America, Africa and South America, and most of those facilities are
located in lower cost countries, including Brazil, Mexico, Russia, South Africa
and Spain while the only other global producer has plants only on two
continents, Europe and North America, most of which are located in higher cost
countries. We believe that this provides us with significant operational
flexibility and a significant competitive advantage. Our investments in, among
other things, incremental expansion of capacity in lower cost countries are
intended to maintain and enhance this global competitive advantage.
We believe that our cathode manufacturing platform, located in Europe
and Brazil, has similar advantages and, in addition, benefits from economies of
scale, technological advancements and other advantages due to its association
with our global graphite electrode manufacturing platform.
We have a strategic alliance with Pechiney, the world leader in
aluminum smelting technology. We believe that this alliance strengthens our
position as the quality leader in the low cost production of high quality
graphite cathodes. We believe that our advanced graphite cathode technology is
enabling us to increase our market share of graphite cathodes sold upon the
commencement of operation of the new, more efficient aluminum smelting furnaces
that are being built, even as older furnaces are being shut down.
We believe that we are the manufacturer best positioned to supply
natural graphite materials and components to the fuel cell and electronic
thermal management markets. We are one of the world's largest manufacturers of
natural graphite for the automotive and chemical markets. We believe that, in
2002, our worldwide market share was 26%. We believe that we
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have the most advanced natural graphite manufacturing facility in the world. We
have strategic alliances with Ballard Power Systems, the world leader in PEM
fuel cell technology, and with leading chip makers and others in electronic
thermal management.
EXPANDING VALUE-DRIVEN ENTERPRISE SELLING. Capitalizing on our global
leadership position and other strategic competitive advantages, as well as the
continuing consolidation within the major markets we serve, we are prioritizing
our sales and marketing efforts toward the growing, larger electric arc furnace
steel and aluminum producers. Among other things, we are focused on offering, on
an enterprise-wide basis, consistently high quality graphite electrodes,
cathodes and technical services at competitive prices and with reliable and
timely deliveries. In addition, we are expanding our product range, adjusting
our product mix and differentiating our products to better meet the unique needs
of each of these producers, as well as improve efficiencies and reduce costs.
As a result of these efforts, we believe that we have increased our
volume of graphite electrodes sold to the ten largest electric arc furnace steel
producers by about 9% in 2002 as compared to 2001. Sales of our graphite
electrodes to the ten largest electric arc furnace steel producers constituted
about 32% of our total volume of graphite electrodes sold in 2002. In 2002, six
of our top ten graphite electrode customers were among the ten largest
purchasers of graphite electrodes in the world. In addition to increased
volumes, this shift in our customer base enables us to further optimize
efficiencies and reduce costs.
We believe that the larger producers will be the survivors of this
continuing consolidation. We also believe that, in many cases, the larger
producers are more creditworthy than smaller producers and that we are able to
better manage our exposure to trade credit risk as we increase the percentage of
our total net sales sold to them.
DELIVERING EXCEPTIONAL AND CONSISTENT QUALITY. We believe that we
operate the premier synthetic and natural graphite research and development
facilities. We also operate a state-of-the-art testing facility and pilot plant
capable of conducting physical and analytical testing to develop synthetic and
natural graphite products and manufacturing process technology. We believe that
our products are among the highest quality products available.
We have worked diligently in recent years to improve, on a worldwide
basis, the overall quality of our products, which encompasses not only the
characteristics of each item produced but also the uniformity of the same item
produced at different facilities as well as the expansion of the range of our
products, the improvement in product delivery and customer and technical
service, and the development of new technologies, products and applications. We
believe that these improvements in overall quality create significant
efficiencies for us (including flexibility for us to source many orders from the
facility that optimizes our profitability), provide us the opportunity to
increase volumes and market share, and create market opportunities and
production efficiencies for our customers. We believe that benefits we can
provide to our customers provide us with an important competitive advantage.
PROVIDING SUPERIOR TECHNICAL SERVICE. We believe that we are the
recognized industry leader in providing value added technical services to
customers for our major product lines. We believe that we have the most
extensive technical and customer service organization in our industry, which we
use strategically to service key customers to our competitive advantage. For
example, we employ about 40 engineers (which we believe is more than any of our
competitors) around the world who provide technical services and advice in all
areas of electric arc steel
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production and aluminum smelting, furnace specification, design, commissioning
and operation. We believe that the services we provide while a furnace is being
commissioned frequently results in our obtaining orders for products for use
with the furnace.
We have received significant recognition for the high quality of our
products and have been awarded preferred or certified supplier status by many
major steel and aluminum companies as well as industry groups and other
customers. We also believe that our strategic partners have entered into
alliances with us due to, among other things, the strength of our technology and
our research and development capabilities.
ACCELERATING COMMERCIALIZATION OF ADVANTAGED TECHNOLOGIES. One of our
core competencies is natural and synthetic graphite and carbon material
sciences, including high temperature processing of these materials. We have over
100 years of experience in product and process technology involving these
sciences. Our intellectual property portfolio is extensive. For example, our
natural graphite line of business currently holds about 190 U.S. and foreign
patents and about 300 U.S. and foreign pending patent applications and our
synthetic graphite line of business currently holds about 164 U.S. and foreign
patents and about 76 U.S. and foreign pending patent applications. Most of our
natural graphite patents and patent applications relate to fuel cell products
and components, electronic thermal management products, components and
applications, industrial heat management products, components and applications,
fire retardant products, conductive products and sealing products, components
and applications. Most of our synthetic graphite patents and patent applications
relate to electrodes and cathodes, including processes for improving the
manufacture, performance and cost efficiencies of electrodes and cathodes, uses
of electrodes in steel making processes and uses of cathodes in aluminum making
processes. We believe that we operate the premier synthetic and natural graphite
research and development facilities as well as state-of-the-art testing
facilities and pilot plants.
We seek to exploit this competency across all of our businesses, to
improve existing products, such as supersize graphite electrodes and graphite
cathodes, and to develop and commercialize new products, such as materials and
components for PEM fuel cell and electronic thermal management applications. We
believe that our technology and our research and development capabilities
provide us a significant competitive advantage and that the realignment of our
businesses into three lines of business will enable us to accelerate
commercialization of improved and new products.
ESTABLISHING STRATEGIC ALLIANCES WITH LEADING CUSTOMERS AND SUPPLIERS
AS WELL AS KEY TECHNOLOGY FOCUSED COMPANIES. We seek to enter into strategic
alliances with industry leaders which we believe will position us to leverage
our resources and accelerate our commercialization activities. Among others, we
have strategic alliances with Pechiney in our cathode business, Ballard Power
Systems in our PEM fuel cell materials and components business, ConocoPhillips
in our graphite electrode supply chain optimization activities, and two leading
chip makers in our electronic thermal management materials and products
business.
OUR LINES OF BUSINESS
Carbon is one of the fundamental elements and is capable of forming an
enormous variety of compounds. As a result of these characteristics, carbon is
one of the most widely used elements in manufacturing processes of all kinds.
Graphite is the crystalline form of carbon. Graphite can be processed to be
resistant to corrosive materials, withstand high temperatures and act as either
a conductor of, or an insulator from, heat and electricity. Graphite is both
manmade
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(called synthetic graphite) and occurs naturally (called natural graphite).
Synthetic graphite is made primarily from petroleum coke, a by-product of
petroleum refining. Natural graphite is a mined mineral that is processed to
increase its purity.
SYNTHETIC GRAPHITE LINE OF BUSINESS
Our synthetic graphite line of business manufactures and delivers high
quality graphite electrodes, cathodes and advanced synthetic graphite products
and materials as well as related services. Electrodes and cathodes are key
components of the conductive power systems used to produce steel, aluminum,
silicon metal, ferronickel, thermal phosphorous, titanium dioxide and other
non-ferrous metals. Graphite electrodes are consumed primarily in the production
of steel in electric arc furnaces, the long term growth sector of the steel
industry. Graphite electrodes accounted for about 72% of the net sales of this
line of business in 2002. Cathodes are used in aluminum smelting. Cathodes are
manufactured by our subsidiary, Carbone Savoie, and accounted for about 17% of
the net sales of this line of business in 2002. Our advanced synthetic graphite
products and materials include primary and specialty products for a wide variety
of markets, including the transportation and semiconductor markets.
We estimate that, in 2002, the worldwide market for cathodes and
graphite electrodes was about $2.5 billion. Customers for these products are
located in all major geographic markets.
GRAPHITE ELECTRODES
Use of Graphite Electrodes in Electric Arc Furnaces. There are two
primary technologies for steel making:
o basic oxygen furnace steel production (sometimes called
"INTEGRATED STEEL PRODUCTION"); and
o electric arc furnace steel production.
Electric arc furnace steel makers are called "mini-mills" because of
their historically smaller capacity as compared to basic oxygen furnace steel
makers and because they historically served more localized markets. Graphite
electrodes are used primarily in electric arc furnace steel production. They are
also used to refine steel in ladle furnaces and in other smelting processes such
as production of titanium dioxide.
Electrodes act as conductors of electricity in the furnace, generating
sufficient heat to melt scrap metal, iron ore or other raw materials used to
produce steel, silicon metal or other metals. The electrodes are gradually
consumed in the course of that production.
Electric arc furnaces that produce steel typically range in size from
those that produce about 25 metric tons of steel per production cycle to those
that produce about 150 metric tons per production cycle. Electric arc furnaces
operate using either alternating or direct electric current. The vast majority
of electric arc furnaces use alternating current. Each of these furnaces
typically uses nine electrodes (in three columns of three electrodes each) at
one time. The other electric arc furnaces, which use direct current, typically
use one column of three electrodes. The size of the electrodes varies depending
on the size of the furnace, the size of the furnace's electric transformer and
the planned productivity of the furnace. In a typical furnace using
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alternating current and operating at a typical number of production cycles per
day, one of the nine electrodes is fully consumed (requiring the addition of a
new electrode), on average, every eight to ten operating hours. The actual rate
of consumption and addition of electrodes for a particular furnace depends
primarily on the efficiency and productivity of the furnace. Therefore, demand
for graphite electrodes is directly related to the amount and efficiency of
electric arc furnace steel production.
Electric arc furnace steel production requires significant heat (as
high as 5,000 degrees Fahrenheit, which we believe is the hottest operating
temperature in any industrial or commercial manufacturing process worldwide) to
melt the raw materials in the furnace, primarily scrap metal. Heat is generated
as electricity (as much as 150,000 amps) passes through the electrodes and
creates an electric arc between the electrodes and the raw materials.
Graphite electrodes are currently the only products available that have
the high levels of electrical conductivity and the capability of sustaining the
high levels of heat generated in an electric arc furnace producing steel.
Therefore, graphite electrodes are essential for electric arc furnace steel
production. We believe that there are currently no commercially viable
substitutes for graphite electrodes in electric arc furnace steel making. We
estimate that, on average, the cost of graphite electrodes represents about 3%
of the cost of producing steel in a typical electric arc furnace.
Electric arc furnace steel production has, for many years, been the
long term growth sector of the steel industry, at an estimated average annual
growth rate of about 3%. Graphite electrode demand is expected to grow over the
long term at an estimated average annual growth rate of about 1% to 2%. There
are currently in excess of 2,000 electric arc steel production furnaces
operating worldwide. Worldwide electric arc furnace steel production grew from
about 90 million metric tons (about 14% of total steel production) in 1970 to
about 285 million metric tons (about 34% of steel production) in 2000, 279
million metric tons in 2001 (about 33% of steel production) and 299 million
metric tons (about 33% of total production) in 2002. We estimate that steel
makers worldwide added net new electric arc furnace steel production capacity of
about 13 million metric tons in 2000, about 11 million metric tons in 2001 and
about 15 million metric tons in 2002. We believe that a portion of the new
capacity added in the past three years has not yet become operational. We are
aware of about 23 million metric tons of announced new electric arc furnace
steel production capacity that is scheduled to be added in 2003 through 2005.
After an electric arc steel production furnace has been commissioned,
the cost and time required to suspend and recommence production due to
operational, economic or other factors is relatively low and short as compared
to a basic oxygen steel production furnace. As a result, electric arc furnace
steel producers are better able to reduce and increase production to respond
to changes in demand and prices for steel. This ability has resulted in
significant fluctuations in electric arc furnace steel production over the past
five years, as economic conditions affecting demand for steel have fluctuated.
The following table illustrates the growth in electric arc steel production
since 1970:
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WORLDWIDE STEEL PRODUCTION
(MILLIONS OF METRIC TONS)
[Graph Omitted]
Sources: International Iron and Steel Institute and GTI estimates
We believe that, in a strong recovery from the current global economic downturn,
electric arc furnace steel production will rebound significantly.
Relationship Between Graphite Electrode Demand and Electric Arc Furnace
Steel Production. We believe that the worldwide growth in electric arc furnace
steel production has been due primarily to improvements in the cost
effectiveness and operating efficiency of electric arc furnace steel making. We
believe that growth has also been due to the fact that, as a result of recent
technical advances, electric arc furnace steel makers are capable of producing
the majority of the product lines that are produced by basic oxygen furnace
steel makers.
The improved efficiency of electric arc furnaces has resulted in a
decrease in the average rate of consumption of graphite electrodes per metric
ton of steel produced (called "SPECIFIC CONSUMPTION"). We estimate that specific
consumption declined from about 4.3 kilograms of graphite electrodes per metric
ton of steel produced in 1990 to about 2.4 kilograms per metric ton in 2002. We
believe that, on average, as the costs (relative to the benefits) increase for
electric arc furnace steel makers to achieve significant further efficiencies in
specific consumption, the decline in specific consumption will continue at a
more gradual pace. We further believe that the rate of decline in the future
will be impacted by the addition of new electric arc furnace steel making
capacity. To the extent that this new capacity replaces old capacity, it has the
effect of reducing industry wide specific consumption due to the efficiency of
new electric arc furnaces. To the extent that this new capacity increases
industry wide electric arc furnace steel production capacity and that capacity
is utilized, it creates additional demand for graphite electrodes. While we
believe that the rate of decline of specific consumption over the long term has
become lower, we believe that there was a slightly more significant decline in
2001 and 2002 than would otherwise have been the case due to the shutdown of
older, less efficient electric arc furnaces due to industry rationalization.
The fluctuations in electric arc steel production reflected in the
preceding table resulted in corresponding fluctuations in demand for graphite
electrodes. Other than in China, for which reliable information is generally not
available, we believe that the graphite electrode manufacturing capacity
utilization rate was about 93% in 2000, about 86% in 2001 and about
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90% in 2002. In 2002, we believe that graphite electrode manufacturing capacity
worldwide (excluding China, for which reliable information is generally not
available) was about 800,000 metric tons.
Production Capacity. Currently, there is one other global manufacturer
and about ten other notable regional or local manufacturers of graphite
electrodes. There have been no significant entrants in the manufacture of
graphite electrodes since 1950.
Since 1998, we have reduced our net graphite electrode manufacturing
capacity by about 65,000 metric tons. Completed actions include the shutdown of
graphite electrode manufacturing capacity in Canada, Germany, the U.S. and
Italy, coupled with incremental expansion of graphite electrode manufacturing
capacity in Mexico, South Africa and Spain. In addition, from 1998 through 2002,
two of our competitors reduced their annual graphite electrode manufacturing
capacity. Their announced reductions total more than 35,000 metric tons. Two of
our graphite electrode competitors, who have about 60,000 metric tons of annual
graphite electrode manufacturing capacity, are subject to bankruptcy
proceedings.
We successfully completed the first phase of capacity expansion,
amounting to 10,000 metric tons, at our low cost manufacturing facility in
Mexico in the 2002 fourth quarter. We intend to complete the expansion of this
facility to 60,000 metric tons of annual graphite electrode manufacturing
capacity by the end of the 2003 first quarter. We believe that, following this
expansion, this facility will be the largest graphite electrode manufacturing
plant in the world and will strengthen our ability to supply demand from the
large NAFTA market on a low cost basis. We believe that our total annual
graphite electrode manufacturing capacity will be about 210,000 metric tons by
the end of the 2003 first quarter.
We are not aware of any "greenfield" construction of new graphite
electrode manufacturing facilities by any global or notable competitor. We are
aware of incremental or other possible expansion of existing capacity.
Graphite Electrode Market Share. We estimate that about 62% of the
electric arc furnace steel makers worldwide (other than in China, for which
reliable information is not generally available) and about 84% of the electric
arc furnace steel makers in the U.S. and the markets where we have manufacturing
facilities purchased all or a portion of their graphite electrodes from us in
2002. We further estimate that we supplied about 45% of all graphite electrodes
purchased in the U.S. and the markets where we have manufacturing facilities and
about 19% worldwide, in each case in 2002. We estimate that the global market
for graphite electrodes was about $2.0 billion in 2002.
We estimate that, in 2002, sales in the U.S. accounted for about 19% of
our total net sales of graphite electrodes and that we sold graphite electrodes
in over 70 countries, with no other country accounting for more than 11% of our
total net sales of graphite electrodes.
We believe that we have increased our volume of graphite electrodes
sold to the ten largest electric arc furnace steel producers by about 9% in 2002
as compared to 2001. Sales of our graphite electrodes to the ten largest
electric arc furnace steel producers constituted about 32% of our total volume
of graphite electrodes sold in 2002. In 2002, six of our top ten customers were
among the ten largest purchasers of graphite electrodes in the world. In
addition to increased volumes, this shift in our customer base enables us to
further optimize efficiencies and reduce costs.
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We expect that the larger producers will be the survivors of the
continuing consolidation within the steel and aluminum industries. We also
believe that, in many cases, the larger producers are more creditworthy than
smaller producers and that we are able to better manage our exposure to trade
credit risk as we increase the percentage of our total net sales sold to them.
CATHODES. Cathodes consist primarily of blocks used as floor lining
for, and conductors of electricity in, furnaces (called "POTS") used to smelt
aluminum. Cathodes are made from either carbon or graphite. Cathodes are
currently the only products available that have the high levels of electrical
conductivity and the capability of sustaining highly corrosive melts at high
temperature in an aluminum smelting furnace. We believe that there are currently
no commercially viable substitutes for cathodes in aluminum smelting. In a
typical aluminum smelting furnace operating at a typical rate and efficiency of
production, the cathodes must be replaced every 5 to 8 years. Since cathodes are
used in the construction of pots, demand for them is directly related to both
the number of new aluminum smelting furnaces being built and the frequency with
which existing furnaces are rebuilt.
We are allied with Pechiney, which is one of the world's leading
producers of aluminum and the leading supplier of smelting technology to the
aluminum industry. We are using Pechiney's smelting technology and our graphite
technology and expertise in high temperature industrial applications to develop
further improvements in graphite cathodes. We believe that use of graphite
cathodes (instead of carbon cathodes) allows a substantial improvement in
process efficiency.
We believe that worldwide demand for aluminum will continue to grow
over the long term at an average annual rate of about 3%, primarily because of
greater use of aluminum by the transportation industry and higher growth in
demand in China. We also believe that, over the long term, new aluminum smelting
furnaces will need to be built to meet the growth in demand. We believe,
therefore, that demand for graphite cathodes will continue to grow, both for new
smelting furnaces as well as for substitution for carbon cathodes in existing
smelting furnaces.
We believe that we are the largest manufacturer of cathodes in the
world and, in 2002, expanded the manufacturing capacity of our Brazilian
facility, the only non-captive manufacturer of cathodes in the Americas. We
estimate that we sold about 16% of the cathodes sold in the world in 2002. There
are seven producers of cathodes in the world (excluding those located in Russia
and China, about whom reliable information is generally not available). We
estimate that the worldwide market for cathodes was about $450 million in 2002.
ADVANCED SYNTHETIC GRAPHITE PRODUCTS. Advanced synthetic graphite
includes isomolded, molded and extruded materials in a variety of grades for
diverse applications. These materials include primary products (such as bulk
graphite blocks (called "billets") that are sold to customers for further
processing or finishing for end users) and machined specialty products (ranging
from pressure casting molds for steel railroad car wheels to rocket nozzles,
rocket cones and other components for the defense and aerospace industries).
Isomolded grade ATJ is made in billets weighing more than one metric
ton. Products fabricated from grade ATJ are used in applications including
continuous casting and hot press manufacturing processes, composite tooling and
molds, and resistance heating elements. Molded grades PGW and PGX are among the
largest monolithic graphite shapes in the world. Grade PGX can be produced in
shapes up to 73 inches in diameter and 75 inches in length and weighing more
than ten metric tons. Products fabricated from grades PGW and PGX are used in
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applications including high temperature furnaces and crucibles, chemical
processing equipment, and pressure and centrifugal casting equipment. Extruded
grades CS and SLX are among the highest quality synthetic graphite materials
produced in the world today. Products fabricated from grade CS and SLX are used
as fused refractories, diamond drill molds and semiconductor components as well
as in applications in aluminum smelting.
We manufacture our advanced synthetic graphite products using raw
materials, processes and technologies similar to those we use to make graphite
electrodes and cathodes. We estimate the worldwide market for advanced synthetic
graphite products and materials was about $450 million in 2002.
NATURAL GRAPHITE LINE OF BUSINESS
Our natural graphite line of business develops, manufactures and sells
high quality, highly engineered, natural graphite-based products, services and
technologies for both established and high-growth-potential markets. We
currently sell these products primarily to the transportation, chemical, 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. Our natural graphite-based products are
developed and manufactured by our subsidiary, AET.
Flexible graphite is used primarily as a gasket and sealing material.
We are one of the largest producers of flexible graphite for these uses.
Advanced flexible graphite can be used in the production of materials,
components and products for other markets. For the fuel cell power generation
market, we are developing materials and components for PEM fuel cells and fuel
cell systems, including flow field plates and gas diffusion layers. For the
electronic thermal management market, we are developing and selling thermal
interface products and developing and introducing prototype and next generation
heat spreaders, heat sinks and heat pipes for electronic applications, including
applications in computers and communications, industrial, military, office and
automotive equipment. Other identified markets include: fire retardant products
for building and construction materials applications, and industrial thermal
management products for high temperature process applications.
The versatility of our proprietary processes and equipment enables us
to modify natural graphite-based products to meet a variety of customer
specifications. We work with our customers to develop technologically advanced
solutions, utilizing our knowledge and expertise in the production of these
products.
SEALING PRODUCTS. We produce flexible graphite material from expandable
natural graphite flake. This is an intermediate product that we produce from
mined natural graphite flake using proprietary treating processes. We further
fabricate the flexible graphite material into a variety of sheet, laminate and
tape products. Flexible graphite is lightweight, conformable,
temperature-resistant and inert to most chemicals. Due to these characteristics,
it is an excellent gasket and sealing material that to date has been used
primarily in high temperature and corrosive environments in the automotive and
chemical industries. For example, automotive applications for our flexible
graphite products include head gaskets and exhaust gaskets as well as engine and
exhaust heat shields. We market our flexible graphite products under the
GRAFOIL(R) name.
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FUEL CELL PRODUCTS. Fuel cells were invented in 1839 and were first
used in practical applications in the 1960s in NASA's Gemini and Apollo space
programs to provide electricity aboard spacecrafts. A fuel cell is an
environmentally friendly power generator, which combines hydrogen (which can be
obtained from a variety of sources such as methanol, natural gas and other
fuels) with oxygen (from air, not necessarily pure) to produce electricity
through an electrochemical process without combustion. The only by-products from
this process are water and heat. We believe that Proton Exchange Membrane
("PEM") fuel cells have emerged as the leading fuel cell technology because they
offer high power density, reduced weight and lower costs relative to alternative
fuel cell technologies. PEM fuel cells have the potential for use as
replacements for existing power generation systems in the following
applications:
o transportation applications, such as automobiles, buses and other
vehicles;
o stationary applications, such as residences, commercial buildings
and industrial operations; and
o portable applications, such as machinery, equipment and electronic
devices.
We expect significant growth from this opportunity in the second half of this
decade.
Transportation Market. We believe that manufacturers of automobiles,
buses and other vehicles are searching for a viable alternative to the internal
combustion engine. We also believe that PEM fuel cells have the potential to
provide the power of an internal combustion engine, to reduce or eliminate
polluting emissions, and to lower vehicle operating costs through higher fuel
efficiency and lower maintenance costs. The use of fuel cell systems in the
global transportation market segment was projected in June 2002 by
PricewaterhouseCoopers LLP to reach 1.6 million units by 2011.
We believe, based on actual revenues and statements by Ballard Power
Systems customers and other automobile manufacturers, that commercial sales of
PEM fuel cells for use in automobiles began in late 2002 and will increase in
2003. For example, Honda and Toyota announced that they had released their FCX
and FCHV fuel cell vehicles, respectively, in 2002, a year ahead of schedule. In
addition, DaimlerChrysler is expected to have 30 of its Citaro fuel cell buses
operating in ten European cities and to release its F-cell fuel cell vehicle in
2003.
We also believe that the significant market opportunities for fuel cell
vehicles will be supported by governmental programs. In January 2002, the Bush
administration launched a new program called Freedom Cooperative Automotive
Research ("FREEDOMCAR") aimed at spurring the growth of hydrogen fuel cells for
next generation cars and trucks. In January 2003, the Bush administration
launched FreedomFUEL which, in connection with FreedomCAR, raises the U.S.
government's commitment to fuel cell research by focusing on technologies and
infrastructure needed to produce, distribute and store hydrogen. About $1.7
billion of funding is proposed over the next five years under these programs.
We believe that Ballard Power Systems is the world's leader in the
development and commercialization of PEM fuel cells. For example, eleven out of
the fourteen prototype fuel cell vehicles in the California Fuel Cell
Partnership are powered by Ballard Power Systems fuel cells, including the FC5
developed by Ford Motor Company and the NECAR 4A and 5, Jeep Commander and, most
recently, the F-Cell
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developed by DaimlerChrysler. In addition, Honda's FCX vehicle is, and
DaimlerChrysler's Citaro bus and F-cell vehicle will be, powered by Ballard
Power Systems' Mark 900 fuel cells.
Advanced flexible graphite can be used in the production of materials,
components and products for PEM fuel cells and fuel cell systems. We market our
advanced flexible graphite products for fuel cell applications under the
GRAFCELL(R) name. GRAFCELL(R) advanced flexible graphite is included in Honda's
FCX vehicle and the DaimlerChrysler Citaro bus and F-Cell vehicle. In addition,
it will be included in, among others, the Ballard Power Systems Mark 900 fuel
cells to be delivered to Ford (a Cdn. $34.5 million sale by Ballard Power
Systems, the largest single fuel cell stack order in the industry to date) and
Ballard Power Systems fuel cell stacks to be provided to Honda (a Cdn. $25.9
million sale by Ballard Power Systems).
Stationary Power Market. Fuel cells have the potential to provide
electric power for residential, commercial and industrial stationary
applications. Long-term increases in demand for these applications are expected,
driven by continued growth of digital and new communications systems and
infrastructures and industrialization of developing nations as well as continued
population and personal income growth. We believe that demand for technologies
such as fuel cells will be driven by requirements for uninterruptible electric
power with a high degree of reliability and distributed power generation
capability. Commercial sales are expected to begin with residential and general
stationary systems in 2003. We believe that the North American market for
stationary fuel cells will be about $7 billion in 2011.
Portable Power Market. Fuel cells have the potential to provide
electric power currently provided by rechargeable and nonrechargeable batteries
in many portable electronic devices used in consumer, construction, marine and
industrial applications. The fastest growing market opportunity is expected to
be portable electronic devices, including laptop computers, cell phones and
handheld devices. According to Allied Business Intelligence, Inc., over 40
billion batteries are produced worldwide each year and, in 1999, the global
rechargeable battery market alone was estimated to be about $4 billion, with
annual growth rates approaching 16%. Commercial sales of fuel cells for these
applications are expected to begin with small portable system applications in
2003.
ELECTRONIC THERMAL MANAGEMENT PRODUCTS. When electronic devices are
used they generate heat. Dissipation of this heat is essential in order for
these devices to operate properly for extended periods. Typically, the more
advanced the device the more heat it generates. Electronics manufacturers
are currently experiencing constraints in the development of even more advanced
devices because of the limitations of current thermal management products and
technology to dissipate the higher levels of heat generated. We are developing
and introducing high quality, highly engineered advanced flexible graphite
products, designs and solutions that improve thermal management in electronic
applications, including computers and communications, industrial, military,
office and automotive equipment.
Our products include thermal interface products, heat sinks, heat
spreaders and heat pipe products. Thermal interface products are those products
that reside between a chip set or other heat generating unit in a device and the
remaining components in the heat dissipation system in the device. Heat sinks
are finned units (similar to radiators) that dissipate heat via air movement
into the surrounding environment. Heat spreaders or pipes are engineered plates
or tubes that move or spread heat from hot spots, such as a processing chip, to
other locations in the device for dissipation into the environment.
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We expect that our products' superior ability to manage heat will allow
engineers to redesign electronic devices to reduce cost, size and weight while
improving performance. Our products offer many advantages over competitive
products, such as copper or aluminum. These advantages include:
o excellent ability to conduct heat;
o mechanical and thermal stability;
o lightweight, compressible and conformable nature;
o cost competitiveness; and
o ease of handling.
Our line of eGRAF(TM) thermal management products are designed to aid
the cooling of chip sets and other heat generating components in computers,
communications equipment and other electronic devices. We can provide custom or
off-the-shelf products and sophisticated solutions for cooling complex devices.
Our products are approved by customers for use in over 75 applications. For
example, in 2002, we received an eGRAF(TM) thermal management component approval
from Pelago Networks for use in the telecommunications industry, marking a new
application for our products. During 2002, we also completed our first
commercial sales of eGRAF(TM) heat spreaders and sinks. We obtained orders from
industry leading electronic companies like IBM, Hitachi, Nortel, Maxtor and
Agilent.
In December 2001, we announced the development of our new, advanced
eGRAF(TM) HiTherm series of thermal interface products designed to provide lower
thermal resistance and superior thermal conductivity. Qualification efforts
moved forward in 2002 with customers such as IBM and Intel, who have indicated
about a 40% improvement in thermal conductivity and a 45% reduction in thermal
resistance as compared to the earlier eGRAF(TM) thermal interface products.
We believe that the thermal component market for computer,
communication, industrial, military, office and automotive equipment
applications was about $3 billion in 2001. We are targeting the following
markets:
o thermal interface products: a projected market of about $300
million in annual sales by 2006 and an annual growth rate of about
13% from 2001 through 2006;
o heat sink products: a projected market of about $900 million in
annual sales by 2006 and an annual growth rate of about 7% from
2001 through 2006; and
o heat spreader and heat pipe products: a projected market of about
$600 million in annual sales by 2006 and an annual growth rate of
about 15% from 2001 through 2006;
in each case as projected in 2001 by Business Communications Company, Inc. and
Prismark Partners L.L.C.
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FIRE RETARDANT AND INDUSTRIAL THERMAL MANAGEMENT PRODUCTS AND OTHER
PRODUCTS AND SERVICES. We market engineered expandable graphite under the
GRAFGUARD(R) name as a fire retardant additive for materials that require
improved fire protection characteristics, including wood products, foam,
plastics and other construction and building materials. We have developed
engineered expandable graphite that expands when exposed to heat and can be used
to improve the performance of traditional fire retardant additives, including
phosphates, halogens and nitrogen compounds. We believe that growth in the use
of expandable graphite will be driven by increasingly stringent performance
requirements for fire retardant materials. SRI Consulting estimated that the
worldwide market for flame retardants in 1998 was about $2.1 billion.
Advanced flexible graphite can be used in the production of materials,
components and products of industrial thermal management applications. We market
our advanced flexible graphite products for these applications under the
GRAFSHIELD(R) name. We believe that engineered natural graphite products can
provide superior heat management solutions for insulation packages, induction
furnaces, high temperature vacuum furnaces and direct solidification furnaces,
and intend to target these markets. We believe that the market for these
products was about $200 million worldwide in 2001.
CARBON MATERIALS LINE OF BUSINESS
Our carbon materials line of business manufactures and delivers high
quality carbon electrodes, carbon, semi-graphitic and graphite refractory bricks
and carbon refractory blocks.
CARBON ELECTRODES. Carbon electrodes are used primarily to produce
silicon metal, which is consumed in the production of aluminum. Carbon
electrodes are also used in the production of ferronickel and thermal
phosphorous. Carbon electrodes are used and consumed in a manner similar
to that of graphite electrodes, although at lower temperatures and with
different consumption rates. We believe that demand for carbon electrodes
fluctuates based primarily on changes in production of silicon metal. We also
believe that the silicon metal industry is directly impacted by changes in
global and regional economic conditions. We estimate that demand for carbon
electrodes was about 86,000 metric tons in 2000 and about 69,000 metric tons in
each of 2001 and 2002.
We estimate that we sold about 26% of the carbon electrodes sold in the
world in 2002. We estimate that the worldwide market for carbon electrodes was
about $110 million in 2002. There are two significant manufacturers of carbon
electrodes in the world. We are the only manufacturer of carbon electrodes in
the Western Hemisphere.
REFRACTORIES. Semi-graphitic and carbon refractory grade bricks are
used primarily as chemical industry tank and reactor linings and blast furnace
and submerged arc furnace hearth walls. These bricks have excellent resistance
to corrosion and abrasion. Our carbon brick is one of the established standards
for North American blast furnaces. Our semi-graphitic brick is used where higher
conductivity is required or when additional abrasion resistance is desired. Our
bricks are made in a multitude of standard shapes and sizes, and can also be cut
to custom sizes.
Graphite refractory grade brick is used primarily for its high thermal
conductivity and the ease with which it can be machined to large or complex
shapes. Common applications in blast furnace and submerged arc furnaces are
cooling courses in the hearth bottoms for heat distribution and removal, backup
linings in hearth walls for improved heat transfer and safety, and lintels over
copper cooling plates where a single brick cannot span the cooling plate.
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Carbon refractory blocks are used primarily as hearth bottom pads in
blast furnaces and submerged arc furnaces, for which they are machined to shape
and assembled in a variety of designs. We also provide special shapes (such as
sidewall blocks, tap blocks, tuyere surrounds and runner liners) for blast
furnaces, submerged arc furnaces and cupola furnaces.
PLANNING, PRODUCTION AND DISTRIBUTION
PLANNING
We plan and source our graphite electrode and cathode production
globally. Our global planning activities seek to maximize our cash flow from
existing assets by scheduling the optimum product mix from our network of fully
integrated state-of-the-art graphite electrode and cathode manufacturing
facilities in diverse geographic regions. We deploy synchronous work processes
at most of our manufacturing facilities. We have also installed and continue to
install and upgrade proprietary process technologies at our synthetic graphite
manufacturing facilities and use statistical process controls in our
manufacturing processes.
We have developed, and begun installing, a global information system
using J.D. Edwards One World software for both enterprise resource planning and
advanced production planning for managing our supply chains. The advanced
planning capabilities that we have developed for our global synthetic graphite
manufacturing capacity allow us to use our modularized capacity to seek to
optimize, under then current conditions, changes in variables affecting
profitability, including variable production costs, changes in currency exchange
rates and changes in product mix. These capabilities also enable us to seek to
maximize capacity utilization at as many of our facilities as possible as well
as minimize our average fixed production cost per unit produced. We believe that
our global manufacturing network provides a significant competitive advantage
with respect to operational flexibility to timely service customers and maximize
profitability. Our network also helps us to minimize risks associated with
dependence on any single economic region.
PRODUCTION
ELECTRODES AND CATHODES. The manufacture of a graphite electrode takes,
on average, about two months. Graphite electrodes range in size from three
inches to 30 inches in diameter and two feet to nine feet in length and weigh
between 20 pounds and 4,800 pounds (2.2 metric tons).
The manufacture of graphite electrodes involves the six main processes
described below:
Forming: Calcined petroleum coke is crushed, screened,
sized and blended in a heated vessel with coal
tar pitch. The resulting plastic mass is extruded
through a forming press and cut into cylindrical
lengths (called "green" electrodes) before
cooling in a water bath.
Baking: The "green" electrodes are baked at about 1,400
degrees Fahrenheit in specially designed furnaces
to purify and solidify the pitch and burn off
impurities. After cooling, the electrodes are
cleaned, inspected and sample-tested.
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Impregnation: Baked electrodes are impregnated with a special
pitch when higher density, mechanical strength
and capability to withstand higher electric
currents are required.
Rebaking: The impregnated electrodes are rebaked to solidify the
special pitch and burn off impurities, thereby adding
strength to the electrodes.
Graphitizing: Using a process that we developed, the rebaked
electrodes are heated in longitudinal electric
resistance furnaces at about 5,000 degrees
Fahrenheit to restructure the carbon to its
characteristically crystalline form, graphite.
After this process, the electrodes are gradually
cooled, cleaned, inspected and sample-tested.
Machining: After graphitizing, the electrodes are machined
to comply with international specifications
governing outside diameters, overall lengths and
joint details. Tapered sockets are
machine-threaded at each end of the electrode to
permit the joining of electrodes in columns by
means of correspondingly double-tapered
machine-threaded graphite nipples (called "PINS").
Cathodes range in size from 5 feet to 12 feet and weigh between 800
pounds and 3,700 pounds. Graphite cathodes are manufactured by a comparable
process to graphite electrodes. Carbon electrodes (which can be up to 55 inches
in diameter) and carbon cathodes are manufactured by a comparable process
(excluding impregnation and graphitization). Other carbon materials are
manufactured using a process comparable to that for carbon electrodes or a
proprietary hot press process. We believe that we manufacture the broadest range
of sizes in graphite electrodes and cathodes and that the quality of our
electrodes and cathodes is competitive with or better than that of comparable
products of any other major manufacturer.
We generally warrant to our customers that our electrodes and cathodes
will meet our specifications. Electrode and cathode returns and replacements
have aggregated less than 1% of net sales in each of the last three years.
We have the capacity to manufacture about 210,000 metric tons of
graphite electrodes annually and about 40,000 metric tons of cathodes annually.
We have the capacity to manufacture about 30,000 metric tons of carbon
electrodes annually. The following table sets forth certain information
regarding our sales volumes:
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
2000 2001 2002
---- ---- ----
(Metric tons)
<s> <c> <c> <c>
Volume of graphite electrodes sold.............. 217,000 174,000 180,000
Volume of cathodes sold......................... 35,000 33,000 37,000
Volume of carbon electrodes sold................ 23,000 19,000 17,000
</table>
Graphite electrodes are manufactured in Brazil, Mexico, South Africa,
France, Spain and Russia. Cathodes are manufactured in France and Brazil. Carbon
electrodes and other carbon materials are manufactured in the U.S.
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Major maintenance at our facilities is conducted on an ongoing basis.
Manufacturing operations at any facility may be subject to curtailment due to
new laws or regulations, changes in interpretations of existing laws or
regulations or changes in governmental enforcement policies.
ADVANCED SYNTHETIC GRAPHITE. Advanced synthetic graphite products are
manufactured by a comparable process to graphite electrodes. Our facilities have
the capability to process a wide range of raw materials, mill, mix and extrude
or mold small to very large graphite blocks, impregnate, bake and graphitize the
blocks, purify the blocks to reduce the impurities to parts per million levels,
and machine the blocks using advanced machining stations to manufacture products
finished to high tolerances and unique shapes. Advanced graphite materials are
manufactured in the U.S. and France.
NATURAL GRAPHITE. We use a proprietary process to convert natural
graphite flake into expandable graphite. During this process, we can manufacture
expandable graphite with a number of specific properties. For example, we can
change its sensitivity to temperature, modify its particle size and give it long
term stability. We manufacture flexible graphite by further processing
expandable graphite. We fabricate finished gasket and sealing products by
fabricating flexible graphite into sheet, laminate and tape products. We
manufacture advanced flexible graphite by subjecting expandable or flexible
graphite to additional proprietary processing. These additional processing steps
alter the properties and characteristics of the graphite to make materials with
modified electrical, thermal and strength characteristics.
Our natural graphite line of business operates two state-of-the-art
manufacturing facilities in the U.S. These facilities have the capability to
chemically treat natural graphite flake, bake the flake in high temperature
furnaces to expand the graphite flake, mechanically form and calender the
expanded flake, and form and shape finished and intermediate products. In August
2001, AET's advanced flexible graphite line for fuel cell component and
electronic thermal management product manufacturing successfully began
production.
Our natural graphite line of business has a quality assurance system
designed to meet the most stringent requirements of its customers.
QUALITY STANDARDS. Certain of our global manufacturing facilities are
certified and registered to QS-9000, the U.S. quality standard, as well as
ISO-9002, the international quality standard.
RAW MATERIALS AND SUPPLIERS. The primary raw materials for electrodes
and cathodes are engineered by-products and residues of the petroleum and coal
industries. We use these raw materials because of their high carbon content. The
primary raw materials for graphite electrodes and graphite cathodes are calcined
petroleum cokes (needle coke for electrodes and regular grade cokes for
cathodes), coal tar pitch and petroleum pitch. The primary raw materials for
carbon electrodes and carbon cathodes are calcined anthracite coal and coal tar
pitch and, in some instances, a petroleum coke-based material. The primary raw
material for our natural graphite products is natural graphite flake.
Typically, we purchase the raw materials for our synthetic graphite and
carbon materials lines of business from a variety of sources, under short term
contracts or on the spot market, in each case at fluctuating prices. We believe
that adequate supplies of these raw materials are available at market prices. We
purchase the majority of our petroleum coke from
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ConocoPhillips. Since the beginning of 2001, these purchases have been made
pursuant to a seven year supply agreement. In addition, in 2001, we shut down
our coal calcining operations primarily because we entered into a five-year
agreement to purchase calcined coal from a third party at a lower net effective
cost than we could produce it for ourselves. These agreements contain customary
terms and conditions. We believe that the quality and cost of these raw
materials on the whole is competitive with or better than those available to our
major competitors and that, under current conditions, these raw materials are
available in adequate quantities. We also believe that we are able to purchase
these raw materials on a more cost efficient basis than our competitors who have
more limited product lines and production volumes.
We believe that adequate supplies of natural graphite flake are
available at market prices. We entered into an arrangement with Mazarin Mining
Corporation Inc. to develop and commercialize a natural graphite deposit in
Canada. The initial phase of the feasibility study, relating to the quality of
the natural graphite flake in the deposit, was completed in 2000 with favorable
results. The second phase of the feasibility study is expected to be completed
by the end of 2004. The feasibility study is expected to cost about $2 million,
for which we will receive a 25% interest in the mine. After completion of the
study, we may decide to commence commercial production of the deposit with
Mazarin, exercise an option to extend the period for the development decision
for five one-year periods until 2009, or terminate the arrangement. In the case
of extension, we will have to make option payments totaling Cdn. $800,000 if the
option is extended for the full five years. We have the right to purchase the
entire production of natural graphite flake from the deposit. We believe that at
full capacity, if developed, the deposit should produce about 50,000 tons of
natural graphite flake per year, which would make it one of the largest single
sources of natural graphite flake in the world. We believe that, if developed,
the deposit would have sufficient reserves to meet our projected needs for the
next 10 to 15 years. Consummation of the arrangement is subject to, among other
things, the receipt of any required governmental approvals.
Electric power or natural gas used in manufacturing processes is
purchased from local suppliers primarily under short-term contracts or in the
spot market.
DISTRIBUTION
Our graphite electrode customers generally seek to negotiate prices and
anticipated volumes on an annual basis. These customers then generally place
orders for graphite electrodes three to six months prior to the specified
delivery date. These orders are cancelable by the customer. Therefore, we
manufacture graphite electrodes and seek to manage graphite electrode inventory
levels to meet rolling sales forecasts. We generally seek to maintain an
appropriately low level of finished graphite electrode inventories, taking into
account these factors and the length of graphite electrode manufacturing cycles.
Our other products are generally manufactured or fabricated to meet customer
orders. As a result, we do not manage or operate based on backlog.
Finished products are generally stored at our manufacturing facilities.
We ship our finished products to customers primarily by truck and ship, using
"just in time" techniques where practical. Limited quantities of some finished
products are also stored at local warehouses around the world to meet customer
needs. Accordingly, inventory levels will vary with demand for these finished
products. Recently, we have entered into long term supply contracts with
purchasers of our carbon electrodes. We may, from time to time in the future,
enter into long term supply contracts with purchasers of our other products.
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Proximity of manufacturing facilities to customers can provide a
competitive advantage in terms of cost of delivery of electrodes and cathodes.
The significance of these costs is affected by fluctuations in exchange rates,
methods of shipment, import duties and whether the manufacturing facilities are
located in the same economic trading region as the customer. We believe that we
are generally better positioned globally in terms of such proximity than our
major competitors to supply graphite electrodes and cathodes.
SALES AND CUSTOMER SERVICE
SYNTHETIC GRAPHITE. Our synthetic graphite line of business sells
products in every major geographic market primarily through its direct sales
force, whose members are trained and experienced with our products. Its direct
sales force operates from about 17 sales offices located around the world. It
also sells products through independent sales agents and distributors.
We have customer technical service personnel based around the world,
and we assist customers to maximize their production and minimize their costs.
We employ about 40 engineers to provide technical services and advice in all
areas of electric arc steel production and aluminum smelting furnace design,
commissioning and operation, electrode and cathode specification and use, and
related matters. This technical service includes periodically monitoring certain
customers' electric arc steel furnace efficiency levels. We believe that we have
more technical service engineers located in more countries than any of our
competitors.
The sales and service groups of our synthetic graphite line of business
include those dedicated to cathodes who are employed by Carbone Savoie. Carbone
Savoie's sales and service groups work closely with those of Pechiney to
maximize use of their respective products and technologies.
NATURAL GRAPHITE. Our natural graphite line of business has about 8
direct field sales employees in the U.S. and about 2 in Europe. It also
sells products through independent sales agents and distributors. We have
customer service personnel, supported by our staff of development scientists and
manufacturing engineers, to assist customers in learning about and using our
products, improving their manufacturing processes and operations and solving
their technical dilemmas. Our natural graphite line of business works closely
with its customers to develop and test prototype materials. Its customer sales
team coordinates sales, technology and manufacturing efforts to meet customer
needs.
CARBON MATERIALS. Our carbon materials line of business sells products
through the direct global sales force of our synthetic line of business, located
in all of our major markets, as well as through independent agents and
distributors. Our U.S. sales office coordinates the activities of our
experienced sales staff and these agents and distributors. Our experienced
engineering staff provides technical service to our customers around the world.
We provide specialized technical assistance to submerged arc and blast furnace
operators with regard to product performance, furnace monitoring and operations
analysis. We believe that our customer technical service staff is highly
regarded.
TECHNOLOGY
One of our core competencies is graphite and carbon materials sciences,
including high temperature processing. We have over 100 years of experience in
the research and development
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of technology and know-how involving these sciences and processes. Our
intellectual property portfolio is extensive. We believe that we operate the
premier synthetic and natural graphite research and development facilities. We
also operate a state-of-the-art testing facility and pilot plant capable of
conducting physical and analytical testing to develop natural and synthetic
graphite and carbon products and process technology. We seek to exploit this
competency across all of our businesses to improve existing products and develop
and commercialize new products.
RESEARCH AND DEVELOPMENT
We conduct our research and development program both independently and
in conjunction with our strategic partners and customers. We have two dedicated
technology centers, one in Parma, Ohio, which is used by all of our lines of
business, and the other in Venissieux, France, which is used by Carbone Savoie.
We have the capability to provide small quantity or trial quantity production
through a pilot plant facility located in Parma. Our state-of-the-art testing
facility is also located in Parma. The activities at these centers and
facilities are integrated with the efforts of our engineers at our manufacturing
facilities who are focused on improving manufacturing processes.
Past developments by us in our synthetic graphite line of business
include larger and stronger electrodes, new chemical additives to enhance raw
materials used in the manufacture of graphite electrodes and cold pastes with
reduced environmental impact for use with cathodes. We have received significant
recognition for the high quality of our products and have been awarded preferred
or certified supplier status by many major steel and aluminum companies as well
as industry groups and other customers.
Two areas of current focus by our synthetic graphite line of business
are further improvements in supersize graphite electrodes and in graphite
cathodes. Supersize electrodes are used in the modern high-powered, larger
electric arc furnaces that constitute the majority of newly built furnaces. In
2002, we introduced a next generation of supersize graphite electrode for the
most demanding electric arc steel producing furnaces. Graphite cathodes can be
used instead of carbon cathodes in smelting aluminum. Use of graphite cathodes
allows for substantial improvements in process efficiency. We believe that the
market for supersize graphite electrodes and graphite cathodes represent growth
sectors of the graphite electrode and cathode businesses. There are about five
other manufacturers of supersize graphite electrodes and two other large
manufacturers of graphite cathodes in the world.
A significant portion of our research and development programs is
focused on our alliance with Ballard Power Systems, on our alliances with
companies that use or specify the use of thermal management technologies, on our
technology licensing and technical services businesses and on new product
development.
We believe that our research and development capabilities were an
important factor in selection of us by Ballard Power System to enter into an
exclusive long term product development and collaboration agreement. Our
combined development efforts have led to significant advancements in materials
and components used in its fuel cells. We also believe that the strength of our
research and development capabilities and our technology were important factors
in the selection of us as a strategic partner by other companies.
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TECHNOLOGY LICENSING AND TECHNICAL SERVICES
We offer, through licensing contracts, rights to use our intellectual
property to other firms developing or manufacturing products. We also provide,
through service contracts, research and development services, extensive product
testing services, and graphite and carbon process and product technology
information services to customers, suppliers and universities to assist in their
development of new or improved process and product technology.
To further capitalize on the value of our technology outside of our
existing product lines, we launched our new HT2 technology licensing and
services business in 2001. This business provides cost-effective technical
services for a broad range of markets and licenses our proprietary technology
for a broad range of applications through its web site, www.HT2.com. The web
site includes technical papers on graphite and carbon science, technical
literature, searches, industry news, and access to services such as high
temperature testing and analysis, high temperature heat treating, consulting for
process and product development, and technology licensing.
INTELLECTUAL PROPERTY
We own, and have obtained licenses to, various domestic and foreign
patents related to our technologies. These patents expire at various times over
the next two decades. The patents that we own and have licensed, in the
aggregate, are important to our competitive position and growth opportunities,
particularly in connection with our natural graphite line of business.
In 2002, we filed 49 U.S. and 22 foreign patent applications pertaining
to our natural graphite line of business and 4 U.S. and 11 foreign patent
applications pertaining to our synthetic graphite line of business. Also, in
2002, we were granted 15 U.S. and 11 foreign patents for our natural graphite
line of business and 2 U.S. and 3 foreign patents for our synthetic graphite
line of business. Among our competitors, we hold the highest number of patents
for flexible graphite, as well as the largest number of patents relating to the
use of flexible graphite for PEM fuel cell applications.
We own, and have obtained licenses to, various trade names and
trademarks used in our businesses. For example, the trade name and trademark
UCAR are owned by Union Carbide Corporation (which has been acquired by Dow
Chemical Company) and are licensed to us on a worldwide, exclusive and
royalty-free basis until 2015. This particular license automatically renews for
successive ten-year periods. It permits non-renewal by Union Carbide commencing
after the first ten-year renewal period upon five years' notice of non-renewal.
The trade name and trademark CARBONE SAVOIE are owned by Carbone Savoie and are
used in connection with cathodes manufactured by it. The trademark CARBONE
SAVOIE is registered in many countries throughout the world.
We have an extensive amount of proprietary know-how and information.
This proprietary know-how and information is also important to establishing and
maintaining our competitive position and growth opportunities. We seek to
protect our proprietary know-how and information, through, among other things,
the requirement that employees, consultants, strategic partners and others, who
have access to such proprietary information and know-how, enter into
confidentiality or restricted use agreements.
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STRATEGIC ALLIANCES
We are pursuing strategic alliances that enhance or complement our
existing or related businesses. Strategic alliances may be in the form of joint
venture, licensing, supply or other arrangements that we believe will accelerate
product commercialization, increase cash flow or leverage our strengths.
SYNTHETIC GRAPHITE. We have developed a strategic alliance with
Pechiney in the cathode business, which includes our relationship with it as a
significant customer under a long term supply contract. Our joint venture with
Pechiney has allied us with the world recognized leader in aluminum smelting
technology. Under our alliance, Carbone Savoie holds our entire cathode
manufacturing capacity, which is about 40,000 metric tons of cathodes annually.
With this alliance, we believe that we are positioned as the quality leader in
the low cost production of graphite cathodes, the preferred technology for
deployment in new aluminum smelting furnaces due to their ability to provide
substantial improvements in process efficiency. We are using Pechiney's smelting
technology and our graphite technology and expertise in high temperature
industrial applications to develop further improvements in graphite cathodes.
Our graphite cathodes are used by Pechiney in its own plants and marketed to its
licensees as well as to third parties.
In April 2001, we entered into a joint venture with Jilin to produce
and sell high-quality graphite electrodes in China. If successfully implemented,
the joint venture would utilize renovated capacity at Jilin's main facility in
Jilin City and complete additions at another facility in Changchun that were
begun by Jilin. During the 2002 fourth quarter, we impaired our investments
associated with this joint venture. This impairment results from uncertainty
about the completion and start-up of the facilities due to the effects that the
challenging 2002 graphite electrode industry conditions have had on Jilin. We
continue to work closely with Jilin on production alternatives.
In the 2001 fourth quarter, we entered into a strategic alliance with
AMI GE, S.A. de C.V., a Mexican company that is 50%-owned by General Electric
Company. AMI GE is a supplier of furnace regulators and other furnace equipment.
Based in Mexico, AMI GE is seeking to expand its services globally. Under the
alliance, AMI GE will market our technical services to steel producers and
others. We believe that the range and quality of our technical services will
provide a competitive advantage to AMI GE, and AMI GE will provide us with
opportunities to increase sales of our products and services to new and existing
customers.
NATURAL GRAPHITE. We have been working with Ballard Power Systems since
1992 on developing natural graphite-based materials for use in its PEM fuel
cells. In 1999, we entered into a collaboration agreement with Ballard Power
Systems to coordinate our respective research and development efforts on flow
field plates and a supply agreement for flexible graphite materials. In 2000,
Ballard Power Systems launched its Mark 900 series fuel cell stack and announced
that
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it was the foundation for future Ballard Power Systems' fuel cells for
transportation, stationary and portable applications. The flow field plates used
in the Mark 900 are made from our GRAFCELL(R) advanced flexible graphite
products.
In October 2001, Ballard Power Systems launched its most advanced PEM
fuel cell platform to date, the Mark 902. GRAFCELL(R) advanced flexible graphite
is a strategic material for the Mark 902. Building upon the Mark 900, the
advantages of the Mark 902 include lower cost, improved design for volume
manufacturing, improved reliability, higher power density and enhanced
compatibility with customer system requirements. The unit cell design of the
Mark 902 allows scalable combinations to achieve a variety of power outputs
ranging from 10 kilowatt to 300 kilowatt and is designed to allow configuration
for stationary and transportation applications.
In June 2001, our subsidiary, AET, entered into a new exclusive
development and collaboration agreement and a new exclusive long term supply
agreement with Ballard Power Systems, which significantly expand the scope and
term of the 1999 agreements. In addition, Ballard Power Systems became a
strategic investor in AET, 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 PEM fuel cells. As an investor in AET, Ballard Power Systems has
rights of first refusal with respect to certain equity ownership transactions,
tag along and drag along rights, and preemptive and other rights to acquire
additional equity ownership under certain limited circumstances.
The scope of the new exclusive development and collaboration agreement
includes natural graphite-based materials and components, including flow field
plates and gas diffusion layers, for use in PEM 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, AET will be
the exclusive manufacturer and supplier of natural graphite-based materials for
Ballard Power Systems' fuel cells and fuel cell systems. AET will also be the
exclusive manufacturer of natural graphite-based components, other than those
components Ballard Power Systems manufactures for itself. The initial term of
this agreement, which contains customary terms and conditions, extends through
2016. We have the right to manufacture and sell, after agreed upon release
dates, natural graphite-based materials and components for use in PEM fuel cells
to other parties in the fuel cell industry. In connection with the manufacture
and sale of components, Ballard Power Systems will grant AET a royalty-bearing
license for related manufacturing process technology.
In July 2001, AET entered into a thermal design joint development
agreement with Menova Engineering Inc. relating to the design and development of
thermal components and heat solution products for computer and communications
applications using eGRAF(TM) thermal management products. Menova will work
exclusively with AET in the design and testing of new, graphite-based thermal
solutions. In May 2001, AET also entered into a product manufacturing services
agreement with JBC Seals, Packing & Kits Inc., which expands AET's ability to
produce high volume, custom eGRAF(TM) thermal interface and other electronic
thermal management products.
In the 2001 second quarter, AET entered into a joint development
program with a leading chip manufacturer to introduce thermal interface products
for the next generation hand-held and portable devices.
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In December 2000, we entered into a license and technical services
agreement with ConocoPhillips to license our technology for use at a carbon
fiber manufacturing facility that ConocoPhillips was building in Ponca City,
Oklahoma. In February 2003, ConocoPhillips announced that it would no longer be
pursuing its carbon fiber initiative. Work under the agreement has been
postponed until the parties have had an opportunity to discuss the implications
of ConocoPhillips' announcement.
COMPETITION
SYNTHETIC GRAPHITE AND CARBON MATERIALS. Competition in the graphite
electrode, cathode, advanced synthetic graphite and carbon materials businesses
is based primarily on price, product quality and customer service.
There is one other global manufacturer and about ten other notable
regional or local manufacturers of graphite electrodes, including SGL Carbon
(whose plants are located in North America and Europe), and four manufacturers
in Japan (one of whom, Showa Denko Carbon, Inc., has a plant located in the
U.S.).
The downturn in global and regional economic conditions and the
antitrust investigations, lawsuits and claims are having an impact on the
graphite electrode industry. We believe that, at a minimum, these impacts
include increased price competition and increased debt or cost burdens, or both,
for most manufacturers in the industry. In December 1998, the U.S. subsidiary of
SGL Carbon AG filed for protection under the U.S. Bankruptcy Code. This
proceeding was dismissed in March 2000 on the grounds that it was not commenced
in good faith. In October 2001, The Carbide/Graphite Group, Inc., a former
competitor, filed for protection under the U.S. Bankruptcy Code and subsequently
ceased operations in December 2002. It is possible that other competitors could
make similar bankruptcy filings. It is also possible that, as a result of these
bankruptcy filings or increased debt or costs, one or more of our competitors
could divest graphite electrode manufacturing facilities. This could increase
the number or change the capabilities of our competitors. It is not uncommon for
companies subject to bankruptcy filings to enjoy, at least temporarily, a cost
advantage as compared to their competitors. This advantage enables them to
compete more aggressively on price.
There are seven notable manufacturers of cathodes in the world. We
believe that we and SGL Carbon are the largest manufacturers in the world. There
are two significant manufacturers of carbon electrodes in the world, us and SGL
Carbon. There are about five significant manufacturers of advanced synthetic
graphite materials in the world.
In general, the manufacture of high quality graphite and carbon
products is a mature, capital intensive business that requires extensive process
expertise and know-how regarding working with various raw materials and with raw
material suppliers, furnace manufacturers and steel, aluminum or other metal
producers or other end users (including working on the specific applications for
finished products). It also requires high quality raw material sources and a
developed energy supply infrastructure. There have been no significant entrants
in the manufacture of graphite electrodes since 1950. We believe that it is
unlikely that new "greenfield" graphite electrode manufacturing facilities will
be built during the next several years due to, among other things, the
relatively high cost of building a new facility and the need for extensive
manufacturing process know-how. We believe that there are no commercially viable
substitutes for graphite electrodes in electric arc steel production furnaces or
cathodes in
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aluminum smelting furnaces. We are aware of commercially viable technologies
that are competitive with carbon electrodes.
NATURAL GRAPHITE. Competition in the natural graphite business with
respect to existing products sold to the transportation, semiconductor,
aerospace and electronic thermal management markets is based primarily on
quality and price. Competition with respect to services and new products is, and
is expected to be, based primarily on product and service innovation,
performance and cost effectiveness as well as customer service, with the
relative importance of these factors varying among services, products and
customers.
Competitors include companies located around the world that develop and
manufacture natural graphite-based products, including SGL Carbon, Le Carbone
S.A. (Pty) Ltd. and companies that develop, manufacture or provide substitute or
alternative materials, products, services or solutions. We are one of two
significant manufacturers of flexible graphite products in the world. SGL Carbon
was the largest manufacturer of those products in 2002.
Our PEM fuel cell products compete with other graphitic products,
including fibers, composites and synthetic graphite, and metal-based products
such as stainless steel. Our electronic thermal management products compete with
a wide variety of materials, including copper and other metals, ceramics,
conductive rubbers and greases. Our fire retardant products compete with
compounds containing phosphates, halogens and hydrated aluminas as well as many
other materials. Our sealing and gasket products compete with various fiber
products such as asbestos, cellulose and synthetic composites as well as
stainless steel and other metals. Our industrial thermal management products
compete with a wide variety of materials, including natural and synthetic
fibers, other carbon forms and metal-based products.
ENVIRONMENTAL MATTERS
We are subject to a wide variety of federal, state, local and foreign
laws and regulations relating to the presence, storage, handling, generation,
treatment, emission, release, discharge and disposal of hazardous, toxic and
other substances and wastes governing our current and former properties and
neighboring properties and our current operations. These laws and regulations
(and the enforcement thereof) are periodically changed and are becoming
increasingly stringent. We have experienced some level of regulatory scrutiny at
most of our current and former facilities, and have been required to take
remedial action and incurred related costs, in the past and may experience
further regulatory scrutiny, and may be required to take further remedial action
and incur additional costs, in the future. Although this has not been the case
in the past, these costs could have a material adverse effect on us in the
future.
The principal U.S. laws and regulations to which we are subject include
the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery
Act, the Safe Drinking Water Act and similar state and local laws which regulate
air emissions, water discharges and hazardous waste generation, treatment,
storage, handling, transportation and disposal. In addition, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 and the Small Business
Liability Relief and Brownfields Revitalization Act of 2002, and similar state
laws provide for responses to and liability for releases of hazardous substances
into the environment. The Toxic Substances Control Act and related laws are
designed to assess the risk of new products to health and to the environment at
early developmental stages. Finally, laws adopted
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or proposed in various states impose or may impose, as the case may be,
reporting or remediation requirements if operations cease or property is
transferred or sold.
Our manufacturing operations outside the U.S. are subject to the laws
and regulations of the countries in which those operations are conducted. These
laws and regulations primarily relate to pollution prevention and the control of
the impacts of industrial activities on the quality of the air, water and soil.
Regulated activities include, among other things: use of hazardous substances;
packaging, labeling and transportation of products; management and disposal of
toxic wastes; discharge of industrial and sanitary wastewater; and emissions to
the air.
We believe that we are currently in material compliance with the
federal, state, local and foreign environmental laws and regulations to which we
are subject. We have received and continue periodically to receive notices from
the U.S. Environmental Protection Agency or state environmental protection
agencies, as well as claims from others, alleging that we are a potentially
responsible party (a "PRP") under Superfund and similar state laws for past and
future remediation costs at hazardous substance disposal sites. Although
Superfund liability is joint and several, in general, final allocation of
responsibility at sites where there are multiple PRPs is made based on each
PRP's relative contribution of hazardous substances to the site. Based on
information currently available to us, we believe that any potential liability
we may have as a PRP will not have a material adverse effect on us.
We have sold or closed a number of facilities that had solid waste
landfills. In the case of sold facilities, we have retained ownership of the
landfills. We have closed these landfills, and we believe that we have done so
in material compliance with applicable laws and regulations. We continue to
monitor these landfills pursuant to applicable laws and regulations. To date,
the costs associated with the landfills have not been, and we do not anticipate
that future costs will be, material to us.
We establish accruals for environmental liabilities where it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. We adjust accruals as new remediation and other
commitments are made and as information becomes available which changes
estimates previously made.
Estimates of future costs of environmental protection are necessarily
imprecise due to numerous uncertainties, including the impact of new laws and
regulations, the availability and application of new and diverse technologies,
the extent of insurance coverage, the identification of new hazardous substance
disposal sites at which we may be a PRP and, in the case of sites subject to
Superfund and similar state laws, the ultimate allocation of costs among PRPs
and the final determination of remedial requirements. Subject to the inherent
imprecision in estimating such future costs, but taking into consideration our
experience to date regarding environmental matters of a similar nature and facts
currently known, we believe that costs and capital expenditures (in each case,
before adjustment for inflation) for environmental protection will not increase
materially over the next several years.
INSURANCE
We obtain insurance against civil liabilities relating to personal
injuries to third parties, for loss of or damage to property and for
environmental matters to the extent that it is currently available and provides
coverage that we believe is appropriate upon terms and conditions and for
premiums that we consider fair and reasonable. We believe that we have insurance
providing
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coverage for claims and in amounts that we believe appropriate as described
above. We cannot assure you, however, that we will not incur losses beyond the
limits of or outside the coverage of our insurance. We currently believe that
recovery under our insurance, if any, will not materially offset liabilities
that have or may become due in connection with antitrust investigations,
lawsuits or claims.
EMPLOYEES
At December 31, 2002, we had 3,885 employees, of which 1,894 were in
Europe (including Russia), 840 were in Mexico and Brazil, 362 were in South
Africa, 4 were in Canada, 778 were in the U.S. and 7 were in the Asia Pacific
region. At December 31, 2002, we had 2,717 hourly employees.
At December 31, 2002, about 66% of our worldwide employees were covered
by collective bargaining or similar agreements, which expire at various times in
each of the next several years. At December 31, 2002, about 810 employees, or
21% of our employees, were covered by agreements, which expire, or are subject
to renegotiation, at various times through December 31, 2003. We believe that,
in general, our relationships with our unions are satisfactory and that we will
be able to renew or extend our collective bargaining or similar agreements on
reasonable terms as they expire. We cannot assure you, however, that renewed or
extended agreements will be reached without a work stoppage or strike or will be
reached on terms satisfactory to us.
Excluding our subsidiaries prior to the time when we acquired them, we
have not had any material work stoppages or strikes during the past decade.
CORPORATE HISTORY
Our business was founded in 1886 by National Carbon Company. In 1917,
National Carbon Company and four other businesses were combined to become the
predecessor to Union Carbide Corporation. National Carbon Company eventually
became the Carbon Products Division of Union Carbide. In 1989, Union Carbide
realigned each of its worldwide businesses into separate subsidiaries. As part
of the realignment, the business of the Carbon Products Division was separated
from Union Carbide's other businesses and became owned by us. We remained wholly
owned by Union Carbide.
In 1991, Union Carbide sold 50% of our common equity held by it to
Mitsubishi Corporation for $232.5 million. At that time, we had total debt of
$297 million that we had assumed from Union Carbide. That debt consisted of $209
million of long term debt, $4 million of payments due within one year on long
term debt and $84 million of short term debt. In other words, treating each
parent as responsible for 50% of our debt, Union Carbide received and Mitsubishi
paid $381 million.
In January 1995, we consummated a leveraged equity recapitalization
pursuant to an agreement among Union Carbide, Mitsubishi, GTI and a corporation
affiliated with Blackstone Capital Partners II Merchant Banking Fund L.P. and
its affiliates. In the 1995 leveraged equity recapitalization:
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o GTI issued common stock representing about 75% of the then
outstanding common stock to Blackstone, an affiliate of JPMorgan
Chase Bank (formerly Chase Manhattan Bank) and certain members of
management for $203 million;
o GrafTech Global and certain of its foreign subsidiaries borrowed
$585 million under senior secured credit facilities arranged
through Chemical Bank, a predecessor of JPMorgan Chase Bank;
o GrafTech Global issued $375 million of senior subordinated notes;
o we repaid about $250 million of then existing indebtedness;
o GTI repurchased all of its common equity then held by Mitsubishi
for $406 million;
o GTI paid to Union Carbide a cash dividend of $347 million on our
common equity then held by Union Carbide, which common equity was
converted into about 25% of the common stock outstanding after the
1995 leveraged equity recapitalization; and
o certain members of management received restricted stock matching a
portion of the common stock purchased by them and options to
purchase up to an aggregate of about 12% of the common stock
outstanding after the 1995 leveraged equity recapitalization on a
fully diluted basis, subject to certain vesting requirements.
In addition, in the 1995 leveraged equity recapitalization, we
transferred all of our operating subsidiaries to GrafTech Global or subsidiaries
of GrafTech Global.
In August 1995, GTI completed an initial public offering of common
stock. In connection with the offering, GTI sold common stock representing 22%
of the common stock outstanding after the offering for net proceeds of $227
million and Union Carbide sold all of the common stock then owned by it for net
proceeds of $199 million. GrafTech Global used net proceeds received by GTI to
redeem $175 million aggregate principal amount of senior subordinated notes. We
used the balance of the net proceeds received by GTI for general corporate
purposes and to reduce other outstanding indebtedness.
In March 1996, Blackstone, an affiliate of Chemical Bank and certain
members of management sold shares of common stock in a secondary public
offering. After the offering, Blackstone owned about 20% of the then outstanding
common stock.
In February 1997, GTI's Board of Directors authorized a program which,
as amended in December 1997, authorized the repurchase of up to $200 million of
common stock at prevailing prices from time to time in the open market or
otherwise depending on market conditions and other factors, without any
established minimum or maximum time period or number of shares. GTI purchased an
aggregate of $92 million of common stock (including common stock repurchased
from Blackstone as described below) under this program. The last repurchase was
made in 1997. We may reactivate this program at any time.
In April 1997, Blackstone sold about 14% of the then outstanding common
stock in a secondary public offering. Concurrently with the offering, we
repurchased 1,300,000 shares of common stock from Blackstone for $48 million.
This repurchase constituted part of the stock
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repurchase program described above. After the offering and the repurchase,
Blackstone ceased to be a principal stockholder of GTI.
In June 1997, antitrust investigations by authorities in the U.S. and
the European Union were commenced against us and other producers and
distributors of graphite and carbon products. Subsequently, antitrust
investigations by authorities in other countries and civil antitrust lawsuits
were commenced and threatened against us and them.
In March 1998, we began to implement management changes, which resulted
in a new senior management team.
In February 2000, we completed a debt recapitalization and obtained the
Senior Facilities.
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.
In February 2002, we completed a private offering of $400 million
aggregate principal amount of Senior Notes at a price of 100% of principal
amount. In May 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.
RISK FACTORS AND FORWARD LOOKING STATEMENTS
RISKS RELATING TO US
WE ARE DEPENDENT ON THE GLOBAL STEEL AND OTHER METALS INDUSTRIES. OUR RESULTS OF
OPERATIONS MAY DETERIORATE DURING GLOBAL AND REGIONAL ECONOMIC DOWNTURNS.
Our principal product, graphite electrodes, which accounted for about
63% of our total net sales in 2002, is sold primarily to the electric arc
furnace steel production industry. Many of our other products are sold primarily
to other metals industries and the transportation industry. These are global
basic industries, and customers in these industries are located in every major
geographic market. As a result, our customers are affected by changes in global
and regional economic conditions. This, in turn, affects demand for, and prices
of, our products sold to these industries. Accordingly, we are directly affected
by changes in global and regional economic conditions. These conditions are
affected by events and circumstances beyond our control such as geopolitical
events (such as the war on terror and the circumstances involving Iraq and North
Korea), changes in demand by consumers, businesses and governments, and policy
decisions by governments and central banks.
In addition, demand for our products sold to these industries may be
adversely affected by improvements in those products as well as in the
manufacturing operations of customers, which reduce the rate of consumption or
use of our products for a given level of production by our customers. We
estimate that specific consumption declined from about 4.3 kilograms of graphite
electrodes per metric ton of steel produced in 1990 to about 2.4 kilograms per
metric ton in 2002. While we believe that the rate of decline of specific
consumption over the long term has become lower, we believe that there was a
slightly more significant decline in 2001 and 2002 than would otherwise have
been the case due to the shutdown of older, less efficient electric arc
furnaces.
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As a result of global and regional economic conditions, reductions in
specific consumption and other factors, demand for our graphite electrodes and
some of our other products sold to these industries has fluctuated
significantly. Prices have declined significantly since 1998, although we
implemented certain graphite electrode price increases in 2002 and 2003,
primarily with respect to sales in 2003. Since 1999, our net sales and net
income have declined significantly.
We believe that business conditions for most of our products (other
than cathodes) will remain challenging through 2003.
We cannot assure you that the electric arc furnace steel production
industry will continue to be the long term growth sector of the steel industry,
that the aluminum industry will continue to experience long term growth or that
any of the industries to which we sell products will experience recovery from
current economic conditions affecting them. Accordingly, we cannot assure you
that there will be stability or growth in demand for or prices of graphite
electrodes or our other products sold to these industries. An extended
continuation of current economic conditions or an adverse change in global or
certain regional economic conditions could materially adversely affect us.
ANY SUBSTANTIAL GROWTH IN NET SALES, CASH FLOW FROM OPERATIONS OR NET INCOME
FROM OUR NATURAL GRAPHITE LINE OF BUSINESS DEPENDS ON SUCCESSFULLY DEVELOPING,
INTRODUCING AND SELLING NATURAL GRAPHITE TECHNOLOGY AND PRODUCTS FOR EMERGING
APPLICATIONS ON A PROFITABLE BASIS. IF WE ARE NOT SUCCESSFUL, WE WILL NOT
ACHIEVE OUR PLANNED GROWTH.
Our planned growth depends on successful and profitable development and
sale primarily of:
o materials and components for PEM fuel cells and fuel cell systems;
and
o electronic thermal management products for electronic devices such
as computers and communications, industrial, military, office
equipment and automotive equipment.
Successful and profitable commercialization of technology and products
is subject to various risks, including risks beyond our control such as:
o the possibility that we may not be able to develop viable products
or, even if we develop viable products, that our products may not
gain commercial acceptance;
o the possibility that our commercially accepted products could be
subsequently displaced by other technologies or products;
o the possibility that, even if our products are incorporated in new
products of our customers, our customers' new products may not
become viable or commercially accepted or may be subsequently
displaced;
o the possibility that a mass market for commercially accepted
products, or for our customers' products which incorporate our
products, may not develop;
o restrictions under our agreement with Ballard Power Systems on
sales of our fuel cell materials and components to, and
collaboration with, others; and
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o failure of our customers, including Ballard Power Systems, to
purchase our products in the quantities that we expect.
These risks could be impacted by adoption of new laws and regulations,
changes in governmental programs, failure of necessary supporting systems (such
as fuel delivery infrastructure for fuel cells) to be developed, and consumer
perceptions about costs, benefits and safety.
OUR FINANCIAL CONDITION COULD SUFFER IF WE EXPERIENCE UNANTICIPATED COSTS AS A
RESULT OF ANTITRUST INVESTIGATIONS, LAWSUITS AND CLAIMS.
Since 1997, we have been subject to antitrust investigations, lawsuits
and claims. We have recorded pre-tax charges of $350 million against results of
operations as a reserve for estimated potential liabilities and expenses in
connection with antitrust investigations and related lawsuits and claims. We
cannot assure you that remaining liabilities and expenses in connection with
antitrust investigations, lawsuits and claims will not materially exceed the
remaining uncommitted balance of the reserve or that the timing of payment
thereof will not be sooner than anticipated. At December 31, 2002, $98 million
remained in the unfunded reserve. The balance of the reserve is available for
the remaining balance of the fine payable by us to the U.S. Department of
Justice that was imposed in 1998 (excluding imputed interest thereon), the fine
assessed against us by the antitrust authority of the European Union in July
2001 and other antitrust related matters. The aggregate amount of remaining
committed payments for imputed interest at December 31, 2002 was about $6
million. Our insurance has not and will not materially cover liabilities that
have or may become due in connection with antitrust investigations or related
lawsuits or claims.
If such liabilities or expenses materially exceed the remaining
uncommitted balance of the reserve or if the timing of payment thereof is sooner
than anticipated, we may not be able to comply with the financial covenants
under the Senior Facilities. A failure to so comply, unless waived by the
lenders thereunder, would be a default thereunder. This would permit the lenders
to accelerate the maturity of the Senior Facilities. It would also permit the
lenders to terminate their commitments to extend credit under our revolving
credit facility. This would have an immediate material adverse effect on our
liquidity. An acceleration of maturity of the Senior Facilities would permit the
holders of the Senior Notes to accelerate the maturity of the Senior Notes. If
we were unable to repay our debt to the lenders and holders or otherwise obtain
a waiver from the lenders and holders, we could experience the consequences or
be forced to take the actions described in the three following risk factors and
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. We cannot assure you that we would be able to obtain any such
waiver on acceptable terms or at all.
WE ARE HIGHLY LEVERAGED AND OUR SUBSTANTIAL DEBT AND OTHER OBLIGATIONS COULD
LIMIT OUR FINANCIAL RESOURCES, OPERATIONS AND ABILITY TO COMPETE AND MAY MAKE US
MORE VULNERABLE TO ADVERSE ECONOMIC EVENTS.
We are highly leveraged, and we have substantial obligations in
connection with antitrust investigations, lawsuits and claims. At December 31,
2002, we had total debt of $731 million and a stockholders' deficit of $381
million. We typically discount or factor a substantial portion of our accounts
receivable and use the proceeds to reduce our debt. During 2002, certain of our
subsidiaries sold receivables totaling $187 million, of which we estimate that
$46 million would
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have been outstanding at December 31, 2002. We are dependent on our revolving
credit facility, the availability of which depends on continued compliance with
the financial covenants under the Senior Facilities, for liquidity. We do not
believe that we will have positive annual cash flow from operations in 2003. We
believe that our debt will increase by about $35 million to $40 million at the
end of 2003 as compared to the end of 2002, before taking into account possible
asset sales.
Our high leverage and our antitrust related obligations could have
important consequences, including the following:
o our ability to restructure or refinance our debt or obtain
additional debt or equity financing for payment of these
obligations, or for working capital, capital expenditures,
acquisitions, strategic alliances or other general corporate
purposes, may be impaired in the future;
o a substantial portion of our cash flow from operations must be
dedicated to debt service and payment of these antitrust related
obligations, thereby reducing the funds available to us for other
purposes;
o an increase in interest rates could result in an increase in the
portion of our cash flow from operations dedicated to servicing
our debt, in lieu of other purposes;
o we may have substantially more leverage and antitrust related
obligations than certain of our competitors, which may place us at
a competitive disadvantage; and
o our leverage and our antitrust related obligations may hinder our
ability to adjust rapidly to changing market conditions or other
events and make us more vulnerable to insolvency, bankruptcy or
other adverse consequences in the event of a downturn in general
or certain regional economic conditions or in our business or in
the event that these obligations are greater, or the timing of
payment is sooner, than expected.
OUR ABILITY TO SERVICE OUR DEBT, INCLUDING THE SENIOR NOTES, AND MEET OUR OTHER
OBLIGATIONS DEPENDS ON CERTAIN FACTORS BEYOND OUR CONTROL.
Our ability to service our debt, including the Senior Notes, and meet
our other obligations as they come due is dependent on our future financial and
operating performance. This performance is subject to various factors, including
certain factors beyond our control such as, among other things, changes in
global and regional economic conditions, developments in antitrust
investigations, lawsuits and claims involving us, changes in our industry,
changes in interest or currency exchange rates and inflation in raw materials,
energy and other costs.
If our cash flow and capital resources are insufficient to enable us to
service our debt and meet these obligations as they become due, we could be
forced to:
o reduce or delay capital expenditures;
o sell assets or businesses;
o limit or discontinue, temporarily or permanently, business plans,
activities or operations;
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o obtain additional debt or equity financing; or
o restructure or refinance debt.
We cannot assure you as to the timing of such actions or the amount of
proceeds that could be realized from such actions. Accordingly, we cannot assure
you that we will be able to meet our debt service and other obligations as they
become due or otherwise.
WE ARE SUBJECT TO RESTRICTIVE COVENANTS UNDER THE SENIOR FACILITIES AND THE
SENIOR NOTES. THESE COVENANTS COULD SIGNIFICANTLY AFFECT THE WAY IN WHICH WE
CONDUCT OUR BUSINESS. OUR FAILURE TO COMPLY WITH THESE COVENANTS COULD LEAD TO
AN ACCELERATION OF OUR DEBT.
The Senior Facilities and the Senior Notes contain a number of
covenants that, among other things, significantly restrict our ability to:
o dispose of assets;
o incur additional indebtedness;
o repay or refinance other indebtedness or amend other debt
instruments;
o create liens on assets;
o enter into leases or sale/leaseback transactions;
o make investments or acquisitions;
o engage in mergers or consolidations;
o make certain payments and investments, including dividend
payments; and
o make capital expenditures or engage in certain transactions with
subsidiaries and affiliates.
The Senior Facilities also require us to comply with specified
financial covenants, including minimum interest coverage and maximum leverage
ratios. In addition, pursuant to the Senior Facilities, we cannot borrow under
our revolving credit facility:
o if the aggregate amount of our payments made (excluding certain
imputed interest) and additional reserves created in connection
with antitrust, securities and stockholder derivative
investigations, lawsuits and claims exceed $340 million by more
than $130 million (which $130 million is reduced by the amount of
certain debt, other than the Senior Notes, incurred by us that is
not incurred under the Senior Facilities); or
o if the additional borrowings would cause us to breach the
financial covenants contained therein.
Further, substantially all of our assets in the U.S. are pledged to
secure guarantees of the Senior Facilities by our domestic subsidiaries. In
addition, our principal foreign operating subsidiaries are obligors under
intercompany term notes and guarantees of those notes issued to
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GrafTech Finance that are pledged to secure the Senior Notes. Our Swiss
subsidiary is an obligor under an intercompany revolving note and our principal
foreign subsidiaries are guarantors of that note that are pledged to secure the
Senior Facilities. Most of the assets of the obligors under the intercompany
revolving note and the related guarantees, which constitute a majority of our
assets outside the U.S., are pledged to secure that note and those guarantees.
We are currently in compliance with the covenants contained in the
Senior Facilities and the Senior Notes. However, our ability to continue to
comply may be affected by events beyond our control. The breach of any of the
covenants contained in the Senior Facilities, unless waived by the lenders,
would be a default under the Senior Facilities. This would permit the lenders to
accelerate the maturity of the Senior Facilities. It would also permit the
lenders to terminate their commitments to extend credit under our revolving
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 will 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
our revolving credit facility. If we were unable to repay our debt to the
lenders and holders or otherwise obtain a waiver from the lenders and holders,
we could be forced to take the actions described in the preceding risk factor
and the lenders and holders could proceed against the collateral securing the
Senior Facilities and the Senior Notes and exercise all other rights available
to them. We cannot assure you that we will have sufficient funds to make these
accelerated payments or that we will be able to obtain any such waiver on
acceptable terms or at all.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OPERATIONS IN MULTIPLE COUNTRIES.
In 2002, about 71% of our net sales were derived from sales outside of
the U.S., and at December 31, 2002, about 78% of our total property, plant and
equipment and other long-lived assets were located outside the U.S. As a result
of our significant international operations, we are subject to risks associated
with operating multiple countries, including:
o currency devaluations and fluctuations in currency exchange rates,
including impacts of transactions in various currencies,
translation of various currencies into dollars for U.S. reporting
purposes, and impacts on results of operations due to the fact
that costs of our foreign subsidiaries for our principal raw
material, petroleum coke, are incurred in dollars even though
their products are primarily sold in other currencies;
o imposition of or increases in customs duties and other tariffs;
o imposition of or increases in currency exchange controls,
including imposition of or increases in limitations on conversion
of various currencies into dollars or euros, making of
intercompany loans by subsidiaries or remittance of dividends,
interest or principal payments or other payments by subsidiaries;
o imposition of or increases in revenue, income or earnings taxes
and withholding and other taxes on remittances and other payments
by subsidiaries;
o imposition of or increases in investment or trade restrictions and
other restrictions or requirements by non-U.S. governments;
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o inability to definitively determine or satisfy legal
requirements, inability to effectively enforce contract or
legal rights and inability to obtain complete financial or
other information under local legal, judicial, regulatory,
disclosure and other systems; and
o nationalization and other risks which could result from a change
in government or other political, social or economic instability.
We cannot assure you that such risks will not have a material adverse effect on
us in the future.
In general, our results of operations and financial condition are
affected by inflation in each country in which we have a manufacturing facility.
We maintain operations in Brazil, Russia and Mexico, countries which have had in
the past, and may have now or in the future, highly inflationary economies,
defined as cumulative inflation of about 100% or more over a three calendar year
period. We cannot assure you that future increases in our costs will not exceed
the rate of inflation or the amounts, if any, by which we may be able to
increase prices for our products.
OUR ABILITY TO GROW AND COMPETE EFFECTIVELY DEPENDS ON PROTECTING OUR
INTELLECTUAL PROPERTY, INCLUDING THAT RELATING TO FUEL CELL POWER GENERATION AND
ELECTRONIC THERMAL MANAGEMENT. FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY
COULD ADVERSELY AFFECT OUR GROWTH OPPORTUNITIES.
We believe that our intellectual property, consisting of patents and
proprietary know-how and information, particularly our intellectual property
relating to fuel cell power generation and electronic thermal management, are
important to our competitive position and growth opportunities. Failure to
protect our intellectual property may result in the loss of the exclusive right
to use our technologies. We rely on patent, trademark and trade secret laws,
patents and confidentiality and restricted use agreements to protect our
intellectual property. We own, and have obtained licenses to, various domestic
and foreign patents related to our technologies. These patents expire at various
times over the next two decades. When such patents expire, we will no longer
have the right to exclude others from making, using or selling the claimed
inventions. Some of our intellectual property is not covered by any patent or
patent application.
We cannot assure that agreements designed to protect our proprietary
know-how and information will not be breached, that we will have adequate
remedies for any such breach, or that such partners, consultants, employees or
others will not assert rights to intellectual property arising out of these
relationships. Moreover, we also cannot assure that protection for our
intellectual property under our patents will be effective or that the use of our
patented technology or proprietary know-how or information does not infringe the
intellectual property rights of others.
Our patents are subject to complex factual and legal considerations.
Accordingly, there can be uncertainty as to the validity, scope and
enforceability of any particular patent. Therefore, we cannot assure that:
o any of the U.S. or foreign patents now or hereafter owned by us,
or that third parties have licensed to us or may in the future
license to us, will not be circumvented, challenged or
invalidated;
o any of the U.S. or foreign patents that third parties have
licensed to us, or may license to us in the future, will not be
licensed to others; or
o any of the patents for which we have now or may in the future
apply will be issued at all or with the breadth of claim coverage
sought by us.
In addition, effective patent, trademark and trade secret protection may be
unavailable, limited or not applied for in the U.S. or in any of the foreign
countries in which we operate.
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Our ability to establish and maintain our competitive advantage through
our technology and any intellectual property rights may be achieved, in part, by
prosecuting claims against others whom we believe have misappropriated our
technology or have infringed upon our intellectual property rights, as well as
by defending against misappropriation or infringement claims brought by others
against us. Our involvement in litigation to protect or defend our rights in
these areas could result in a significant expense to us, adversely affect the
development of sales of the related products, and divert the efforts of our
technical and management personnel, regardless of the outcome of such
litigation.
If necessary or desirable, we may seek licenses to intellectual
property of others. However, we can give no assurance that we will obtain such
licenses or that the terms of any such licenses will be acceptable to us.
Our failure to obtain a license from a third party for its intellectual
property that is necessary for us to make or sell any of our products could
cause us to incur substantial liabilities and to suspend the manufacture or
shipment of products or use of processes requiring the use of such intellectual
property.
OUR CURRENT AND FORMER MANUFACTURING OPERATIONS ARE SUBJECT TO INCREASINGLY
STRINGENT HEALTH, SAFETY AND ENVIRONMENTAL REQUIREMENTS.
We use and generate hazardous substances in our manufacturing
operations. In addition, both the properties on which we currently operate and
those on which we have ceased operations are and have been used for industrial
purposes. Further, our manufacturing operations involve risks of personal injury
or death. We are subject to increasingly stringent environmental, health and
safety laws and regulations relating to our current and former properties and
neighboring properties and our current operations. These laws and regulations
provide for substantial fines and criminal sanctions for violations and
sometimes require the installation of costly pollution control or safety
equipment or costly changes in operations to limit pollution or decrease the
likelihood of injuries. In addition, we may become subject to potentially
material liabilities for the investigation and cleanup of contaminated
properties and to claims alleging personal injury or property damage resulting
from exposure to or releases of hazardous substances or personal injury as a
result of an unsafe workplace. In addition, noncompliance with or stricter
enforcement of existing laws and regulations, adoption of more stringent new
laws and regulations, discovery of previously unknown contamination or
imposition of new or increased requirements could require us to incur costs or
become the basis of new or increased liabilities that could be material.
WE ARE DEPENDENT ON SUPPLIERS OF RAW MATERIALS AND ENERGY AT AFFORDABLE PRICES.
OUR RESULTS OF OPERATIONS COULD DETERIORATE IF THAT SUPPLY IS SUBSTANTIALLY
DISRUPTED FOR AN EXTENDED PERIOD.
We purchase raw materials and energy from a variety of sources. In many
cases, we purchase them under short term contracts or on the spot market, in
each case at fluctuating prices. The availability and price of raw materials and
energy may be subject to curtailment or change due to:
o limitations which may be imposed under new legislation or
regulation;
o suppliers' allocations to meet demand of other purchasers during
periods of shortage (or, in the case of energy suppliers, extended
cold weather);
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o interruptions in production by suppliers; and
o market and other events and conditions.
Petroleum and coal products, including petroleum coke and pitch, our
principal raw materials, and energy, particularly natural gas, have been subject
to significant price fluctuations. Over the past several years, we have
mitigated the effect of price increases on our results of operations through our
cost reduction efforts. We cannot assure you that such efforts will successfully
mitigate future increases in the price of raw materials or energy. A substantial
increase in raw material or energy prices which cannot be mitigated or passed on
to customers or a continued interruption in supply, particularly in the supply
of petroleum coke or energy, would have a material adverse effect on us.
OUR RESULTS OF OPERATIONS COULD DETERIORATE IF OUR MANUFACTURING OPERATIONS WERE
SUBSTANTIALLY DISRUPTED FOR AN EXTENDED PERIOD.
Our manufacturing operations are subject to disruption due to extreme
weather conditions, floods and similar events, major industrial accidents,
strikes and lockouts, and other events. We cannot assure you that no such events
will occur. If such an event occurs, it could have a material adverse effect on
us.
WE HAVE SIGNIFICANT INTERCOMPANY LOANS, AND TRANSLATION GAINS AND LOSSES DUE TO
CHANGES IN CURRENCY EXCHANGE RATES RESULTING IN SIGNIFICANT NON-CASH GAINS OR
LOSSES.
We have intercompany loans between GrafTech Finance and some of our
foreign subsidiaries. Some of these loans are denominated in currencies other
than the dollar and, accordingly, are subject to translation gains and losses
due to changes in currency exchange rates. At December 31, 2002, the aggregate
principal amount of non-dollar denominated intercompany loans was $400 million.
A portion of these intercompany loans are deemed to be essentially permanent
and, as a result, translation gains and losses on these loans are recorded in
accumulated other comprehensive income (loss) on the Consolidated Balance
Sheets. The balance of these loans are deemed to be temporary and, as a result,
translation gains and losses on these loans are recorded in other (income)
expense, net on the Consolidated Statements of Operations. We record both
unrealized and realized translation gains and losses in other (income)
expense, net on the Consolidated Statements of Operations. We have the ability
to replace each intercompany loan with an identical new intercompany loan. When
we replace such a loan, we record net cumulative realized translation gains or
losses with respect to that loan. Those realized gains or losses are,
however, non-cash gains or losses. In 2002, we recorded a gain of $21 million
in other (income) expense, net with respect to intercompany loans. We cannot
assure that we will have any such gains in the future.
OUR RESULTS OF OPERATIONS FOR ANY QUARTER ARE NOT NECESSARILY INDICATIVE OF OUR
RESULTS OF OPERATIONS FOR A FULL YEAR.
Sales of graphite electrodes and other products fluctuate from quarter
to quarter due to such factors as changes in global and regional economic
conditions, changes in competitive conditions, scheduled plant shutdowns by
customers, national vacation practices, changes in customer production schedules
in response to seasonal changes in energy costs, weather conditions, strikes and
work stoppages at customer plants, and changes in customer order patterns in
response to the announcement of price increases. We have experienced, and expect
to continue to experience, volatility with respect to demand for and prices of
graphite electrodes and other products, both globally and regionally.
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We have also experienced volatility with respect to prices of raw
materials and energy, and it has frequently required several quarters of cost
reduction efforts to mitigate increases in those prices. We expect to experience
volatility in such prices in the future. We have experienced translation gains
and losses in the past, some of which have been significant, and expect to
experience translation gains and losses in the future.
Accordingly, results of operations for any quarter are not
necessarily indicative of the results of operations for a full year.
THE GRAPHITE AND CARBON INDUSTRY IS HIGHLY COMPETITIVE. OUR MARKET SHARE, NET
SALES OR NET INCOME COULD DECLINE DUE TO VIGOROUS PRICE AND OTHER COMPETITION.
Competition in the graphite and carbon products industry (other than
with respect to new products) is based primarily on price, product quality and
customer service. Graphite electrodes, in particular, are subject to rigorous
price competition. Price increases by us or price reductions by our competitors,
decisions by us with respect to prices, profit margins and market shares,
technological developments, changes in the desirability or necessity of entering
into long term supply contracts with customers, or other competitive or market
factors or strategies could adversely affect our market share, net sales or net
income.
Competition with respect to new products is, and is expected to be,
based primarily on product innovation, performance and cost effectiveness as
well as customer service.
Competition could prevent implementation of price increases, require
price reductions or require increased spending on research and development,
marketing and sales that could adversely affect us.
WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY IMPLEMENT ANY STRATEGIC ALLIANCES
FOR ANY OF OUR BUSINESSES.
One of our key strategies is to pursue strategic alliances that enhance
or complement our existing or related businesses. We cannot assure you that any
alliance will be completed or as to the timing, terms or benefits of any
alliance that may be completed.
WE MAY NOT BE SUCCESSFUL IN THE LAWSUIT AGAINST OUR FORMER PARENTS INITIATED BY
US.
We have initiated a lawsuit against our former parents. Successful
prosecution of this lawsuit is subject to risks, including:
o failure to successfully defend against motions to dismiss and
other procedural motions prior to trial;
o failure to successfully establish our theories of liability and
damages or otherwise prove our claims at trial;
o successful assertion by the defendants of substantive defenses,
including statute of limitations defenses, to liability at trial
or on appeal; and
o successful assertion by the defendants of counterclaims or cross
claims, including claims for indemnification, at trial or on
appeal.
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We cannot predict the ultimate outcome of this lawsuit, including the
possibility, timing or amount of any recovery of damages by us or any liability
we may have in connection with any counterclaims or cross claims. In addition,
we cannot assure you as to the possibility, timing or amount of any settlement
or the legal expenses to be incurred by us or as to the effect of this lawsuit
on management's focus and time available for our ongoing operations.
Litigation such as this lawsuit is complex. Complex litigation can be
lengthy and expensive. 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.
WE MAY NOT BE ABLE TO COMPLETE OUR PLANNED ASSET SALES.
We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years. We cannot assure you if or
when we will be able to complete these sales or that we will realize proceeds
therefrom that meet our current expectations.
WE MAY NOT ACHIEVE THE COST SAVINGS TARGETED UNDER OUR 2002 MAJOR COST SAVINGS
PLAN.
Our targeted cost savings under our 2002 plan are based on assumptions
regarding the costs and savings associated with the activities undertaken and to
be undertaken as part of the 2002 plan. We cannot assure you that these
assumptions are correct or that we will be able to implement these activities at
the anticipated costs, if at all. If the costs associated with these activities
are higher than anticipated or if we are unable to implement the activities as
and when we have assumed, we may not be able to meet our cost savings targets.
RISKS RELATING TO THE SENIOR NOTES AND PLEDGES OF OUR ASSETS
THE SENIOR NOTES AND THE RELATED GUARANTEES HAVE LIMITED SECURITY. AS A RESULT,
THEY ARE EFFECTIVELY SUBORDINATED TO THE SENIOR FACILITIES, WHICH ARE SECURED BY
MOST OF OUR ASSETS, AND TO CERTAIN OTHER SECURED DEBT AND OBLIGATIONS. THIS
COULD RESULT IN HOLDERS OF THE SENIOR NOTES RECEIVING LESS ON LIQUIDATION THAN
THE LENDERS UNDER THE SENIOR FACILITIES AND CERTAIN OTHER CREDITORS.
Unsecured intercompany term notes in an aggregate principal amount
equal to $448 million (based on currency exchange rates in effect at December
31, 2002) and unsecured guarantees of those unsecured intercompany term notes
issued to GrafTech Finance by certain of our foreign subsidiaries (which notes
and guarantees are collectively called "UNSECURED INTERCOMPANY TERM NOTE
OBLIGATIONS") have been pledged by GrafTech 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, at December 31, 2002, the
aggregate principal amount of unsecured intercompany term notes pledged to
secure the Senior Notes equaled $399 million (based on currency exchange rates
in effect at December 31, 2002), or about 73% of the aggregate principal amount
of the outstanding Senior Notes. The remaining unsecured intercompany term notes
held by GrafTech Finance in an aggregate principal amount of about 9% of the
aggregate principal amount of the Senior Notes, or $49 million (based on
currency exchange rates in effect at December 31, 2002), and any pledged
unsecured intercompany term notes that cease to be pledged due to a reduction in
the principal amount of the then outstanding Senior Notes due to redemption,
repurchase or other
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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 GrafTech 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.
Substantially all of our assets in the U.S. are pledged to secure
guarantees of the Senior Facilities by our domestic subsidiaries. In addition,
UCAR Carbon and our Swiss subsidiary are obligors under secured intercompany
revolving notes that are pledged to secure the Senior Facilities. Substantially
all of their assets are pledged to secure those notes. The secured intercompany
revolving note of our Swiss subsidiary is also guaranteed by our other principal
foreign subsidiaries. Those guarantees are secured by a pledge of most of the
assets of the guarantors. Those guarantees are pledged to secure the Senior
Facilities. As a result, most of our assets outside the U.S. are pledged to
secure the secured intercompany revolving note of our Swiss subsidiary and
guarantees of that note. Further, our obligation to pay the $57.5 million
balance of the antitrust fine to the DOJ is secured by a lien on the shares of
GrafTech Global and GrafTech Finance held by GTI as well as the interest of GTI
in the lawsuit initiated by us against our former parents, and we may secure our
obligation to pay the antitrust fine of (euro)50.4 million (about $53 million,
at currency exchange rates in effect at December 31, 2002) assessed by the EU
Competition Authority with a letter of credit issued under the Senior
Facilities, by a pledge of certain assets of one of our French subsidiaries or
by some other means.
The Senior Notes are guaranteed by GTI, GrafTech Global and UCAR Carbon
and other U.S. subsidiaries holding a substantial majority of our U.S. assets.
Those guarantees are unsecured, except the guarantee by UCAR Carbon. Each of the
guarantors of the Senior Notes has also guaranteed the Senior Facilities, and
those guarantees are secured. AET has also guaranteed the Senior Facilities, but
has not guaranteed the Senior Notes. The guarantee of the Senior Notes by UCAR
Carbon has been secured by a limited pledge of AET. While all of our shares of
AET are pledged to secure the UCAR Carbon guarantee of the Senior Notes, at no
time will the value of the pledged portion of such shares exceed 19.99% of the
principal amount of the then outstanding Senior Notes. Moreover, the pledge of
such shares is junior to the pledge of the same shares to secure the UCAR Carbon
guarantee of the Senior Facilities.
None of our foreign subsidiaries has guaranteed the Senior Facilities
or the Senior Notes. The Senior Notes do not contain any limitation on new
secured intercompany term loans pursuant to the Senior Facilities, or related
guarantees, to foreign subsidiaries that are unsecured intercompany term note
obligors.
The guarantees of the unsecured intercompany term notes by foreign
subsidiaries that are pledged to secure the Senior Notes are limited as required
to comply with applicable law. Many of these laws effectively limit the amount
of the guarantee to the net worth of the guarantor foreign subsidiary.
The lenders and creditors whose debt and obligations are secured will
have prior claims on our assets, to the extent of the lesser of the value of the
assets securing, or the amount of, the respective debt or obligations. If we
become bankrupt or insolvent or are liquidated or if maturity of such debt or
obligations is accelerated, the secured lenders and creditors will be entitled
to exercise the remedies available to a secured party under applicable law and
pursuant
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to the relevant agreements and instruments. If they exercise such
remedies, it is possible that our remaining assets could be insufficient to
repay the Senior Notes in full.
WE HAVE A HOLDING COMPANY STRUCTURE AND THE ISSUER OF THE SENIOR NOTES IS A
SPECIAL PURPOSE FINANCE COMPANY. ACCORDINGLY, THE SENIOR NOTES ARE STRUCTURALLY
SUBORDINATED TO CERTAIN OF OUR OBLIGATIONS.
GTI is our parent company. It is a holding company with no material
assets or operations other than the common stock of GrafTech Global and GrafTech
Finance and its interest in the lawsuit initiated by us against our former
parents. Its principal liabilities consist of its guarantees of the Senior
Facilities and the Senior Notes, its obligations with respect to the antitrust
fines payable to the DOJ and the EU Competition Authority as well as any other
remaining potential liabilities and expenses in connection with antitrust
investigations and related lawsuits and claims, an intercompany promissory note
owed to GrafTech Global issued in connection with our leveraged equity
recapitalization in 1995, and guaranties of debt and commercial obligations of
our subsidiaries. GrafTech Global is a holding company with no material assets
or operations other than the common stock of UCAR Carbon, which, in turn, holds
the common stock of our other subsidiaries other than GrafTech Finance and an
intercompany promissory note owed to it by GTI. Its principal liabilities
consist of its guarantees of the Senior Facilities and the Senior Notes, an
intercompany promissory note owed to GrafTech Finance and guaranties of debt and
commercial obligations of our subsidiaries.
The Senior Notes were issued by GrafTech Finance. GrafTech Finance is
the borrower under the Senior Facilities. GrafTech Finance does not have any
material assets other than:
o the unsecured intercompany term note obligations that are pledged
to secure the Senior Notes and that, in the case of the unsecured
intercompany term notes, have a stated maturity that is the same
as the stated maturity of the Senior Notes;
o a secured intercompany revolving note issued by our Swiss
subsidiary and secured guarantees of that note by our other
principal foreign subsidiaries, as well as a secured intercompany
revolving note issued by UCAR Carbon, that are pledged to secure
the Senior Facilities;
o certain other intercompany notes (called "CASH FLOW NOTES")
payable to it created to facilitate the flow of funds among our
subsidiaries (some or all of which have been or will be
effectively contributed to our Swiss subsidiary in connection with
a corporate realignment of our subsidiaries); and
o assets associated with our treasury, cash management, cash pooling
and hedging activities that are conducted through GrafTech
Finance.
Its principal liabilities consist of its obligations under the Senior Facilities
and the Senior Notes, its obligations under cash flow notes payable by it (some
or all of which have been or will be likewise assumed by our Swiss subsidiary)
and liabilities associated with such treasury and other activities.
A substantial portion of our operations is conducted by, and a
substantial portion of our cash flow from operations is derived from, our
foreign subsidiaries. The foreign subsidiaries that have issued unsecured
intercompany term notes are our operating subsidiaries in Mexico, Spain,
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South Africa and Switzerland and our holding company in France. The obligations
of the holding company in France in respect of its unsecured intercompany term
note are guaranteed by our operating company in France engaged in the graphite
electrode business on an unsecured basis. The unsecured intercompany term notes
are guaranteed by our operating subsidiaries in Brazil, Canada, Mexico, Spain,
Switzerland and the United Kingdom and the holding company in France. These
subsidiaries have also guaranteed the secured intercompany revolving note of our
Swiss subsidiary that is pledged to secure the Senior Facilities. Those
guarantees are secured by pledges of most of their assets.
Our operating subsidiary in Italy engaged in the advanced graphite
materials business and our operating subsidiary in Russia as well as Carbone
Savoie, AET and certain immaterial domestic and foreign operating companies and
holding companies are neither guarantors of the Senior Notes nor unsecured
intercompany term note obligors. At December 31, 2002, the aggregate book value
of their assets was about $110 million. For 2002, their net income was about $6
million and their cash flow from operations was about $5 million (excluding the
impact of payments and borrowings under a short-term intercompany note issued by
Carbone Savoie).
GrafTech Finance has made and will continue to make secured
intercompany revolving loans to our Swiss subsidiary and UCAR Carbon. At
December 31, 2002 (and based on currency exchange rates in effect on December
31, 2002), the aggregate principal amount of the secured intercompany revolving
note of our Swiss subsidiary was about $44 million. GrafTech Finance may make
secured intercompany revolving loans to one or more other domestic or foreign
subsidiaries on the same basis as the existing secured intercompany revolving
loans. The Senior Notes do not contain any limitation on existing or new secured
intercompany revolving loans pursuant to the Senior Facilities to domestic or
foreign subsidiaries that are guarantors of the Senior Notes or unsecured
intercompany term note obligors.
GrafTech Finance will rely upon interest and principal payments on
intercompany loans, as well as loans, advances and other transfers from our
operating subsidiaries, to generate the funds necessary to meet its debt service
obligations with respect to the Senior Facilities and the Senior Notes. Our
subsidiaries are separate entities that are legally distinct from GrafTech
Finance, and our subsidiaries that are neither guarantors of the Senior Notes
nor unsecured intercompany term note obligors have no obligation, contingent or
otherwise, to pay debt service on the Senior Notes or to make funds available
for such payments. The ability of our subsidiaries to make these interest or
principal payments, loans, advances or other transfers is subject to, among
other things, their earnings, their availability of funds, the covenants of
their own debt, corporate laws, restrictions on dividends or repatriation of
earnings, monetary transfer restrictions and foreign currency exchange
regulations.
The ability of GrafTech Finance or the holders of the Senior Notes to
realize upon the assets of any subsidiary that is neither a guarantor of the
Senior Notes nor an unsecured intercompany term note obligor in any liquidation,
bankruptcy, insolvency or similar proceedings involving such subsidiary will be
subject to the claims of their respective creditors, including their respective
trade creditors and holders of their respective debt.
As a result, the Senior Notes are structurally subordinated to all
existing and future debt and other obligations, including trade payables, of our
subsidiaries that are neither guarantors of the Senior Notes nor unsecured
intercompany term note obligors. At December 31, 2002, the debt and liabilities
of such subsidiaries totaled $10 million (excluding intercompany trade and other
miscellaneous liabilities of $20 million).
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Except as otherwise specifically stated, the financial information
included or incorporated by reference in this Report is presented on a
consolidated basis, including both our domestic and foreign subsidiaries. As a
result, such financial information does not completely indicate the assets,
liabilities or operations of each source of funds for payment of debt service on
the Senior Notes.
THE PROVISIONS OF THE UNSECURED INTERCOMPANY TERM NOTE OBLIGATIONS CAN BE
CHANGED, AND THE UNSECURED INTERCOMPANY TERM NOTES CAN BE PREPAID IN WHOLE OR IN
PART, WITHOUT THE CONSENT OF THE HOLDERS OF THE SENIOR NOTES UNDER CERTAIN
CIRCUMSTANCES. PREPAYMENT WOULD INCREASE THE STRUCTURAL SUBORDINATION OF THE
SENIOR NOTES. PREPAYMENT OR CHANGES IN SUCH PROVISIONS COULD REDUCE OR ELIMINATE
THE ABILITY OF HOLDERS OF THE SENIOR NOTES TO SEEK RECOVERY DIRECTLY FROM OUR
FOREIGN SUBSIDIARIES UPON A DEFAULT UNDER THE SENIOR NOTES.
In general, the unsecured intercompany term notes and the unsecured
intercompany term note guarantees cannot be changed, and the unsecured
intercompany term notes cannot be prepaid or otherwise discharged, without the
consent of the holders of the Senior Notes. However, without the consent of the
holders of the Senior Notes:
o the interest rate, interest payment dates, currency of payment of
principal and interest and currency in which an unsecured
intercompany term note is denominated (subject to certain
limitations) can be amended;
o provisions of an unsecured intercompany term note obligation can
be amended to comply with changes in applicable law, so long as
such amendments do not change the enforceability, principal
amount, stated maturity, average life, ranking or priority or
prepayment provisions of an unsecured intercompany term note or
the enforceability of or obligations guaranteed under an unsecured
intercompany term note guaranty; and
o an unsecured intercompany term note can be prepaid in whole or in
part if the proceeds received by GrafTech Finance from such
prepayment are (i) invested in or loaned to a guarantor of the
Senior Notes, (ii) loaned to another foreign subsidiary pursuant
to an unsecured intercompany note that is pledged to secure the
Senior Notes and is, to the extent permitted by applicable law,
guaranteed by the unsecured intercompany term note guarantors or
(iii) applied to an offer to purchase Senior Notes at a purchase
price equal to 100% of the principal amount of the Senior Notes,
plus accrued and unpaid interest.
The principal amount (expressed in dollars) of any unsecured
intercompany term note that is not denominated in dollars could increase or
decrease at any time due to changes in currency exchange rates.
A reduction in the principal amount of one or more unsecured
intercompany notes could increase the structural subordination of the Senior
Notes, as described in the preceding risk factors, and reduce the ability of
holders of the Senior Notes to realize upon the assets of our foreign
subsidiaries upon a default under the Senior Notes. A change in the provisions
of the unsecured intercompany note obligations could also limit such ability.
IN THE EVENT OF THE BANKRUPTCY OR INSOLVENCY OF GRAFTECH GLOBAL, UCAR CARBON OR
ANY OF THE SUBSIDIARY GUARANTORS OR UNSECURED INTERCOMPANY TERM NOTE OBLIGORS,
THE GUARANTEE OF THE
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SENIOR NOTES BY GRAFTECH GLOBAL, UCAR CARBON OR SUCH
SUBSIDIARY OR THE UNSECURED INTERCOMPANY TERM NOTE AND THE UNSECURED
INTERCOMPANY TERM NOTE GUARANTEE OF SUCH OBLIGOR COULD BE VOIDED OR
SUBORDINATED.
In the event of the bankruptcy or insolvency of GrafTech Global, UCAR
Carbon or any of the subsidiary guarantors or unsecured intercompany term note
obligors, its guarantee, unsecured intercompany term note guarantee or unsecured
intercompany term note would be subject to review under relevant fraudulent
conveyance, fraudulent transfer, equitable subordination and similar statutes
and doctrines in a bankruptcy or insolvency proceeding or a lawsuit by or on
behalf of creditors of that guarantor or obligor. Under those statutes and
doctrines, if a court were to find that the guarantee or note was incurred with
the intent of hindering, delaying or defrauding creditors or that the guarantor
or obligor received less than a reasonably equivalent value or fair
consideration for its guarantee or note and, at the time of its incurrence, the
guarantor or obligor:
o was insolvent or rendered insolvent by reason of the incurrence of
its guarantee or note; or
o was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital to
carry on its business; or
o intended to, or believed that it would, incur debts beyond its
ability to pay as they matured or became due;
then the court could void or subordinate its guarantee or note.
The measure of insolvency varies depending upon the law of the
jurisdiction being applied. Generally, however, a company will be considered
insolvent at a particular time if the sum of its debts at that time is greater
than the then fair saleable value of its assets or if the fair saleable value of
its assets at the time is less than the amount that would be required to pay its
probable liability on its existing debts as they become absolute and mature. We
believe that each of the guarantors and obligors was:
o neither insolvent nor rendered insolvent by reason of the
incurrence of its guarantee or note;
o in possession of sufficient capital to run its business
effectively; and
o incurring debts within its ability to pay as the same mature or
become due.
The assumptions and methodologies used by us in reaching these
conclusions about our solvency and the solvency of the guarantors or obligors
may not be adopted by a court, and a court may not concur with these
conclusions. If the guarantee of a guarantor or the unsecured intercompany term
note guarantee or unsecured intercompany term note of an unsecured intercompany
term note obligor is voided or subordinated, holders of the Senior Notes would
effectively be subordinated to all indebtedness and other liabilities of that
guarantor or obligor.
The unsecured intercompany term note obligors are incorporated in
jurisdictions other than the U.S. and are subject to the insolvency laws of such
other jurisdictions. We cannot
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assure you that the insolvency laws of such jurisdictions will be as favorable
to your interests as creditors as the laws of the U.S.
WE MAY NOT HAVE THE ABILITY TO PURCHASE THE SENIOR NOTES UPON A CHANGE OF
CONTROL AS REQUIRED BY THE SENIOR NOTES.
Upon the occurrence of certain specific kinds of change of control
events, we will be required to offer to purchase the outstanding Senior Notes at
a purchase price equal to 101% of the principal amount, plus accrued and unpaid
interest, if any, to the date of purchase. If such event were to occur, we
cannot assure you that we would have sufficient funds to pay the purchase price
of the outstanding Senior Notes, and we expect that we would require third party
financing to do so. We cannot assure you that we would be able to obtain this
financing on favorable terms or at all. In the event of certain kinds of change
of control events, we may have to repay all borrowings under the Senior
Facilities or obtain the consent of the lenders under the Senior Facilities to
purchase the Senior Notes. If we do not obtain such consent or repay such
borrowings, we may be prohibited from purchasing the Senior Notes. In such case,
our failure to purchase tendered Senior Notes would constitute a default under
the Senior Notes. If the holders of the Senior Notes were to accelerate the
maturity of the Senior Notes upon such default, the lenders under the Senior
Facilities would have the right to accelerate the maturity of the Senior
Facilities. We cannot assure you that we will have the financial ability to
purchase outstanding Senior Notes and repay such borrowings upon the occurrence
of any such event.
FORWARD LOOKING STATEMENTS
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; impacts of regional and global economic conditions;
interest rate management activities; 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, revenues, business opportunities, values, debt
levels, cash flows, cost savings and reductions, margins, earnings and growth.
The words "will," "may," "plan," "estimate," "project," "believe," "anticipate,"
"intend," "should," "target," "goal," "expect" 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 due to
geopolitical events, governmental actions or other factors;
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o the possibility that anticipated additions to capacity for
producing steel in electric arc furnaces or anticipated reductions
in graphite electrode manufacturing capacity may not occur;
o the possibility that increased production of steel in electric arc
furnaces or reductions in graphite electrode manufacturing
capacity may not result in stable or increased demand for or
prices or sales volume of graphite electrodes;
o the possibility that economic or technological developments may
adversely affect growth in the use of graphite cathodes in lieu of
carbon cathodes in the aluminum smelting process;
o the possibility that anticipated additions to aluminum smelting
capacity using graphite cathodes may not occur or that increased
production of graphite cathodes by competitors may occur;
o the possibility that increased production of aluminum may not
result in stable or increased demand for or prices or sales volume
of graphite cathodes;
o the possibility of delays in or failure to achieve widespread
commercialization of PEM fuel cells which use natural graphite
materials and components or that manufacturers of PEM fuel cells
may obtain those materials or components 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 or other product development milestones or
delays in expanding or failure to expand our manufacturing
capacity to meet growth in demand for new or improved products, if
any;
o the possibility that we may be unable to protect our intellectual
property or may infringe the intellectual property rights of
others;
o the occurrence of unanticipated events or circumstances relating
to antitrust investigations or lawsuits or to lawsuits initiated
by us against our former parents;
o the possibility that expected cost savings from our 2002 major
cost savings plan or our other cost savings efforts will not be
fully realized;
o the possibility that anticipated benefits from the refinement of
our organizational structure into three lines of business may be
delayed or may not occur;
o the possibility that the anticipated long-term benefits from the
corporate realignment of our subsidiaries or the refinement of our
organizational structure into three lines of business may not be
fully achieved;
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o the occurrence of unanticipated events or circumstances relating
to health, safety or environmental compliance or remediation
obligations or liabilities to third parties, labor relations, raw
material or energy supplies or cost, or strategic plans;
o changes in interest or currency exchange rates, in competitive
conditions or in inflation;
o the possibility of failure to satisfy conditions or milestones
under, or occurrence of breach of terms of, our strategic
alliances with Pechiney, Ballard, ConocoPhillips or others;
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, as well as future
decisions by us.
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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ITEM 2. PROPERTIES
We operate the following facilities, which are owned or leased as
indicated.
<table>
<caption>
<s>
OWNED OR
LOCATION OF FACILITY PRIMARY USE LEASED
- -------------------- ----------- ------
U.S.
Irvine, California............... Machine Shop Leased
Wilmington, Delaware............. Corporate Headquarters Leased
Lakewood, Ohio................... Flexible Graphite Manufacturing Facility and Sales Office Owned
Parma, Ohio...................... Technology Center, Testing Facility, Pilot Plant and Flexible Owned
Graphite Manufacturing Facility
Clarksville, Tennessee........... Sales Office, Shared Service Center and Machine Shop Owned
Columbia, Tennessee.............. Carbon Electrode Manufacturing Facility and Sales Office Owned
Lawrenceburg, Tennessee.......... Advanced Carbon Materials Manufacturing Facility Owned
Clarksburg, West Virginia........ Advanced Graphite Materials Manufacturing Facility and Sales Owned
Office
Europe
Calais, France................... Electrode Manufacturing Facility Owned
Notre Dame, France............... Electrode and Advanced Graphite Materials Manufacturing Owned
Facility and Sales Office
Notre Dame, France............... Cathode Manufacturing Facility and Sales Office Leased
Venissieux, France............... Cathode Manufacturing Facility and Technology Center Owned
Caserta, Italy................... Machine Shop Owned
Malonno, Italy................... Machine Shop and Sales Office Owned
Saronno, Italy................... Sales Office Leased
Moscow, Russia................... Sales Office Leased
Vyazma, Russia................... Electrode Manufacturing Facility Owned
Pamplona, Spain.................. Electrode Manufacturing Facility and Sales Office Owned
Etoy, Switzerland................ Sales Office and European Headquarters Owned
Sheffield, United Kingdom........ Machine Shop and Sales Office Owned
Other International
Salvador Bahia, Brazil........... Electrode and Cathode Manufacturing Facility Owned
Sao Paulo, Brazil................ Sales Office Leased
Beijing, China................... Sales Office Leased
Hong Kong, China................. Sales Office Leased
Monterrey, Mexico................ Electrode Manufacturing Facility and Sales Office Owned
Meyerton, South Africa........... Electrode Manufacturing Facility and Sales Office Owned
</table>
We believe that our facilities, which are of varying ages and types of
construction, are in good condition, are suitable for our operations and
generally provide sufficient capacity to meet our requirements for the
foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
ANTITRUST INVESTIGATIONS
In April 1998, pursuant to a plea agreement between 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. 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 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. At December 31,
2002, the statutory rate of interest was 1.41% 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 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 had assessed a
fine against us in the amount of 676 million KRW ($569,000, based on currency
exchange rates in effect at the time of payment) and assessed fines against five
other graphite electrode producers in amounts ranging up to 4,396 million KRW
(approximately $3.3 million, based on currency exchange rates in effect at the
time of the decision imposing the fine). 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 our cooperation with that
authority during its investigation. In May 2002, we appealed the decision. In
July 2002, the Korean antitrust authority affirmed its decision on appeal. We
paid the fine together with accrued interest, an aggregate of $584,000, in
August 2002.
In January 2000, 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. In July 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 $53 million,
based on exchange rates in effect at December 31, 2002) against us and assessed
fines against seven other graphite electrode producers in amounts 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
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<page>
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 have had discussions with the EU Competition Authority regarding
the appropriate form of collateral security during the pendency of the appeal.
If the EU Competition Authority seeks to require payment of the fine or
provision of collateral security therefor, we may file an interim appeal to the
Court to waive or modify such requirement. We cannot predict how or when the
Court would rule on such an interim appeal.
In May 2001, 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 have provided that information.
In May 2002, the EU Competition Authority issued a statement of
objections initiating proceedings against us and other producers of specialty
graphite. The statement alleges that we and other producers violated European
antitrust laws in connection with the sale of specialty graphite. In December
2002, the EU Competition Authority issued its decision regarding the
allegations. Under the decision, the EU Competition Authority assessed no fine
against us and assessed fines against seven other producers in amounts ranging
up to (euro)28 million. We received a 100% reduction from the amount that
otherwise would have been assessed against us due to our cooperation.
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, the EU Competition Authority 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.
To the extent that antitrust investigations involving us have been
resolved with guilty pleas or by adverse decisions, such guilty pleas and
decisions make it more difficult for us to defend against other investigations
as well as civil lawsuits and claims. We have been vigorously protecting, and
intend to continue to vigorously protect, our interests in connection with the
investigations described above. We may, however, at any time settle any possible
unresolved charges.
ANTITRUST LAWSUITS
Through December 31, 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 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
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<page>
is unique, in the aggregate they consist primarily of current and deferred cash
payments with some product credits and discounts. All payments due have been
timely paid.
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 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 the U.S. Court
of Appeals for the Third Circuit with regard to these dismissals. The U.S. Court
of Appeals for the Third Circuit heard oral argument on these appeals on March
11, 2003, and we are awaiting its decision. The third complaint was dismissed
without prejudice to refile pending the resolution of such appeals. We filed a
motion to stay the lawsuit commenced by the fourth complaint pending resolution
of appeals in the other foreign customer lawsuits and such motion was granted in
July 2002.
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, initially filed in the U.S.
Bankruptcy Court for the Northern District of Ohio and subsequently transferred
to the U.S. District Court for the Northern District of Ohio, Eastern Division,
is now entitled Cohen & Co., Distribution Trustee v. UCAR International Inc., et
al. (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.
In October 2001, we settled the lawsuit commenced by the third complaint. In
September 2002, we settled the lawsuit commenced by the first complaint. In
January 2003, we settled the lawsuit commenced by the second complaint. The
guilty pleas and decisions described above do not relate to carbon electrodes.
In the 2002 first quarter, we and other producers of cathodes were
served with a complaint commencing a civil antitrust lawsuit in the U.S.
District Court for the District of Oregon entitled Northwest Aluminum Company,
et al. vs. VAW Aluminum A.G., et al (the
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<page>
"CARBON CATHODE LAWSUIT"). The complaint was filed by two producers of aluminum.
Other producers of cathodes are also named as defendants in the complaint. In
the complaint, the plaintiffs allege that the defendants violated U.S. federal
antitrust law in connection with the sale of cathodes and seek, among other
things, an award of treble damages resulting from such alleged violations. In
November 2002, we settled this lawsuit. The guilty pleas and decisions described
above do not relate to cathodes.
In December 2002 and January 2003, we and other producers of bulk
graphite were served with two complaints commencing two civil class action
antitrust lawsuits. The first complaint, filed in the U.S. District Court for
the District of New Jersey, is entitled Industrial Graphite Products, Inc. v.
Carbone Lorraine North America Corporation, et al. The second complaint, filed
in the same court, is entitled Ceradyne, Inc. v. Carbone Lorraine North America
Corporation, et al. In February 2003, we learned that a class action complaint
commencing a civil class action antitrust lawsuit had been filed against us and
other producers of bulk graphite in the District Court entitled General
Refractories Company v. GrafTech International Ltd., et al. In March 2003, this
lawsuit was dismissed by the District Court without prejudice. In March 2003, we
learned that two complaints commencing civil class action antitrust lawsuits had
been filed against us and other producers of bulk graphite in the U.S. District
Court for the District of New Jersey entitled General Refractories Company v.
GrafTech International Ltd., et al. and Midwest Graphite Co., Inc. v. SGL
Carbon, LLC, et al., respectively. The lawsuits commenced by the first, second,
fourth and fifth complaints, along with a lawsuit commenced by a sixth complaint
filed only against SGL Carbon, LLC, SGL Carbon A.G. and SGI Carbon GmbH, were
subsequently consolidated or are subject to consolidation into a single lawsuit
in the United States District Court for the District of New Jersey entitled In
re: Bulk [Extruded] Graphite Products Antitrust Litigation (the "BULK GRAPHITE
LAWSUITS"). In the bulk graphite lawsuits, the plaintiffs allege that the
defendants violated U.S. federal antitrust law in connection with the sale of
bulk graphite and seek, among other things, an award of treble damages resulting
from such alleged violations. In March 2003, we reached an agreement to settle
the bulk graphite lawsuits.
The foreign customer 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.
ANTITRUST EARNINGS CHARGES
We have recorded pre-tax charges of $350 million against results of
operations as a reserve for potential liabilities and expenses in connection
with antitrust investigations and related lawsuits and claims. The 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.
The fines and net settlements and expenses are within the amounts we used to
evaluate the aggregate charge of $350 million. To the extent that aggregate
liabilities and expenses, net, are known or reasonably estimable, at December
31, 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 December 31, 2002, we have paid an aggregate of $252 million of
fines and net settlement and expense payments and $14 million of imputed
interest. At December 31, 2002, $98 million remained in the reserve. The balance
of the reserve is available for the fine payable to the DOJ (excluding imputed
interest thereon), the fine assessed by the EU Competition Authority and other
matters. The aggregate amount of remaining committed payments payable to the DOJ
for imputed interest at December 31, 2002 was about $6 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.
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. Oral
hearings were held on those
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motions in the 2001 first and second quarters. The court approved a motion to
disqualify certain of our counsel in November 2002, and denied our motion to
reconsider that decision. We do not believe that either that decision or the
adverse ruling on such motion for reconsideration will adversely affect this
lawsuit. The court has not ruled on the motions to dismiss.
We expect to incur $10 million to $20 million for legal expenses to
pursue this lawsuit from the date of filing the complaint through trial. Through
December 31, 2002, we had incurred about $5 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is listed on the NYSE under the trading symbol "GTI".
The closing sale price of our common stock was $5.96 on December 31, 2002, the
last trading day of our last fiscal year. The following table sets forth, for
the periods indicated, the high and low closing sales prices for our common
stock as reported by the NYSE:
<table>
<caption>
<s> <c> <c>
High Low
---- ---
2001:
First Quarter................................................. $13.85 $9.19
Second Quarter................................................ 15.14 10.36
Third Quarter................................................. 13.30 8.35
Fourth Quarter................................................ 10.89 7.00
2002:
First Quarter................................................. 14.30 9.80
Second Quarter................................................ 14.05 11.00
Third Quarter................................................. 11.85 7.05
Fourth Quarter................................................ 7.60 3.82
</table>
As of February 28, 2003, there were 188 record holders of common stock. We
estimate that about 3,500 stockholders are represented by nominees.
Our common stock is included in the Russell 2000 Index.
Effective August 7, 1998, GTI adopted a Stockholder Rights Plan (the
"RIGHTS PLAN"). Under the Rights Plan, one preferred stock purchase right (a
"RIGHT") was distributed on September 21, 1998 to stockholders of record on
August 20, 1998 as a dividend on each share of common stock outstanding on the
record date. Each share of common stock issued after the record date is
accompanied by a Right.
When a Right becomes exercisable, it entitles the holder to buy one
one-thousandth of a share of a new series of preferred stock for $110. The
Rights are subject to adjustment upon the occurrence of certain dilutive events.
The Rights will become exercisable only when a person or group becomes the
beneficial owner of 15% or more of the outstanding shares of common stock or 10
days after a person or group announces a tender offer to acquire beneficial
ownership of 15% or more of the outstanding shares of common stock. No
certificates representing the Rights will be issued, and the Rights are not
transferable separately from the common stock, unless the Rights become
exercisable.
Under certain circumstances, holders of Rights, except a person or
group described above and certain related parties, will be entitled to purchase
shares of common stock (or, in certain circumstances, other securities or
assets) at 50% of the price at which the common stock traded prior to the
acquisition or announcement (or 50% of the value of such other securities or
assets). In addition, if GTI is acquired after the Rights become exercisable,
the Rights will entitle those holders to buy the acquiring company's common
shares at a similar discount.
GTI is entitled to redeem the Rights for one cent per Right prior to
the time when the Rights become exercisable. If not redeemed, the Rights will
expire on August 7, 2008.
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The preferred stock issuable upon exercise of Rights consists of Series
A Junior Participating Preferred Stock, par value $.01 per share, of GTI. In
general, each share of that preferred stock will be entitled to a minimum
preferential quarterly dividend payment equal to the greater of $10 per share or
1,000 times the quarterly dividend declared on the common stock, will be
entitled to a liquidation preference of $110,000 and will have 1,000 votes,
voting together with the common stock.
DIVIDEND POLICIES AND RESTRICTIONS
It is the current policy of GTI's Board of Directors to retain earnings
to finance strategic and other plans and programs, conduct business operations,
fund acquisitions, meet obligations and repay debt. Any declaration and payment
of cash dividends or repurchases of common stock will be subject to the
discretion of GTI's Board of Directors and will be dependent upon our financial
condition, results of operations, cash requirements and future prospects, the
limitations contained in the Senior Facilities and the Senior Notes and other
factors deemed relevant by GTI's Board of Directors. We do not anticipate paying
any cash dividends.
GTI is a holding company that derives substantially all of its cash
flow from GrafTech Global and GrafTech Finance. GTI's ability to pay dividends
or repurchase common stock from earnings or cash flow from operating or
investing activities is dependent upon the earnings and cash flow from operating
or investing activities of GrafTech Global and its subsidiaries and the
distribution of those earnings and cash flows by GrafTech Global to GTI.
Under the Senior Facilities, GTI is permitted to pay dividends on
common stock and repurchase common stock only in an annual aggregate amount of
$25 million, plus up to an additional $25 million if certain leverage ratio and
excess cash flow requirements are satisfied. We are also permitted to repurchase
common stock from present or former directors, officers or employees in an
aggregate amount of up to the lesser of $5 million per year (with unused amounts
permitted to be carried forward) or $25 million on a cumulative basis since
February 22, 2000. In addition, GrafTech Global is permitted to pay dividends to
GTI for those purposes and also in respect of GTI's administrative fees and
expenses and to fund payments in connection with antitrust, securities and
stockholder derivative investigations, lawsuits and claims. The total amount of
dividends to fund those payments (in each case, excluding certain imputed
interest), plus the total amount paid on intercompany debt owed to GTI for the
same purpose (in each case, excluding certain imputed interest), plus the amount
of additional reserves created with respect to these investigations, lawsuits
and claims may not exceed $340 million by more than $130 million (which $130
million is reduced by the amount of certain debt, other than the Senior Notes,
incurred by us that is not incurred under the Senior Facilities).
Under the Senior Notes, GTI is permitted to pay dividends on common
stock and repurchase common stock only in a cumulative (from February 15, 2002)
amount of $25 million (subject to reduction if we make other restricted
payments), plus, if certain leverage ratio requirements are satisfied, an amount
of up to the sum of 50% of certain cumulative (from April 1, 2002) consolidated
net income, 100% of net cash proceeds from certain sales of common stock
(subsequent to February 15, 2002) and certain investment returns. We are also
permitted to repurchase common stock from present or former directors, officers
or employees of up to the lesser of $5 million annually or $10 million on a
cumulative basis from February 15, 2002. GrafTech Global is permitted to pay
dividends to GTI for those and other purposes.
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RECENT SALES OF UNREGISTERED SECURITIES AND OTHER ISSUANCES
In 2002, certain of our officers and other employees elected to defer
an aggregate of $49,212 in compensation pursuant to our compensation deferral
program. The amount that we will be obligated to pay them, at the expiration of
the deferral period, with respect to the deferred compensation will equal the
value, at such expiration, of an aggregate of 6,204 shares of common stock. That
number of shares equals the aggregate number of shares of common stock which
could have been purchased at market prices on the respective dates of deferral.
Such transactions were registered under the Securities Act of 1933.
In the 2003 first quarter, we contributed 500,000 shares of common
stock into the trust for our qualified U.S. retirement plan. These shares may be
sold by the trust in the future to provide funding to meet obligations under the
plan. We intend to make a voluntary excess contribution of an additional
1,500,000 shares of common stock to the trust in the 2003 second quarter and may
make additional similar contributions to this and other plans in future periods.
Such transactions were and would be exempt from the registration under Section
4(2) of the Securities Act of 1933 because such transactions did and will not
involve the public offering of securities.
We are contributing 1,573,600 shares of common stock into a benefits
protection trust which we adopted to assist us in providing for payment of
nonqualified retirement and other benefit plan obligations to management as well
as payment of obligations with respect to certain compensation deferred by
management and earnings thereon under our compensation deferral plan. These
shares, in addition to the 426,400 shares similarly contributed in 2001, may be
sold in the future to provide funding to meet such obligations under our
non-qualified retirement plans. Such transaction was exempt from registration
under Section 4(2) of the Securities Act of 1933 because such transaction did
not involve the public offering of securities.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data at and for the years
ended December 31, 1998, 1999, 2000, 2001 and 2002 have been derived from our
audited annual Consolidated Financial Statements, except for the data under
"Other Operating Data." The data set forth below should be read in conjunction
with "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements included
elsewhere in this Report.
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
STATEMENT OF OPERATIONS DATA:
<s> <c> <c> <c> <c> <c>
Net sales....................................... $ 947 $ 831 $ 776 $ 654 $ 613
Gross profit...................................... 343 258 216 185 140
Selling, administrative and other expenses........ 103 86 86 78 78
Restructuring charges (credit) (a)................ 86 (6) 6 12 6
Impairment loss on long-lived and other assets (b) 60 35 3 80 17
Antitrust investigations and related lawsuits and
claims (c)...................................... - - - 10 -
Securities class action and stockholder derivative
lawsuits (d).................................... - 13 (1) - -
Corporate realignment and related expenses (e).... - - - 2 3
Interest expense.................................. 73 84 75 60 60
Provision for (benefit from) income taxes......... 32 1 10 15 (13)
Income (loss) before extraordinary
items (a)(b)(c)(d)(e)........................... (30) 42 23 (87) (15)
Extraordinary items, net of tax (f)............... 7 - 13 - 3
Net income (loss) (a)(b)(c)(d)(e)(f).............. (37) 42 10 (87) (18)
Earnings (loss) per common share:
Basic: Income (loss) before extraordinary
items................................. $ (0.66) $ 0.94 $ 0.51 $ (1.75) $ (0.28)
========= ========== ========= ========= =========
Net income (loss)...................... $ (0.83) $ 0.94 $ 0.22 $ (1.75) $ (0.33)
========= ========== ========= ========= =========
Weighted average common shares
outstanding (in thousands)........... 44,972 45,114 45,224 49,720 55,942
Diluted: Income (loss) before extraordinary items $ (0.66) $ 0.91 $ 0.50 $ (1.75) $ (0.28)
========= ========== ========= ========= =========
Net income (loss)...................... $ (0.83) $ 0.91 $ 0.22 $ (1.75) $ (0.33)
========= ========== ========= ========= =========
Weighted average common shares
outstanding (in thousands)........... 44,972 46,503 45,813 49,720 55,942
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents......................... $ 58 $ 17 $ 47 $ 38 $ 11
Total assets...................................... 1,137 933 908 797 859
Short-term debt................................... 19 - 3 7 18
Payments due within one year on long-term debt.... 63 82 27 - -
Long-term debt carrying value..................... 722 640 705 631 699
Fair value of hedged debt obligation.............. - - - - 8
Unamortized bond premium.......................... - - - - 6
Total debt........................................ 804 722 735 638 731
Other long-term obligations....................... 266 224 209 231 258
Balance of reserve for antitrust investigations,
lawsuits and claims............................. 195 131 107 101 98
Other long term obligations (excluding the reserve
for antitrust investigations, lawsuits and
claims) (g)..................................... 149 120 126 132 163
Stockholders' equity (deficit).................... (287) (293) (316) (332) (381)
Working capital................................... 203 105 101 112 108
</table>
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<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
OTHER FINANCIAL DATA:
<s> <c> <c> <c> <c> <c>
Gross profit margin............................... 36.2% 31.0% 27.8% 28.3% 22.8%
Depreciation and amortization..................... $ 51 $ 45 $ 43 $ 36 $ 29
Capital expenditures.............................. 52 56 52 40 50
Cash flow provided by (used in) operations........ (29) 80 94 17 (60)
Cash flow used in investing activities............ (31) (39) (50) (39) (50)
Cash flow provided by (used in) financing activities 62 (80) (13) 15 79
OTHER OPERATING DATA:
Ratio of earnings to fixed charges (h)............ - 1.54x 1.30x - -
Quantity of graphite electrodes sold
(thousands of metric tons).................. 211 206 217 174 180
</table>
- ----------------------
(a) For 1998, represents a charge in connection with closing graphite
electrode operations in Canada and Germany and the consolidation of
certain corporate administrative offices. These costs consisted
primarily of severance, write-offs of fixed assets and environmental
and other shutdown costs. For 1999, represents a net reduction in the
estimate of shutdown costs recorded in 1998. For 2000, represents a
$2 million charge in connection with the restructuring of our advanced
graphite materials business and a $4 million charge in connection with
a corporate restructuring involving workforce reduction. These costs
consisted primarily of severance. For 2001, represents a $7 million
charge in connection with the closure of graphite electrode
manufacturing operations in Tennessee and coal calcining operations in
New York and relocation of corporate headquarters, which consisted
primarily of severance, and a $5 million charge in connection with the
mothballing of our graphite electrode operations in Italy, which
consisted primarily of shutdown costs. For 2002, represents a net
increase in the estimate of the costs in connection with the
mothballing of our graphite electrode operations in Italy. These costs
consisted primarily of severance.
(b) Represents impairment losses on long-lived assets associated with our
Russian assets in 1998, our advanced graphite materials assets in 1999
and our cathode assets in 2000. For 2001, represents a $51 million
impairment loss related to our graphite electrode assets in Tennessee,
a $1 million impairment loss related to our coal calcining assets in
New York, a $1 million impairment loss related to our advanced
graphite materials assets, a $24 million impairment loss related to
our graphite electrode assets in Italy and a $3 million impairment
loss related to available-for-sale securities. For 2002, represents a
$12 million impairment loss related to our carbon electrode assets in
Tennessee, a $2 million impairment loss related to available-for-sale
securities, and a $3 million related to our joint venture with Jilin
in China.
(c) Represents estimated potential liabilities and expenses in connection
with antitrust investigations and related lawsuits and claims.
(d) Represents estimated liabilities and expenses in connection with
securities class action and stockholder derivative lawsuits, $1 million
of which was reversed in 2000.
(e) Represents costs in connection with a corporate realignment of our
subsidiaries.
(f) For 1998 and 2000, represents write-off of capitalized bank fees
resulting from early extinguishment of debt in connection with a debt
refinancing and a debt recapitalization, respectively. For 2002,
represents write-off of capitalized bank fees in connection with our
retirement of debt and issuance of senior notes.
(g) Represents pension, post-retirement and related benefits, employee
severance liabilities and miscellaneous other long-term obligations.
(h) The ratio of earnings to fixed charges has been computed by dividing
(i) earnings before income taxes, plus fixed charges (excluding
capitalized interest) and amortization of capitalized interest by (ii)
fixed charges, which consist of interest charges (including capitalized
interest) plus the portion of rental expense that includes an interest
factor. Earnings were insufficient to cover fixed charges by $3 million
in 1998, by $69 million in 2001 and by $2 million in 2002 due to, among
other things, restructuring charges and impairment losses on long-lived
and other assets.
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<page>
The following quarterly selected consolidated financial data have been
derived from the quarterly unaudited Consolidated Financial Statements. The data
set forth below should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere in this Report.
<table>
<caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(Dollars in millions, except per share data)
2001:
<s> <c> <c> <c> <c>
Net sales........................... $ 171 $ 171 $ 157 $ 155
Gross profit........................ 49 51 43 42
Net income (loss) (a)(b)............ 3 (39) 4 (55)
Basic net income (loss) per share... $ 0.07 $ (0.87) 0.07 $ (0.98)
======= ========= ======== ======
Diluted net income (loss) per share. $ 0.07 $ (0.87) $ 0.07 $ (0.98)
======= ========= ======== ======
2002:
Net sales........................... $ 138 $ 161 $ 154 $ 160
Gross profit........................ 31 36 34 39
Loss before extraordinary item......
(2) (6) (5) (2)
Net loss (c)(d)(e)(f)............... (4) (7) (5) (2)
Basic loss per share before
extraordinary item............... $ (0.03) $ (0.12) (0.08) $ (0.04)
======= ========= ======== ======
Basic net loss per share............ $ (0.06) $ (0.14) $ (0.08) $ (0.04)
======= ========= ======== ======
Diluted loss per share before
extraordinary item............... $ (0.03) $ (0.12) $ (0.08) $ (0.04)
======= ========= ======== ======
Diluted net loss per share.......... $ (0.06) $ (0.14) $ (0.08) $ (0.04)
======= ========= ======== ======
</table>
- ----------------------
(a) The 2001 second quarter includes a restructuring charge of $5 million
related to U.S. graphite electrode operations, a charge of $53 million
related to the impairment of long-lived U.S. graphite electrode and
coal calcining assets, and a charge of $10 million related to antitrust
investigations and related lawsuits and claims.
(b) The 2001 fourth quarter includes a restructuring charge of $7 million
related primarily to Italian graphite electrode assets, a charge of $24
million related to the impairment of long-lived Italian graphite
electrode assets, a $3 million charge related to the impairment of
available-for-sale securities, and a $29 million charge related to
adjustments made in connection with the capitalization of foreign tax
credits to investment in affiliates as well as settlement of audits and
adjustments to reserves.
(c) The 2002 first quarter includes a restructuring charge of $5 million
related primarily to the mothballing of Italian graphite electrode
operations.
(d) The 2002 second quarter includes a $12 million charge related to the
impairment of long-lived U.S. carbon electrode assets and a $1 million
charge related to impairment of available-for-sale securities.
(e) The 2002 third quarter includes a $1 million charge related to the
impairment of available-for-sale securities.
(f) The 2002 fourth quarter includes a $3 million charge related to the
impairment of our joint venture with Jilin in China and an additional
$1 million restructuring charge related to the mothballing of Italian
graphite electrode operations.
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<page>
ITEM 7. 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 and deliver high quality 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, transportation, chemical and petrochemical markets.
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 believe that our electrode and cathode businesses have the leading
market shares in the world. 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. Our customers include industry leaders such
as Nucor Corporation and Arcelor in steel, Alcoa Inc. and Pechiney in aluminum,
Ballard Power Systems Inc. in fuel cells, Intel Corporation in electronics, MEMC
Electronic Materials in semiconductors and The Boeing Company in transportation.
Our core competencies include graphite and carbon material sciences and
high temperature processing know-how. We believe that we operate industry
leading research, development and testing facilities. We also have strategic
alliances with Pechiney, the world leader in aluminum smelting technology,
Ballard Power Systems, the world leader in PEM fuel cell technology, and leaders
in the electronic thermal management and other industries.
In 2002, our businesses were organized around two operating divisions,
our Graphite Power Systems Division, which included our graphite electrode and
cathode businesses, and our Advanced Energy Technology Division, which included
our natural graphite, advanced synthetic graphite and advanced carbon materials
businesses. In 2003, we further refined the organization of our businesses into
three lines of business:
o a synthetic graphite line of business called Graphite Power
Systems, which primarily serves the steel, aluminum, semiconductor
and transportation industries and includes graphite electrodes,
cathodes and other advanced synthetic graphite materials;
o a natural graphite line of business called Advanced Energy
Technology, which primarily serves the transportation, power
generation, electronics and chemical industries and includes fuel
cell, electronic thermal management and sealant products and
services; and
o a carbon materials line of business called Advanced Carbon
Materials, which primarily serves the silicon metal and
ferro-alloy industries and includes carbon electrodes and
refractories.
We believe that our new organizational structure better aligns our
advantaged manufacturing platform with market opportunities and enables
accelerated decision-making to
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respond to those opportunities. Under this organizational structure, we have
begun to further streamline our operations. We are implementing voluntary and
selective severance programs and revising our compensation programs to
strengthen our business strategies. A main component of our compensation
programs is a direct link between cash incentive compensation and cash
profitability of our businesses.
Our management team has actively repositioned our manufacturing
network, improved product quality, reduced costs, reduced debt and other
obligations, and managed antitrust liabilities. We have also implemented an
enterprise-wide risk management process whereby we assess the business risks to
our goal of maximizing cash flow, using a structured and disciplined approach.
This approach seeks to align our people and processes with our critical
strategic uncertainties so that our management team and GTI's Board of Directors
may better evaluate and manage those uncertainties.
COST REDUCTION PLANS
OVERVIEW. GTI's Board of Directors adopted a global restructuring and
rationalization plan in September 1998 that delivered recurring annualized run
rate cost savings of $132 million by the end of 2001. In January 2002, we
announced a major cost savings plan that is one of the most aggressive major
cost reduction plans being implemented in the graphite and carbon industry.
2002 PLAN. 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;
o the implementation of global work process changes, including the
consolidation and streamlining of 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 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
during 2003. After the mothballing and incremental expansion, our total annual
graphite electrode manufacturing capacity will remain about 210,000 metric tons.
During the 2002 second quarter, we launched the expansion at our facility in
Monterrey, Mexico, which will increase its capacity from about 40,000 metric
tons to about
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60,000 metric tons annually. We completed 10,000 metric tons of expansion at
this facility by the end of 2002. We expect to complete the remaining expansion
by the end of the 2003 first quarter.
We have identified a number of additional plant and overhead cost
reduction projects. One of our major projects is employee benefit plan redesign.
In the 2001 fourth quarter and 2002 first quarter, we redesigned and implemented
changes in our retiree medical insurance plan and our U.S. retirement and
savings plans for active and retired employees. Among other things, we froze our
qualified defined benefit plan and established a new defined contribution plan
for most of our U.S. employees. These changes resulted in annual cost savings of
$2 million in 2001 and $11 million in 2002 and will result in annual recurring
cost savings of more than $11 million in 2003 and later years. In addition, on
July 1, 2002, we amended our U.S. post-retirement medical coverage. Effective
March 31, 2003, we will discontinue the Medicare supplement plan (for retirees
65 years or older or those eligible for Medicare benefits). This change will
apply to all current employees not covered by a collective bargaining agreement,
all current retirees who were not covered by a collective bargaining agreement
when they retired and those retirees who retired under a former collective
bargaining agreement. This change is expected to reduce our net post-retirement
medical benefit obligation by about $7 million. The reduction will be amortized
over the remaining life of the retiree population. Effective March 31, 2003, we
will freeze our qualified defined benefit plan for our remaining U.S. employees.
We are also implementing voluntary and selective severance programs.
These programs are designed to compliment our global work process and
organizational redesign. From 1998 through 2002, we reduced our global workforce
by about 1,600 employees (or 30%). The voluntary and selective severance
programs are expected to result in the reduction of our global workforce by up
to an additional 200 employees (or about 5%). The voluntary severance program
requires election by eligible participants by March 31, 2003. These programs may
require up to $14 million of restructuring charges throughout 2003,
approximately $7 million of which are expected to be cash. These programs are
expected to result in annual cost savings of $6 million in 2003 and annual
recurring cost savings of $12 million in 2004 and are part of our annual
recurring cost saving targets discussed below.
The corporate realignment of our subsidiaries was substantially
completed in the 2002 first half and resulted 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, was about 35%.
We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years. We anticipate that the
aggregate estimated pre-tax, cash proceeds from these sales will total $75
million.
We are targeting recurring annual pre-tax cost savings of $30 million
in 2003, $60 million in 2004 and $80 million in 2005, which is later than
previously expected due to a variety of factors. These factors include the sale
of higher cost inventories associated with low operating levels in early 2002,
higher than planned costs associated with activities to transition graphite
electrode production capacity from our higher cost facilities to our lower cost
facilities, including the sourcing of graphite electrodes from other producers
and extended preparations at our existing facilities to run at capacity, and
impacts of net changes in currency exchange rates. Savings achieved under the
2002 plan are additive to those which we achieved by the end of
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2001 under the 1998 plan that is now completed. We achieved cost savings of
about $14 million in 2002.
We believe that implementation of the 2002 plan will require about $27
million of cash exit costs (excluding taxes), of which about $16 million has
been recorded through 2002. Approximately $8 million of the $16 million has been
paid through 2002. The 2002 plan is expected to result in about $37 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. In addition, in
the 2002 first quarter, we recorded a $5 million restructuring charge that
related primarily to the mothballing of our Italian graphite electrode
manufacturing operations under the 2002 plan and an additional $1 million in the
2002 fourth quarter. This charge includes estimated pension, severance and other
related employee benefit costs for 102 employees and other mothballing costs.
The remaining actions associated with the 2002 plan, primarily the
implementation of global work process changes and additional overhead cost
reductions, could result in additional restructuring charges.
1998 PLAN. The key elements of our global restructuring and
rationalization plan announced in September 1998 and enhanced in October 1999
included the shutdown of our graphite electrode manufacturing operations at our
facilities in Canada and Germany and the downsizing of our graphite electrode
manufacturing operations at our facilities in Russia. As a result of the 1998
plan and other cost savings initiatives, we reduced our average graphite
electrode production cost per metric ton by the end of 2001 by 15% since the
1998 fourth quarter.
OTHER COST SAVINGS ACTIVITIES. Since 1998, we have initiated other cost
savings activities. Some of these activities will continue while the 2002 plan
is being implemented.
We began to implement in 2000 and are continuing to implement a global
business process rationalization and transformation initiative. Through December
31, 2002, our investment in the initiative included about $10 million of
consulting fees and internal costs and $10 million of capital expenditures,
primarily for costs related to implementation of global information technology
systems for advanced planning and scheduling software and global treasury
management systems. We have evaluated every aspect of our supply chain and
improved and continue to improve performance through realignment and
standardization of supply chain processes and systems and improvement of
interfaces with trading partners.
Effective April 2001, we entered into a ten year service contract with
CGI Group Inc. valued at $75 million. Pursuant to this contract, 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 activities.
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 cost savings
targets.
In the 2002 third quarter, we entered into a ten year outsourcing
contract with CGI Group Inc. valued at $36 million. Pursuant to this contract,
CGI became the delivery arm for our
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finance and accounting business process services, including accounts receivable
and accounts payable activities. CGI also provides various related analytical
services such as general accounting, cost accounting and financial analysis
activities. Through this contract, we believe that we will be able to further
leverage the resources of CGI to assist us in achieving our cost savings
targets.
STRATEGIC ALLIANCES
We are pursuing strategic alliances that enhance or complement our
existing or related businesses. Strategic alliances may be in the form of joint
venture, licensing, supply or other arrangements.
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.
In April 2001, we entered into a joint venture with Jilin to produce
and sell high-quality graphite electrodes in China. If successfully implemented,
the joint venture would utilize renovated capacity at Jilin's main facility in
Jilin City and complete additions at another facility in Changchun that were
begun by Jilin. We are required to make capital contributions of $6 million of
cash ($2 million of which has been contributed to date) plus technical
assistance ($1 million of which has been contributed to date) for our 25%
ownership interest in the joint venture. The successful implementation and
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. During the 2002 fourth quarter, we impaired our total
investments to date of $3 million associated with this joint venture with Jilin.
This impairment results from uncertainty about the completion and start-up of
the facilities in Changchun, China due to the effects that the challenging 2002
graphite electrode industry conditions have had on Jilin. We continue to work
closely with Jilin on production alternatives. However, we will make no further
contributions to the joint venture until we have agreed upon production
alternatives.
We have been working with Ballard Power Systems since 1992 on
developing natural graphite-based materials for use in its fuel cells for power
generation. In June 2001, our subsidiary, AET, entered into an expanded
exclusive development and collaboration agreement and an expanded exclusive
long-term supply agreement with Ballard Power Systems. In addition, Ballard
Power Systems became a strategic investor in AET, investing $5 million (valued
at the time of investment) in shares of Ballard Power Systems common stock for a
2.5% equity ownership interest in AET.
The scope of the expanded exclusive development and collaboration
agreement includes natural graphite-based materials and components, including
flow field plates and gas diffusion layers, for use in PEM 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
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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 PEM
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 fluctuate.
2001. Economic weakening in North America continued and became more
severe in 2001. This economic weakness was exacerbated by the impact on economic
conditions of the terrorist acts in the U.S. in September 2001. Many steel
companies in the U.S. were subject to or filed for protection under the U.S.
Bankruptcy Code. Electric arc furnace steel production declined in 2001 as
compared to 2000 by about 11% in the U.S.
The economic weakness in North America adversely impacted economic
conditions in Europe, Asia (except for China), Brazil and other regions, and
this impact became more severe during 2001. Electric arc furnace steel
production declined in 2001 as compared to 2000 by about 11% in Asia (excluding
China) and 11% in Brazil. The decline of electric arc furnace steel production
in Brazil was caused both by shortages of electricity brought on by a drought
that reduced hydroelectric power generation (that have been largely relieved in
2002) as well as by the weakening in global economic conditions. Brazil was also
impacted by developing currency, debt and related economic crises in Brazil
itself as well as in neighboring Argentina. Electric arc furnace steel
production in China remained relatively stable.
Worldwide electric arc furnace steel production 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 declined in 2001 as compared to 2000 by about 8%. Overall pricing
worldwide was weak throughout most of this period. While we implemented
increases in local currency selling prices of our graphite electrodes in 2000
and early 2001 in Europe, the Asia Pacific region, the Middle East and South
Africa, we were not able to maintain all of these price increases.
We have been 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 reduced our sales of, or refused to sell
(except for cash on delivery), graphite electrodes to some customers and
potential customers in the U.S. and, to a limited extent, elsewhere. Our unpaid
trade receivables from steel companies in the U.S. that have filed for
protection under the U.S. Bankruptcy Code since January 1, 2000 have aggregated
only 1.4% of net sales of graphite electrodes in the U.S. during the period from
January 1, 2000 through December 31, 2002. Our volume of graphite electrodes
sold declined in 2001 as compared to 2000 by about 20% due primarily to the
decline in electric arc furnace steel production as well as our efforts to
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implement and maintain local currency selling price increases and our efforts to
seek to minimize credit risks.
The global and regional economic conditions that impacted demand and
prices for graphite electrodes also impacted demand and prices for most of our
other products sold to the metals, transportation and other industries (other
than graphite cathodes). In general, demand was relatively stable and pricing
remained relatively weak. Demand and prices for graphite cathodes remained
relatively strong primarily due to construction of new aluminum smelters using
graphite cathodes, even as old smelters using carbon cathodes are removed from
service.
2002. Global economic conditions remained relatively weak in 2002.
However, electric arc furnace steel production rebounded from the depressed
level in 2001. We estimate that worldwide electric arc furnace steel production
increased by about 7% in 2002 (to a total of about 299 million metric tons,
about 33% of total steel production) as compared to 2001. This increase was
primarily due to an increase in production in the U.S. and China and, to a
limited extent, in Mexico and Asia (other than China).
In March 2002, President Bush announced his decision to impose tariffs,
of up to 30% initially and declining thereafter over a three year period, on
most imported steel as part of a broader plan to rescue the financially troubled
steel industry in the U.S. Several additional exemptions were granted in 2002 by
the Bush administration. We believe that the tariffs are having a modest
positive impact on electric arc furnace steel production in the U.S. While steel
imported from Mexico is exempt from those tariffs, steel imported from Europe
and Asia is not exempt. Steel production in those regions has been adversely
impacted by the tariffs. Further, import duties in China on both steel and
graphite electrodes have declined as a result of the admission of China to the
World Trade Organization. We cannot predict whether and to what extent these
developments will impact our global business over the long-term. However, the
U.S. Section 201 tariffs will remain in place through 2004, and China has
extended its temporary tariff into 2003.
Worldwide graphite electrode demand was very depressed in the 2002
first quarter, but rebounded from those depressed levels during the balance of
2002. We utilized virtually 100% of our graphite electrode manufacturing
capacity during the last three quarters of 2002 and our volume of graphite
electrodes sold increased about 4% in 2002 from 2001. Overall, we believe that
worldwide graphite electrode demand increased modestly in 2002 as compared to
2001. While we attempted to implement increases in local currency selling prices
of our graphite electrodes in 2002, we believe that graphite electrode pricing
declined by about 10% (in average dollar terms) in 2002 as compared to 2001,
driven by supply/demand imbalance as well as global and industry economic
conditions.
Weak economic conditions in 2002 resulted in relatively low demand and
weak pricing for our other products sold to metals, transportation and other
industries (other than graphite cathodes). We used virtually 100% of our cathode
manufacturing capacity during 2002 and our volume of cathodes sold increased
about 10% in 2002 from 2001. Demand and prices for cathodes remained strong
primarily due to construction of new aluminum smelters using graphite cathodes,
even as old smelters using carbon cathodes are removed from service.
OUTLOOK. We believe that the rebound we experienced in graphite
electrode demand from the depressed level in the 2002 first quarter was
primarily due to the improvement in conditions in the steel industry and an
increase in our market share as we continue to implement our
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enterprise selling and other strategies. We are now seeing the building of steel
inventory levels, especially in the U.S. Our graphite electrode order book is
about 80% full for 2003 and our cathode order book is virtually full for 2003.
We announced, effective for new orders placed after February 2003, price
increases of (euro)100 per metric ton for our graphite electrodes sold in
Europe, $200 per metric ton for our graphite electrodes sold in Asia, the Middle
East, North Africa and South America and $0.05 per pound for our graphite
electrodes sold in the U.S. We cannot predict whether we will be able to
maintain such price increases without adversely affecting sales volume.
We plan to continue to operate our plants at capacity to meet demand,
which is expected to positively impact average graphite electrode and cathode
production cost per metric ton in 2003 as compared to the 2002. In addition, we
also expect to benefit from the impact of our prior and current plant
rationalization activities, cost activities and cost reduction programs as well
as increased economies of scale.
We believe that business conditions for most of our products (other
than graphite electrodes and cathodes) will remain challenging well into 2003.
In particular, demand for carbon electrodes in the U.S. (where our main customer
base is located) and demand for advanced graphite and carbon material products
used in semiconductor, telecommunication and electronic industries is depressed.
Accordingly, we expect the financial performance of our businesses selling those
products to remain similar to 2002 levels. We will continue to seek to drive
productivity improvements in these businesses through our cost savings
initiatives.
We continue to focus on commercializing new technologies. In our
natural graphite line of business, we are seeking to commercialize approximately
20 active eGRAF(TM) thermal management product development programs that are
currently underway. Approximately half of these programs are already in the
product testing phase.
We are focused on delivering significant improvement in earnings and
cash flow in 2003 over 2002. We are expecting improvements in graphite electrode
sales volumes and prices as well as costs. For example, we have implemented
graphite electrode price increases (in average dollar terms) for 2003 and expect
an increase in volume of graphite electrodes sold of about 5% in 2003 over 2002.
We have implemented interest rate management initiatives to seek to
minimize our interest expense and optimize our portfolio of fixed and variable
interest rate obligations. In the 2002 second quarter, we entered into two
ten-year interest rate swaps for a total notional amount of $250 million to
effectively convert that amount of fixed rate debt (represented by Senior Notes)
to variable rate debt. These swaps reduced our interest expense in 2002 by $6
million. In the 2002 third quarter, we reset our interest rate swaps to allow
the accelerated collection of $10 million in cash. In the 2003 first quarter, we
entered into an additional ten-year interest rate swap for a notional amount of
$200 million that effectively converted that amount of fixed rate debt to
variable rate debt. In the 2003 first quarter, we also entered into five-year
interest rate caps for a notional amount of $300 million. Subsequently in the
2003 first quarter, we sold the entire $450 million notional amount of our
interest rate swaps for $11 million in cash. The adjustment of the carrying
amount of the Senior Notes will be amortized over the term of the Senior Notes
and recorded as a credit against
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interest expense. We are targeting interest expense of $57 to $60 million for
2003, essentially the same as in 2002. Following the sale of the swaps, in March
2003, we entered into $350 million notional amount of interest rate swaps
through the remaining term of our Senior Notes.
Our outlook could be significantly impacted by, among other things,
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, developments involving a war against Iraq, 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 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.
The net proceeds from the offering completed in February 2002 were $387
million. 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 all of these net proceeds to reduce the balance outstanding under our
revolving credit facility and 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 costs are being amortized over the term of the Senior Notes.
The $7 million premium received upon issuance of the additional Senior
Notes issued in May 2002 is classified as long-term liability 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 December 31, 2002, the Senior Facilities constituted $147 million of
our total debt of $731 million (including $6 million for unamortized bond
premium and $8 million for fair value of hedged debt obligations), of which $137
million was borrowings under term loans and all of the scheduled principal
payments of which term loans 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.
We recorded an extraordinary charge of $3 million ($2 million after
tax) in the 2002 first quarter and an extraordinary charge of $1 million ($1
million after tax) in the 2002 second quarter for write-off of capitalized fees
associated with the term loans under Senior Facilities repaid with the net
proceeds from the issuance of the Senior Notes.
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In November 2002, Moody's Investor Service reduced its rating on the
Senior Notes from B2 to B3. Moody's confirmed its Ba3 rating on the Senior
Facilities.
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
natural graphite line of business, 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. The Senior Facilities
consist of a six year term loan facility in the initial amounts of $137 million
and (euro)161 million, an eight year term loan facility in the initial amount of
$350 million and a six year revolving credit facility in the initial maximum
amount of (euro)250 million. The Senior Facilities have been amended as
described elsewhere in this Report. We recorded an extraordinary charge of $13
million, net of tax, in connection with our debt recapitalization. The charge
includes the redemption premium on our previously outstanding senior
subordinated notes, bank, legal, accounting, filing and other fees and expenses,
and write-off of deferred issuance costs.
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, 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. 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. Oral hearings were held on those motions in the
2001 first quarter. The court has not ruled on these motions. We expect to incur
$10 million to $20 million for legal expenses to pursue this lawsuit from the
date of filing the complaint through trial. Through December 31, 2002, we had
incurred about $5 million of these legal expenses. This lawsuit is in its
earliest stages, and the ultimate outcome of this lawsuit is subject to many
uncertainties.
ANTITRUST AND OTHER LITIGATION AGAINST US
Since 1997, we and other producers and distributors of graphite and
carbon products 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.
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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. The
payments due in 1998, 1999 and 2000 were timely made. In January 2001, at our
request, the due date of each of the remaining three payments was deferred by
one year 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. The payment due in 2002 was timely made. 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. At December 31, 2002, the statutory
rate of interest was 1.41% per annum. Accrued interest will be payable together
with each quarterly payment. Of the $110 million aggregate amount, $90 million
is treated as a fine and $20 million is treated as imputed interest for
accounting purposes.
In 1999, 2001 and 2002, investigations by the antitrust authorities in
Canada, Japan and Korea were resolved.
In January 2000, the EU Competition Authority 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 laws in connection with the sale of graphite electrodes. In July 2001,
that authority issued its decision regarding the allegations and assessed a fine
of (euro)50.4 million ($53 million, based on currency exchange rates in effect
at December 31, 2002) against GTI. As a result of the assessment of this fine,
we recorded a pre-tax charge of $10 million against results of operations in the
2001 second quarter as an additional reserve (for a total of $350 million) 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
EU Competition Authority. As a result of our cooperation, this fine reflects a
substantial reduction from the amount that otherwise would have been assessed.
It is the policy of 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. 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 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 an 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 have provided that information.
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In May 2002, the EU Competition Authority issued a statement of
objections initiating proceedings against us and other producers of specialty
graphite. The statement alleges that we and other producers violated European
antitrust laws in connection with the sale of specialty graphite. In December
2002, the EU Competition Authority issued its decision regarding the
allegations. Under the decision, the EU Competition Authority assessed no fine
against us due to our cooperation.
We are continuing to cooperate with the U.S., European 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
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 bulk graphite as well as the sale of 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 December 31, 2002, we have paid an aggregate of $252 million of
fines and net settlement and expense payments and $14 million of imputed
interest. At December 31, 2002, $98 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 fine
assessed against us by the EU Competition Authority and other matters. The
aggregate amount of remaining committed payments payable to the U.S. Department
of Justice for imputed interest at December 31, 2002 was about $6 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,
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 decisions
by the antitrust authorities 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.
CUSTOMER BASE
We are a global company and serve all major geographic markets. Sales
of our products to customers outside the U.S. accounted for about 69% of our net
sales in 2000, 70% of our net sales in 2001 and 71% of our net sales in 2002.
Our customer base includes both steel makers and non-steel makers. In 2002, two
of our ten largest customers were purchasers of non-graphite electrode products.
In 2002, four of our ten largest customers were based in Europe, two were in the
U.S., two were in South Africa and one was in each of Mexico and Brazil. No
single customer or group of affiliated customers accounted for more than 6% of
our net sales in 2002.
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FINANCIAL EFFECTS OF ORGANIZATIONAL CHANGES
In 2001, we realigned our businesses into two operating divisions, the
Graphite Power Systems Division and Advanced Energy Technology Division, each of
which constituted a reportable segment. In 2003, we reorganized our businesses
into three lines of business, synthetic graphite, natural graphite and carbon
materials. These three lines of business constitute two reportable segments,
synthetic graphite and other. The following table sets forth, for periods
indicated, certain items in the Consolidated Statements of Operations and
certain information as to gross profit margins, related to our reportable
segments.
<table>
<caption>
FORMER GRAPHITE NEW SYNTHETIC
POWER SYSTEMS SEGMENT GRAPHITE SEGMENT
--------------------- ----------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
(Dollars in Millions)
2000 2001 2002 2000 2001 2002
---- ---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c> <c>
Net sales................. $ 651 $ 525 $ 504 $ 681 $ 559 $ 538
Cost of sales............. 467 378 388 489 398 413
--- --- --- --- ---- ----
Gross profit.............. $ 184 $ 147 $ 116 $ 192 $ 161 $ 125
==== ==== ==== ==== ===== =====
Gross profit margin....... 28.3% 28.0% 23.0% 28.2% 28.8% 23.2%
</table>
<table>
<caption>
FORMER ADVANCED
ENERGY TECHNOLOGY SEGMENT NEW OTHER SEGMENT
------------------------- -----------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
(Dollars in Millions)
2000 2001 2002 2000 2001 2002
---- ---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c> <c>
Net sales................. $ 125 $ 129 $ 109 $ 95 $ 95 $ 75
Cost of sales............. 93 91 85 71 71 60
--- --- --- ---- --- ----
Gross profit.............. $ 32 $ 38 $ 24 $ 24 $ 24 $ 15
==== ==== ==== ===== ==== ====
Gross profit margin....... 25.6% 29.6% 22.0% 25.9% 25.4% 20.0%
</table>
<table>
<caption>
TOTAL TOTAL
----- -----
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
(Dollars in Millions)
2000 2001 2002 2000 2001 2002
---- ---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c> <c>
Net sales................. $ 776 $ 654 $ 613 $ 776 $ 654 $ 613
Cost of sales............. 560 469 473 560 469 473
--- --- --- ---- --- ---
Gross profit.............. $ 216 $ 185 $ 140 $ 216 $ 185 $ 140
==== ==== ==== ===== ==== ====
Gross profit margin....... 27.8% 28.3% 22.8% 27.8% 28.3% 22.8%
</table>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items in the Consolidated Statements of Operations and the increase or decrease
(expressed as a percentage of such item in the comparable prior period) of such
items:
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<table>
<caption>
FOR THE YEAR ENDED PERCENTAGE INCREASE
DECEMBER 31, (DECREASE)
------------ ----------
2000 2001 2002 2000 TO 2001 2001 TO 2002
---- ---- ---- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c>
Net sales...................................... $ 776 $ 654 $ 613 (16)% (6)%
Cost of sales.................................. 560 469 473 (16) 1
---- --- --- ---- ---
Gross profit................................... 216 185 140 (14) (24)
Research and development....................... 11 12 13 9 8
Selling, administrative and other expenses..... 86 78 78 (9) -
Other (income) expense, net.................... (1) 1 (16) N/M N/M
</table>
- ---------------------
N/M: Not Meaningful
The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain items in the Consolidated
Statements of Operations:
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
<s> <c> <c> <c>
Net sales.................................................... 100.0% 100.0% 100.0%
Cost of sales................................................ 72.2 71.7 77.2
------ ------ ------
Gross profit................................................. 27.8 28.3 22.8
Research and development..................................... 1.4 1.8 2.1
Selling, administrative and other expenses................... 11.0 11.9 12.7
Other (income) expenses, net................................. (0.1) 0.2 (2.6)
</table>
2002 COMPARED TO 2001. Net sales in 2002 were $613 million, a decrease
of $41 million, or 6%, from net sales in 2001 of $654 million. Gross profit in
2002 was $140 million, a decrease of $45 million, or 24%, from gross profit in
2001 of $185 million. Gross profit margin in 2002 was 22.8% of net sales as
compared to gross profit margin in 2001 of 28.3% of net sales. The decrease in
net sales and gross profit was primarily due to lower sales revenue per metric
ton for our graphite electrodes, which reduced net sales by about $43 million.
Former Graphite Power Systems Segment. Net sales decreased 4%, or $21
million, to $504 million in 2002 from $525 million in 2001. The decrease was
primarily attributable to a decrease in average sales revenue per metric ton of
graphite electrodes, partially offset by higher sales volumes for graphite
electrodes and cathodes sold. The volume of graphite electrodes sold increased
6,000 metric tons, or 4%, to 180,000 metric tons in 2002 as compared to 174,000
metric tons in 2001. The increase in volume of graphite electrodes sold
represented an increase in net sales of about $16 million. The average sales
revenue per metric ton (in U.S. dollars and net changes in currency exchange
rates) of our graphite electrodes was $2,100 in 2002 as compared to $2,341 in
2001. The reduced average sales revenue per metric ton of graphite electrodes
represented a decrease of about $43 million in net sales. Unfavorable changes in
currency exchange rates represented a reduction of about $4 million in net sales
of graphite electrodes. Volume of cathodes sold in 2002 was 10% higher than in
2001, with 36,900 metric tons in 2002 as compared to 33,400 metric tons in 2001,
and net sales of cathodes in 2002 were 17% higher than in 2001. We completed the
expansion of our cathode manufacturing capacity in Brazil in 2002 and were
successful in selling virtually all of our cathode manufacturing capacity for
2002.
Graphite electrodes cost of sales increased 3%, or $10 million, to $388
million in 2002 from $378 million in 2001. The increase in cost of sales was
primarily due to higher volume of graphite electrodes sold, partially offset by
lower average graphite electrode cost of sales per metric ton. The reduction in
average graphite electrode cost of sales per metric ton was
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primarily due to cost savings initiatives and lower average fixed cost per
metric ton due to facility closures and, to lesser extent, changes in currency
exchange rates.
Gross profit decreased 21%, or $31 million, to $116 million (23.0% of
net sales) in 2002 from $147 million (28.0% of net sales) in 2001.
Former Advanced Energy Technology Segment. Net sales decreased 16%, or
$20 million, to $109 million in 2002 from $129 million in 2001. We had lower net
sales in each of our product lines, especially in advanced carbon materials due
to a cyclical decrease in the volume of refractories sold, in advanced graphite
materials due to lower sales of products to customers in the aerospace,
semiconductor and industrial sectors and in flexible graphite due to lower sales
of sealing products sold to the transportation industry. Cost of sales decreased
7%, or $6 million, to $85 million in 2002 from $91 million in 2001. The decline
was primarily due to lower volume of products sold. Gross profit decreased 37%,
or $14 million, to $24 million (22.0% of net sales) in 2002 from $38 million
(29.6% of net sales) in 2001.
Other Items Affecting Us as a Whole. Selling, administrative and other
expense was stable at $78 million in each of 2002 and 2001.
Other (income) expense, net was $16 million of income in 2002 as
compared to $1 million of expense in 2001. We recorded both other income and
other expense in both periods resulting from various non-operational activities,
including gains from currency transactions and translation. In 2002, we had $28
million in currency gains, $21 million of which gain was due to currency
translation on intercompany loans and translation of financial statements of
foreign subsidiaries which use the dollar as their functional currency and $7
million of which related to transactions with third parties. These gains were
offset by other expenses, including legal expenses and settlements, financing
costs and costs associated with the curtailment of employee benefit plans.
In 2002, we recorded a total of $23 million in impairment losses and
restructuring charges as described below:
o In the 2002 fourth quarter, we recorded a $3 million ($2 million
after tax) charge relating to the impairment of our investment in
our joint venture with Jilin. The impairment results from
uncertainty about the completion and start-up of the planned
graphite electrode facility in Changchun, China due to the effects
that the challenging 2002 graphite electrode industry conditions
have had on Jilin.
o In the 2002 second and third quarters, we recorded a total of $2
million of charges related to the impairment of available-for-sale
securities.
o In the 2002 second quarter, we recorded a $12 million ($8 million
after tax) charge primarily related to the impairment of our
long-lived carbon electrode assets in Columbia, Tennessee as a
result of a decline in demand and loss of market share. The
primary end market for carbon electrodes is silicon metal, which
was very depressed in the U.S. where our main customer base is
located.
o In the 2002 first and fourth quarter, we recorded a total of $6
million of restructuring charges related primarily to the
mothballing of our graphite electrode operations in
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Caserta, Italy. These charges included estimated pension,
severance and other related employee benefit costs.
In addition, in 2002, we recorded a $5 million charge related to the
accelerated vesting of restricted stock and $3 million in corporate realignment
and related expenses.
In 2001, we recorded a total of $92 million, net, in impairment losses
and restructuring charges as described below:
o 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 on long-lived
assets related to assets located at our facility in Caserta,
Italy. The remaining $3 million related to the impairment of
available-for-sale securities.
o In the 2001 third quarter, we recorded a $2 million restructuring
charge and impairment loss on long-lived assets related to a
corporate realignment of our businesses, the relocation of our
corporate headquarters and the shutdown of our coal calcining
operations located in Niagara Falls, New York. The charge includes
severance and related benefits associated with a workforce
reduction of 24 employees and impairment of leasehold improvement
assets.
o In 2001 third quarter, we reversed $2 million of prior
restructuring charges based on revised lower estimates of
workforce reductions and plant closure costs, and we reclassified
$4 million of prior restructuring charges related to on-site waste
disposal post-monitoring costs to other long-term obligations.
o In the 2001 second quarter, we recorded a $58 million charge for
restructuring and impairment loss on long-lived assets related to
the shutdown of our graphite electrode manufacturing operations in
Clarksville and Columbia, Tennessee and our coal calcining
operations in Niagara Falls, New York. The $58 million charge
includes restructuring charges of $2 million for severance and
related benefits associated with a workforce reduction of 171
employees and $3 million in plant shutdown and related costs. The
remaining $53 million relates to the impairment loss on long-lived
assets.
In addition, in 2001, we recorded a $10 million charge for additional
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims as well as $2 million in corporate realignment
and related expenses.
Interest expense was stable at $60 million in each of 2002 and 2001.
Our average outstanding total debt was $701 million in 2002 as compared to $683
million in 2001 and our average annual interest rate was 8.5% in 2002 as
compared to 8.1% in 2001. These average annual interest rates exclude imputed
interest on antitrust fines, which decreased $3 million to $1 million in 2002
from $4 million in 2001.
Benefit from income taxes was $13 million in 2002 as compared to
provision for income taxes of $15 million for 2001. During both 2002 and 2001,
the benefit from and provision for income taxes reflected an effective rate of
about 35%, excluding the impact of impairment losses on long-lived and other
assets, restructuring charges, the charge related to antitrust investigations
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and related lawsuits and claims, and the charge related to the corporate
realignment of our subsidiaries.
As a result of the changes described above, net loss was $18 million in
2002, an improvement of $69 million from net loss of $87 million in 2001.
2001 COMPARED TO 2000. Net sales in 2001 were $654 million, a decrease
of $122 million, or 16%, from net sales in 2000 of $776 million. Gross profit in
2001 was $185 million, a decrease of $31 million, or 14%, from gross profit in
2000 of $216 million. Gross profit margin in 2001 was 28.3% of net sales as
compared to gross profit margin in 2000 of 27.8% of net sales. The decrease in
net sales and gross profit was primarily due to lower sales volume of most of
our products, particularly graphite electrodes, which reduced net sales by about
$104 million, primarily due to depressed steel industry conditions. The increase
in gross profit margin percentage was primarily due to the fact that the
percentage decrease in net sales was less than the percentage decrease in cost
of sales, due primarily to lower production levels and benefits from our cost
savings activities.
Former Graphite Power Systems Segment. Net sales decreased 19%, or $126
million, to $525 million in 2001 from $651 million in 2000. The decrease was
primarily attributable to a decrease in average sales revenue per metric ton of
graphite electrodes and lower volumes of graphite electrodes and cathodes sold.
The volume of graphite electrodes sold decreased 43,000 metric tons, or 20%, to
174,000 metric tons in 2001 from 217,000 metric tons in 2000. The decrease in
volume of graphite electrodes sold represented a decrease in net sales of about
$104 million. The decrease was primarily a result of continued lower North
American steel production, weaker demand in Europe and Brazil and actions taken
to manage credit risk. The average sales revenue per metric ton (in U.S. dollars
and net changes in currency exchange rates) of our graphite electrodes was
$2,341 in 2001 as compared to $2,379 in 2000. The reduced average sales revenue
per metric ton of graphite electrodes represented a decrease of about $6 million
in net sales. Unfavorable changes in currency exchange rates represented a
reduction of about $15 million in net sales of graphite electrodes, more than
offsetting the benefits of increases in selling prices in local currencies in
certain foreign countries. Volume of cathodes sold was 33,000 metric tons in
2001 as compared to 35,000 metric tons in 2000.
Cost of sales decreased 19%, or $89 million, to $378 million in 2001
from $467 million in 2000. The decrease in cost of sales was primarily due to
the lower volume of graphite electrodes sold and a lower average graphite
electrode cost of sales per metric ton. The reduction in average graphite
electrode cost of sales per metric ton was primarily due to cost savings
initiatives and lower average fixed cost per metric ton due to facility closures
and, to lesser extent, changes in currency exchange rates.
Gross profit decreased 20%, or $37 million, to $147 million (28.0% of
net sales) in 2001 from $184 million (28.3% of net sales) in 2000. The decrease
in gross profit margin was primarily due to the fact that the percentage
decrease in net sales was greater than the percentage decrease in cost of sales.
Former Advanced Energy Technology Segment. Net sales increased 3%, or
$4 million, to $129 million in 2001 from $125 million in 2000. The increase was
primarily due to cyclical increases in the volume of refractories sold and sales
of products to customers in the aerospace industry, new business sales and an
increase in technical service and technology license fees, partially offset by a
decrease in volume of flexible graphite sold for gasket applications due to
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lower demand from the automotive industry as well as a decrease in products sold
to the semiconductor and industrial sectors. Cost of sales decreased 2%, or $2
million, to $91 million in 2001 from $93 million in 2000. The decline was
primarily due to changes in product mix and cost savings initiatives. Gross
profit increased 19%, or $6 million, to $38 million (29.6% of net sales) in 2001
from $32 million (25.6% of net sales) in 2000. The increase in gross profit
margin was due to the increase in net sales and decrease in cost of sales.
Other Items Affecting Us as a Whole. Selling, administrative and other
expense declined $8 million to $78 million in 2001 from $86 million in 2000,
primarily due to reduced corporate spending.
Other (income) expense, net was expense of $1 million in 2001 as
compared to nil in 2000. We recorded both other income and other expense in both
periods resulting from various non-operational activities, including gains from
currency transactions and translation, that were largely offsetting.
In 2001, we recorded a total of $92 million, net, in impairment losses
and restructuring charges as described below:
o 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 on long-lived
assets related to assets located at our facility in Caserta,
Italy. The remaining $3 million related to the impairment of
available-for-sale securities.
o In the 2001 third quarter, we recorded a $2 million restructuring
charge and impairment loss on long-lived assets related to a
corporate realignment of our businesses, the relocation of our
corporate headquarters and the shutdown of our coal calcining
operations located in Niagara Falls, New York. The charge includes
severance and related benefits associated with a workforce
reduction of 24 employees and impairment of leasehold improvement
assets.
o In 2001 third quarter, we reversed $2 million of prior
restructuring charges based on revised lower estimates of
workforce reductions and plant closure costs, and we reclassified
$4 million of prior restructuring charges related to on-site waste
disposal post-monitoring costs to other long-term obligations.
o In the 2001 second quarter, we recorded a $58 million charge for
restructuring and impairment loss on long-lived assets related to
the shutdown of our graphite electrode manufacturing operations in
Clarksville and Columbia, Tennessee and our coal calcining
operations in Niagara Falls, New York. The $58 million charge
includes restructuring charges of $2 million for severance and
related benefits associated with a workforce reduction of 171
employees and $3 million in plant shutdown and related costs. The
remaining $53 million relates to the impairment loss on long-lived
assets.
In addition, in 2001, we recorded a $10 million charge for additional
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims as well as $2 million in corporate realignment
and related expenses.
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In 2000, we recorded a total of $9 million, net, in impairment losses
and restructuring charges as described below:
o 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.
o 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 cash charge related to the write-off of certain
long-lived assets located at one of our facilities in the U.S.
o 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.
In addition, in 2000, we recorded a $2 million write-off of costs
incurred in connection with a proposed initial public offering by AET that was
subsequently withdrawn.
Interest expense decreased to $60 million in 2001 from $75 million in
2000. The decrease was due to lower average annual interest rates and lower
average total debt outstanding. Our average outstanding total debt was $683
million in 2001 as compared to $780 million in 2000 and our average annual
interest rate was 8.1% in 2001 as compared to 9.0% in 2000. These average annual
interest rates exclude imputed interest on antitrust fines.
Provision for income taxes was $15 million for 2001 as compared to $10
million for 2000. During 2001, the provision for income taxes reflected an
effective rate of about 35%, excluding the impact of impairment losses on
long-lived and other assets, restructuring charges, the charge related to
antitrust investigations and related lawsuits and claims, and the charge related
to the corporate realignment of our subsidiaries. For 2000, the provision for
income taxes reflected an effective rate of about 30%. The increase in the
effective rate in 2001 was primarily due to a higher proportion of income from
higher tax jurisdictions.
As a result of the changes described above, net loss was $87 million in
2001, a decrease of $97 million from net income of $10 million in 2000.
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EFFECTS OF INFLATION
In general, our results of operations and financial condition are
affected by the inflation in each country in which we have a manufacturing
facility. During the 2000 first half, the effects of inflation on our cost of
sales in the U.S. and foreign countries (except for highly inflationary
countries) were generally mitigated by a combination of improved operating
efficiency and permanent on-going cost savings. Accordingly, during that period,
these effects were not material to us. From mid-2000 through mid-2001, we
experienced higher energy and raw material costs primarily due to the
substantial increase in the worldwide market price of oil and natural gas.
During the latter part of that period, we were able to similarly mitigate the
effects of those increases on our cost of sales. We have not experienced
significant inflation since mid-2001. We cannot assure that future increases in
our costs will not exceed the rate of inflation or the amounts, if any, by which
we may be able to increase prices for our products.
We account for our non-U.S. subsidiaries under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." Accordingly, except for highly inflationary countries, the assets
and liabilities of our non-U.S. subsidiaries are translated into dollars for
consolidation and reporting purposes. Foreign currency translation adjustments
are generally recorded as part of stockholders' equity and identified as part of
accumulated other comprehensive income (loss) in the Consolidated Balance Sheets
until such time as their operations are sold or substantially or completely
liquidated.
Prior to August 1, 2000, our Swiss subsidiary used the dollar as its
functional currency. Beginning August 1, 2000, our Swiss subsidiary began using
the euro as its functional currency because its operations became predominantly
euro-denominated.
Foreign currency translation adjustments decreasing stockholders'
equity amounted to $20 million, including $16 million associated with our
Brazilian subsidiary, in 2002, $29 million, including $21 million associated
with our South African subsidiary, in 2001 and $35 million, including $23
million associated with our South African subsidiary, in 2000.
We maintain operations in Russia, Mexico and other countries which have
had in the past, and may have now or in the future, highly inflationary
economies, defined as cumulative inflation of about 100% or more over a
three-calendar year period. In general, the financial statements of foreign
operations in highly inflationary economies have been remeasured as if the
functional currency of their economic environments were the dollar and
translation gains and losses relating to these foreign operations are included
in other (income) expense, net in the Consolidated Statements of Operations
rather than as part of stockholders' equity in the Consolidated Balance Sheets.
Since 1999, we have accounted for our Mexican subsidiary using the
dollar as its functional currency, irrespective of Mexico's inflationary status,
because its sales and purchases are predominantly dollar-denominated. We have
always considered Russia to have a highly inflationary economy. Accordingly, we
have always accounted for our Russian operations using the dollar as its
functional currency. Foreign currency translation gains and losses relating to
these subsidiaries are included in other (income) expense, net.
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EFFECTS OF CHANGES IN CURRENCY EXCHANGE RATES
We incur manufacturing costs and sell our products in multiple
currencies. As a result, in general, our results of operations, cash flows and
financial condition are affected by changes in currency exchange rates as well
as by inflation in countries with highly inflationary economies where we have
manufacturing facilities. To manage certain exposures to risks caused by changes
in currency exchange rates, we use various off-balance sheet financial
instruments. To account for translation of foreign currencies into dollars for
consolidation and reporting purposes, we record foreign currency translation
adjustments in accumulated other comprehensive income (loss) as part of
stockholders' equity in the Consolidated Balance Sheets, except in the case of
operations in highly inflationary economies (or which use the dollar as their
functional currency) where we record foreign currency translation gains and
losses as part of other (income) expense, net in the Consolidated Statement of
Operations. We also record foreign currency transaction gains and losses as part
of other (income) expense, net.
When the local currencies of foreign countries in which we have a
manufacturing facility decline (or increase) in value relative to the dollar,
this has the effect of reducing (or increasing) the dollar equivalent cost of
sales and other expenses with respect to those facilities. This effect is,
however, partially offset by the cost of petroleum coke, a principal raw
material used by us, which is priced in dollars. In certain countries where we
have manufacturing facilities, and in certain instances where we price our
products for sale in export markets, we sell in local currencies. Accordingly,
when the local currencies increase (or decline) in value relative to the dollar,
this has the effect of increasing (or reducing) net sales. The result of these
effects is to increase (or decrease) operating profit and net income.
Over the past three years, many of the foreign countries in which we
have a manufacturing facility, particularly Brazil, have been subject to
significant economic pressures, which have impacted inflation and currency
exchange rates affecting those countries. As a result, many of the currencies in
which we manufacture and sell our products weakened against the dollar. During
2002, the Brazilian Real declined about 35%, the South African rand increased
about 38%, and the euro increased about 18%. During 2001, the euro declined
about 5%, the Brazilian real declined about 16% and the South African rand
declined about 36%. During 2000, the South African rand declined about 19%, the
euro declined about 6% and the Brazilian real declined about 8%. In the case of
net sales of graphite electrodes, the impact of these events was a reduction of
about $36 million in 2000, a reduction of about $15 million in 2001 and a
reduction of about $4 million in 2002. We sought to mitigate these adverse
impacts on net sales by increasing local currency prices for some of our
products in various regions as circumstances permitted. We cannot predict
changes in currency exchange rates in the future or whether those changes will
have positive or negative impacts on our net sales or cost of sales. We cannot
assure you that we would be able to mitigate any adverse effects of such
changes.
We have intercompany loans between GrafTech Finance and some of our
subsidiaries. Some of these loans are denominated in currencies other than the
dollar and, accordingly, are subject to translation gains and losses due to
changes in currency exchange rates. Some of these intercompany loans are deemed
to be essentially permanent and, as a result, translation gains and losses on
these loans are reflected in accumulated other comprehensive income (loss) on
the Consolidated Balance Sheets. The remaining intercompany loans are expected
to be repaid in the foreseeable future and, as a result, translation gains and
losses on these loans are reflected in other (income) expense, net on the
Consolidated Statement of Operations. Foreign currency
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translation gains and losses relating to these loans included in other (income)
expense, net, were a gain of $8 million in 2000, a loss of $4 million in 2001
and a gain of $21 million in 2002.
To manage certain exposures to specific financial market risks caused
by changes in currency exchange rates, we use various financial instruments. The
amount of currency exchange contracts used by us to minimize these risks was $56
million at December 31, 2002 and $37 million at December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of funds have consisted principally of invested capital,
cash flow from operations, debt financing and, since July 2001, net proceeds
from our public offering of common stock. Our uses of those funds (other than
for operations) have consisted principally of debt reduction, capital
expenditures, payment of fines, liabilities and expenses in connection with
investigations, lawsuits and claims and payment of restructuring costs.
We are highly leveraged and have substantial obligations in connection
with antitrust investigations, lawsuits and claims. We had total debt of $731
million and a stockholders' deficit of $381 million at December 31, 2002 as
compared to total debt of $638 million and a stockholders' deficit of $332
million at December 31, 2001. We expect that our debt will increase by about $35
to $40 million at the end of 2003 as compared to the end of 2002, before taking
into account possible asset sales. At December 31, 2002, a substantial portion
of our debt had variable interest rates. In addition, if we are required to pay
or issue a letter of credit to secure payment of the fine assessed by the
antitrust authority of the European Union pending resolution of our appeal
regarding the amount of the fine, the payment would be financed by borrowing
under (or secured by a letter of credit that would constitute a borrowing under)
our revolving credit facility. Cash and cash equivalents were $11 million at
December 31, 2002 as compared to $38 million at December 31, 2001. We do not
believe that we will have positive annual cash flow from operations in 2003. We
believe that, following a recovery in the steel, aluminum and transportation
industries, our cash flow from operations will return to positive levels.
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 financial performance. In
light of those factors, we closely monitor compliance with our debt covenants.
LONG-TERM CONTRACTUAL, COMMERCIAL AND OTHER OBLIGATIONS AND
COMMITMENTS. The following tables summarizes our long-term contractual
obligations and other commercial commitments at December 31, 2002.
<table>
<caption>
PAYMENT DUE BY PERIOD
---------------------
LESS
THAN 1 1-3 4-5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
----- ---- ----- ----- -----
(DOLLARS IN MILLIONS)
<s> <c> <c> <c> <c> <c>
CONTRACTUAL AND OTHER OBLIGATIONS
Long-term debt........................................ $ 699 $ - $ 1 $ 148 $ 550
Capital lease obligations............................. 2 - 2 -
Operating leases...................................... 8 3 4 1 -
</table>
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<table>
<caption>
PAYMENT DUE BY PERIOD
---------------------
LESS
THAN 1 1-3 4-5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
----- ---- ----- ----- -----
(DOLLARS IN MILLIONS)
<s> <c> <c> <c> <c> <c>
Unconditional purchase obligations.................... 53 8 16 12 17
--------- -------- -------- -------- --------
Total contractual obligations.................... 762 11 23 161 567
Estimated liabilities and expenses in connection with
antitrust investigations and related lawsuits and
claims........................................... 98 3 67 28 -
Postretirement, pension and related benefits.......... 131 12 28 24 67
Other long-term obligations........................... 32 3 8 4 17
--------- -------- -------- -------- --------
Total contractual and other obligations.......... $ 1,023 $ 29 $ 126 $ 217 $ 651
========= ======== ======== ======== ========
</table>
<table>
<caption>
AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
-----------------------------------------
LESS
THAN 1 1-3 4-5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
----- ---- ----- ----- -----
(DOLLARS IN MILLIONS)
<s> <c> <c> <c> <c> <c>
OTHER COMMERCIAL COMMITMENTS
Lines of credit....................................... $ 9 $ 9 $ - $ - $ -
Letter of credit...................................... 14 14 - - -
Guarantees............................................ 7 6 - - 1
-------- -------- -------- -------- --------
Total other commercial commitments............... $ 30 $ 29 $ - $ - $ 1
======== ======== ======== ======== ========
</table>
The first preceding table includes our reserve for estimated
liabilities and expenses in connection with antitrust investigations and related
lawsuits and claims, which includes the fine of (euro)50.4 million assessed
against us by the EU Competition Authority. The timing of such payments is not
known and for purposes of this table is split between the columns captioned
"payments due in 1-3 years" and "payments due in 4-5 years" on the line entitled
"estimated liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims." It is the policy of EU Competition Authority
to negotiate appropriate terms of payment of antitrust fines, including extended
payment terms. We have had discussions regarding such payment terms. We have
also filed an appeal to the court challenging the amount of the fine. We cannot
predict how or when the court would rule on the appeal. While we cannot assure
that such will be the case, we believe that amount of the fine will be impacted
by the appeal and that, after such ruling, we will be permitted to pay the fine
over an extended period. In addition, if we are required to pay (or issue a
letter of credit to secure payment of) the fine pending resolution of our
appeal, the payment would be financed by a borrowing under (or the letter of
credit would constitute a borrowing under) our revolving credit facility. Such a
requirement would result in a change in the manner in which such amount is
reflected in the preceding tables.
Effective April 2001, we entered into a ten-year information technology
service contract with CGI Group Inc., which became the delivery arm for our
global information technology services. The first preceding table includes a
line entitled "unconditional purchase obligations" that includes the remaining
$44 million relating to that contract. In September 2002, we entered into a
ten-year outsourcing contract with CGI to provide finance and accounting
business process services valued at $36 million. That contract does not
constitute as an unconditional purchase obligation and therefore is not included
in the first preceding table.
The second preceding table includes a line entitled "lines of credit."
These are local lines of credit established by our foreign subsidiaries for
working capital purposes and are not part of our revolving credit facility.
Our pension benefit obligations were underfunded by $80 million at
December 31, 2002 as compared to $50 million at December 31, 2001. This increase
in underfunding was primarily
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due to the decline in asset values resulting from the decline in the capital
markets in the U.S. in 2002.
CASH FLOW AND PLANS TO MANAGE LIQUIDITY. Changes in conditions
affecting our industry, changes in global and regional economic conditions and
other factors have adversely impacted our recent financial performance. As a
result of these changes, our high leverage, our substantial obligations in
connection with antitrust investigations, lawsuits and claims and our
substantial other long-term contractual and commercial obligations and
commitments, we have placed high priority on efforts to manage cash, generate
additional cash flow and reduce debt. Our longer-term efforts include our 1998
major cost savings plan, our 2002 major cost savings plan and our other cost
savings activities, our strategic alliances and our financing activities. Our
shorter-term efforts include our interest rate management and working capital
initiatives.
During the four years prior to 2002, we have had positive annual cash
flow from operations, excluding payments in connection with restructurings and
investigations, lawsuits and claims. Typically, the first quarter of each year
results in neutral or negative cash flow from operations (excluding cash used
for capital expenditures and payments in connection with restructurings and
investigations, lawsuits and claims) due to various factors. Factors impacting
seasonality 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 positive cash flow from operations
(before such exclusions). The third quarter tends to produce relatively less
positive cash flow primarily as a result of scheduled plant shutdowns by our
customers for vacations. Prior to 2000, our cash flow from operations (before
such exclusions) in the first and third quarters was adversely impacted by the
semi-annual interest payments on our previously outstanding senior subordinated
notes. The second and fourth quarters correspondingly benefited from the absence
of interest payments on such notes. We expect the semi-annual interest payments
on the Senior Notes to have a similar impact.
As part of our cash management, we typically discount or factor a
portion of our accounts receivable. Certain of our subsidiaries sold receivables
totaling $187 million in 2002, $223 million in 2001 and $152 million in 2000. If
we had not sold such receivables, our accounts receivable and our debt would
have been about $46 million higher at December 31, 2002. In addition, careful
management of credit risk over the past two years has allowed us to avoid
significant accounts receivable losses notwithstanding 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.
We use, and are dependent on, funds available under our revolving
credit facility, as well as cash flow from operations as our primary sources of
liquidity. As a result, we are also dependent upon continued compliance with the
financial covenants under the Senior Facilities. 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. We also believe that our planned asset sales together with these
improvements in cash flow from operations should allow us to reduce our debt.
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We may from time to time and at any time, at prevailing market prices,
exchange or purchase Senior Notes in open market or privately negotiated
transactions for cash (from cash on hand, borrowings under our revolving credit
facility or new credit facilities, or proceeds from sale of debt or equity
securities or assets), common stock or other equity or debt securities, or a
combination thereof. We may at any time and from time to time seek and obtain
consent from the lenders under the Senior Facilities with respect to any
restrictions thereunder applicable to such transactions. We will evaluate any
such transaction in light of then prevailing market conditions and our then
current and prospective liquidity and capital resources, including projected and
potential needs and prospects for access to capital markets. Any such
transactions may, individually or in the aggregate, be material.
Our high leverage and substantial antitrust related and other
obligations could have a material impact on our liquidity. Our cash flow
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 that our cash flow and capital resources will be
sufficient to enable us to meet our debt service, antitrust related and other
obligations when due. Even if we are able to meet our debt service, antitrust
related and other obligations when due, we may not be able to comply with the
covenants and other provisions under the Senior Facilities. These covenants and
provisions include financial covenants and representations regarding absence of
material adverse changes affecting us. A failure to comply, unless waived by the
lenders, would be a default under the Senior Facilities. This would permit the
lenders to accelerate the maturity of the Senior Facilities. It would also
permit the lenders to terminate their commitments to extend credit under our
revolving credit facility. This would have an immediate material adverse effect
on our liquidity. An acceleration of maturity of the Senior Facilities or a
breach of the covenants contained in the 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 that we would be able to obtain any such waiver or take any of such
actions on favorable terms or at all.
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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 financial covenants relating to specified minimum interest
coverage and maximum net senior secured debt leverage ratios that become more
restrictive over time. At December 31, 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. We cannot assure that 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 ($210 million, based on currency exchange rates in
effect at December 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 net senior secured debt leverage ratio permitted or
minimum interest coverage ratio required under the Senior Facilities. In
addition, (euro)25 million of the (euro)200 million is reserved exclusively for
use to pay or secure payment of the fine assessed by the antitrust authority of
the European Union. At December 31, 2002, we had full availability under our
revolving credit facility and the outstanding balance thereunder was $10
million. 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 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 our existing capital resources, and
taking into account our efforts to reduce costs and working capital needs,
improve efficiencies and product quality, generate growth and cash flow and
maximize funds available to meet our debt service and other obligations, we will
be able to manage our liquidity to permit us to service our debt and meet our
obligations when due.
DESCRIPTION OF SENIOR FACILITIES. The Senior Facilities consist of:
O A Tranche A Facility which provided for initial term loans of
$137 million and (euro)161 million (equivalent to $158 million
based on currency exchange rates in effect at February 22, 2000)
to GrafTech Finance. At December 31, 2002, the Tranche A Facility
had been fully repaid and terminated.
O A Tranche B Facility providing for initial term loans of $350
million to GrafTech Finance. At December 31, 2002, the principal
amount of term loans outstanding under the Tranche B Facility was
$137 million, all of the scheduled principal payments of which are
due in 2007.
O A Revolving Facility providing for dollar and euro-denominated
revolving and swing line loans to, and the issuance of
dollar-denominated letters of credit for the account of, GrafTech
Finance and certain of our other subsidiaries in an aggregate
principal and stated amount at any time not to exceed,
initially,(euro)250 million and, at December 31, 2002,(euro)200
million ((euro)25 million of which can only be used to pay or
secure payment of the fine assessed by the EU Competition
Commission). The Revolving Facility terminates on February 22,
2006. As a condition to each
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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 ($22 million of which debt was outstanding at December
31, 2002)).
We are generally required to make mandatory prepayments in the amount
of:
O Either 75% or 50% (depending on our net debt 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).
GrafTech Finance has made and may make secured and guaranteed
intercompany loans of the net proceeds of borrowings under the Senior Facilities
to GrafTech Global's subsidiaries. The obligations of GrafTech 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 that 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
GrafTech Finance under the Senior Facilities. This guarantee is secured, with
certain exceptions, by first priority security interests in all of the
outstanding capital stock of GrafTech Global and GrafTech Finance, all of the
intercompany debt owed to GTI and GTI's interest in the lawsuit initiated by us
against our former parents.
GTI, GrafTech Global and each of GrafTech Global's subsidiaries
guarantees, with certain exceptions, the obligations of GrafTech Global's
subsidiaries under the intercompany loans, except that our foreign subsidiaries
do not guarantee the intercompany loan obligations of our U.S. subsidiaries.
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The obligations of GrafTech 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.
At December 31, 2002, the interest rate applicable to the Revolving
Facility is, 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). At
December 31, 2002, 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%. GrafTech Finance pays a per annum
fee ranging from 0.375% to 0.500% (depending on our leverage ratio) on the
undrawn portion of the commitments under the Revolving Facility. At December 31,
2002, the interest rates on outstanding debt under the Senior Facilities were:
Tranche B Facility, 5.4%; dollar-denominated borrowings under the Revolving
Facility, 4.8%; and euro-denominated borrowings under the Revolving Facility,
6.4%. The weighted average interest rate on the Senior Facilities was 5.6%
during 2002.
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 financial covenants relating to specified minimum interest coverage
ratios and maximum net senior secured debt leverage ratios (which is the ratio
of our net senior secured debt to our EBITDA), 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 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.
CERTAIN AMENDMENTS TO THE 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. After
giving effect to subsequent amendments to the Senior Facilities, payments within
the $340 million charge recorded in 1997 are excluded from the calculation of
financial covenants and charges over and above the $340 million charge are
excluded from the calculation of financial covenants (until paid) up to a
maximum of $75 million reduced by the amount of certain debt (other than the
Senior Notes) incurred by us that is not incurred under the Senior Facilities
($22 million of
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which debt was outstanding at December 31, 2002). As a result, 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), are excluded from such calculations.
In July 2001, in connection with an underwritten public offering of
common stock, the Senior Facilities were amended to, among other things, change
our financial covenants so that they were less restrictive than would otherwise
have been the case. In connection therewith, we agreed that our investments in
unrestricted subsidiaries after this amendment will be made in the form of
secured loans, which will be pledged to secure the Senior Facilities. In
connection therewith, we paid an amendment fee of $2 million and the margin that
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 a 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. The amendment also changed the manner in which net debt and EBITDA
are calculated to exclude any letter of credit issued to secure payment of the
antitrust fine assessed against us by the EU Competition Authority. In addition,
the amendment expanded our ability to make certain investments, including
investments in AET, and eliminated provisions relating to a spin-off of AET. In
connection therewith, we paid an amendment fee of $1 million and the margin that
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 to, among other things,
permit us to issue up to $150 million aggregate principal amount of Senior
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
Authority) and reduced the basket for certain debt incurred by us that is not
incurred under the Senior Facilities (excluding the Senior Notes) to $75 million
from $130 million ($22 million of which debt was outstanding at December 31,
2002). In connection with the amendment and the consent, we paid fees and costs
of $1 million.
SENIOR NOTES. On February 15, 2002, GrafTech Finance issued $400
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.
In April 2002, 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 up to $150 million aggregate
principal amount of additional Senior Notes to make intercompany loans to our
foreign subsidiaries. On April 30, 2002, we entered into a Supplemental
Indenture.
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On May 6, 2002, GrafTech Finance issued $150 million aggregate
principal amount of additional Senior Notes at a purchase price of 104.5% of
principal amount, plus accrued interest from February 15, 2002, under the same
Indenture pursuant to which it issued the Senior Notes in February 2002. The
Senior Notes constitute one class of debt securities under the Indenture. The
additional Senior Notes bear interest at the same rate and mature on the same
date as the Senior Notes issued in February 2002. The $7 million premium
received upon issuance of the additional Senior Notes was added to the principal
amount of the Senior Notes shown on the Consolidated Balance Sheets and is
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%.
On June 5, 2002, GrafTech Finance offered to exchange new registered
Senior Notes (and related guarantees) that are substantially identical to the
previously outstanding Senior Notes (and related guarantees), except that
certain transfer restrictions and registration rights relating to the previously
outstanding Senior Notes would not apply to the new registered Senior Notes (and
related guarantees). All of the previously outstanding Senior Notes (and related
guarantees) were exchanged under the exchange offer.
Except as described below, GrafTech Finance may not redeem the Senior
Notes prior to February 15, 2007. On or after that date, GrafTech 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 100.00% 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, GrafTech Finance is entitled at
its option on one or more occasions to redeem Senior Notes in an aggregate
principal amount not to exceed 35% of the aggregate principal amount of Senior
Notes originally issued by GrafTech Finance 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 offerings 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
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, GrafTech Finance will be
required to make an offer to repurchase the Senior Notes at a price equal to
101.00% 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
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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 (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 GrafTech Global, UCAR Carbon and GrafTech
Finance.
The Senior Notes rank senior to present and future subordinated debt
and equally with present and future senior debt and obligations of GrafTech
Finance. The Senior Notes are effectively subordinated to present and future
secured debt and obligations of GrafTech 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.
GTI, GrafTech Global and UCAR Carbon and other U.S. subsidiaries
holding a substantial majority of our U.S. assets have guaranteed the Senior
Notes on a senior unsecured basis, except that the guarantee by UCAR Carbon is
secured as described below.
Unsecured intercompany term notes in an aggregate principal amount
equal to $448 million (based on currency exchange rates in effect at December
31, 2002) and guarantees of those unsecured intercompany term notes issued to
GrafTech Finance by certain of our foreign subsidiaries have been pledged by
GrafTech 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, the principal amount of unsecured intercompany term notes
pledged to secure the Senior Notes equals $399 million, or about 73% of the
principal amount of the outstanding Senior Notes. The remaining unsecured
intercompany term notes held by GrafTech Finance in an aggregate principal
amount of $49 million (based on currency exchange rates in effect at December
31, 2002), and any pledged unsecured intercompany term notes that cease to be
pledged due to a reduction in the principal amount of the then outstanding
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 GrafTech 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 AET, 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 AET is junior to the pledge of the same
shares to secure UCAR Carbon's guarantee of the Senior Facilities.
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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 when due or to
repurchase Senior Notes when required, events of default under the Senior Notes
include: failure to comply with applicable covenants; failure to pay at maturity
or upon acceleration 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.
RELATED PARTY TRANSACTIONS. We have not, since January 1, 2000, engaged
in any material transactions with affiliates or related parties other than
transactions with our subsidiaries (including Carbone Savoie and AET),
compensatory transactions (including employee benefits, stock option and
restricted stock grants, compensation deferral and executive employee loans and
stock purchases) with directors or officers, and transactions with our 25%-owned
joint venture with Jilin in China.
We have not been, since January 1, 2000, affiliated with or related to
any special purpose entity other than GrafTech Finance.
OFF-BALANCE-SHEET FINANCINGS AND COMMITMENTS. We do not have any
material off-balance-sheet financing arrangements or other commitments
(including non-exchange traded contracts), other than:
o Interest rate caps and currency exchange rate contracts which are
described under "Item 7A. Quantitative and Qualitative Disclosures
About Market Risk."
o Commitments under non-cancelable operating leases that, at
December 31, 2002, total less than $1 million in each year and $4
million in the aggregate.
o Commitments under our information technology outsourcing services
agreement with CGI Group Inc. that, at December 31, 2002, total
approximately $5 million in each year and about $44 million in the
aggregate.
As part of our cash management activities, we seek to manage accounts
receivable credit risk, collections, and accounts payable and payments thereof
to maximize our free cash at any given time. Careful management of credit risk
has allowed us to avoid significant accounts receivable losses in light of the
poor financial condition of many of our potential and existing
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customers. In light of current and prospective global and regional economic
conditions, we cannot assure you that we will not be materially adversely
affected by accounts receivable losses in the future. We typically discount or
factor a substantial portion of our accounts receivable. Certain of our
subsidiaries sold accounts receivable aggregating $186 million in 2002, $223
million in 2001 and $152 million in 2000. We estimate that $46 million of such
accounts receivable would have been outstanding at December 31, 2002. Accounts
receivable sold and remaining on the Consolidated Balance Sheet aggregated $1
million at December 31, 2002.
CASH FLOW (USED IN) PROVIDED BY OPERATING ACTIVITIES. Cash flow used in
operations was $60 million in 2002 as compared to cash flow provided by
operations of $17 million in 2001, a decline of $77 million. This decline was
primarily due to a decrease in net income before non-cash charges (credits) of
$68 million from a positive $55 million in 2001 to a negative $13 million in
2002, primarily due to lower net sales. In addition, use of working capital
increased $8 million.
Working capital was a use of $40 million of cash flow in 2002, an
increase of $8 million from a use of $32 million of cash flow in 2001. The
change in working capital occurred primarily due to a $38 million decrease in
accounts payable and accruals, a $26 million increase in notes and accounts
receivable and a $2 million increase in prepaid expenses and other current
assets, largely offset by a $31 million decrease in inventories and a $27
million reduction in payments related to antitrust investigations and related
lawsuits and claims and payments related to restructurings. Accounts payable and
accruals declined primarily due to the mothballing of our Italian and U.S.
graphite electrode operations and the high level of accounts payable at December
31, 2001. Accounts receivable increased primarily due to higher net sales in the
2002 fourth quarter as compared to the 2001 fourth quarter. Inventory levels
decreased due to the mothballing of our graphite electrode operations in Italy
and U.S.
Cash flow provided by operations was $17 million in 2001 as compared to
cash flow provided by operations of $94 million in 2000. This decline of $77
million resulted primarily from an increase of $75 million in the use of cash
flow for working capital. Net income before non-cash items charges (credits) and
extraordinary items (net of tax) was stable at $55 million in each of 2000 and
2001.
Working capital was a use of $38 million of cash flow in 2001, a change
of $75 million from a source of $43 million of cash flow in 2000. The change
occurred primarily due to a $38 million increase in inventories, a $20 million
increase in accounts payable, a $11 million increase in restructuring payments,
and a $3 million increase in prepaid expenses, partially offset by a $7 million
reduction in payments for antitrust fines and net settlements and expenses.
Graphite electrode inventory levels increased primarily due to transitioning
activities in connection with the shutdown of our U.S. graphite electrode
manufacturing operations and lower than expected volume of graphite electrodes
sold. Accounts payable increased primarily due to our cash management
activities, partially offset by lower spending, including lower purchases of
petroleum coke as excess inventories stockpiled following the explosion at one
of ConocoPhillips' petroleum coke plants were reduced and lower production
levels as demand for graphite electrodes and certain other products weakened
during 2001.
CASH FLOW USED IN INVESTING ACTIVITIES. We used $50 million of cash
flow in investing activities during 2002 as compared to $39 million during 2001,
in each case primarily for capital expenditures. The increase of $11 million was
primarily due to an increase in capital expenditures. Capital expenditures in
2002 related primarily to expansion of manufacturing
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graphite electrode capacity in Mexico, expansion of cathode manufacturing
capacity in France, JD Edwards system implementation and essential maintenance.
We used $39 million of cash flow in investing activities during 2001 as
compared to $50 million during 2000, in each case primarily for capital
expenditures. The reduction of $11 million was primarily due to a reduction in
capital expenditures that did not constitute strategic capital investments or
essential maintenance.
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES. Cash flow
provided by financing activities was $79 million during 2002 as compared to cash
flow provided by financing activities of $15 million in 2001. The increase of
$64 million was primarily attributable to $557 million of proceeds from our sale
of $550 million of Senior Notes in 2002, of which $392 million was used to repay
other long term debt, $86 million was used to repay borrowings under our
revolving credit facility and $21 million was used to pay financing costs. In
addition, we received $10 million from the reset of interest rate swaps.
Cash flow provided by financing activities was $15 million during 2001
as compared to cash flow used in financing activities of $13 million in 2000.
During 2001, we received net proceeds of $91 million from our public offering of
common stock in July 2001, and $9 million from an additional minority investment
in connection with the broadening of our strategic alliance in the cathode
business with Pechiney, and made $84 million in net debt repayments. During
2000, we incurred $28 million of costs, fees and expenses in connection with our
debt recapitalization in February 2000 and had an increase in net borrowing of
$13 million.
RESTRICTIONS ON DIVIDENDS AND STOCK REPURCHASES
Under the Senior Facilities, we are generally permitted to pay
dividends on common stock and repurchase common stock in an aggregate annual
amount of between $25 million and $50 million, depending on our leverage ratio
and excess cash flow. Under the Senior Notes, we are generally permitted to pay
dividends on common stock and repurchase common stock in an aggregate cumulative
(from February 15, 2002) amount of $25 million, plus certain consolidated net
income, equity proceeds and investment gains.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies as those that require difficult,
subjective or complex judgments by management, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
Our significant accounting policies are described in Note 2 to the
Consolidated Financial Statements. Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments.
However, the following accounting policies could be deemed to be critical.
RELIANCE ON ESTIMATES. In preparing the Consolidated Financial
Statements, we use and rely on estimates in determining the economic useful
lives of our assets, obligations under our employee benefit plans, provisions
for doubtful accounts, provisions for restructuring charges and contingencies,
tax valuation allowances, evaluation of goodwill and other intangible assets,
pension and post-retirement benefit obligations and various other recorded or
disclosed amounts. Estimates require us to use our judgment. While we believe
that our estimates for these matters
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are reasonable, if the actual amount is significantly different than the
estimated amount, our assets, liabilities or results of operations may be
overstated or understated.
EMPLOYEE BENEFIT PLANS. We sponsor various retirement and pension
plans, including defined benefit, defined contribution plans and post retirement
benefit plans that cover most employees worldwide. These plans require
assumptions for the discount rate, expected return on plan assets, expected
salary increases and health care cost trend rate. See Note 11 to the
Consolidated Financial Statements for further detail on these rates and the
effect of a change in these rates on our results of operations.
FINANCIAL INSTRUMENTS. Effective January 1, 2001, we adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 137 and SFAS No. 138. The adoption did not have a significant
impact on our consolidated financial position or results of operations. We do
not use derivative financial instruments for trading purposes. They are used to
manage well-defined currency exchange rate risks and interest rate risks.
We enter into foreign currency instruments to manage exposure to
currency exchange rate fluctuations. These foreign currency instruments, which
include, but not limited to, forward exchange contracts and purchased currency
options, attempt to hedge global currency exposures, net, relating to
euro-denominated debt, identifiable foreign currency receivables, payables and
commitments held by our foreign and domestic subsidiaries. Forward exchange
contracts are agreements to exchange different currencies at a specified future
date and at a specified rate. Purchased foreign currency options are
instruments which give the holder the right, but not the obligation, to exchange
different currencies at a specified rate at a specified date or over a range of
specified dates. Forward exchange contracts and purchased currency options are
carried at market value. Gains and losses due to the recording of such
contracts at fair value are recognized currently as other (income) expense, net.
At December 31, 2002 and 2001, the aggregate net notional amount of these
contracts approximated $56 million and $37 million, respectively. All of these
contracts mature within one year and are marked to market monthly. Unrealized
gains and losses on outstanding foreign currency contracts was a loss of $3
million at December 31, 2002 and nil at December 31, 2001.
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 the 2002 second quarter, we entered into two
ten-year interest rate swaps for a total notional amount of $250 million to
effectively convert that amount of fixed rate debt (represented by Senior Notes)
to variable rate debt. These interest rate swaps are fair value swaps and are
accounted for based on the short-cut method. These swaps reduced our interest
expense in 2002 by $6 million. In the 2002 third quarter, we reset our interest
rate swaps to allow for the accelerated collection of $10 million in cash. The
collection of this cash will be amortized over the term of the Senior Notes and
recorded as a credit against interest expense. The adjustment for the fair
value of the hedged debt obligations was $8 million at December 31, 2002 and has
been recorded as part of other assets in the Consolidated Balance Sheet. In the
2003 first quarter, we entered into an additional ten-year interest rate swap
for a notional amount of $200 million that effectively converted that amount of
fixed rate debt to variable rate debt. In the 2003 first quarter, we also
entered into five-year interest rate caps for a notional amount of $300 million.
Subsequently in the 2003 first quarter, we sold the entire $450 million notional
amount of our interest rate swaps for $10 million in cash. The adjustment of
the carrying amount of the Senior Notes will be amortized over the term of the
Senior Notes and recorded as a credit against interest expense. Following the
sale of the swaps, in March 2003, we entered into $350 million notional amount
of interest rate swaps through the remaining term of our Senior Notes.
CONTINGENCIES. We account for contingencies in accordance with SFAS No.
5, "Accounting for Contingencies." SFAS No. 5 requires that we record an
estimated loss from a loss contingency when information available prior to
issuance of the Consolidated Financial Statements indicates that it is probable
that an asset has been impaired or a liability has been incurred at the date of
the Consolidated Financial Statements and the amount of the loss can be
reasonably estimated. Accounting for contingencies such as those relating to
environmental, legal and income tax matters requires us to use our judgment.
While we believe that our accruals for these matters are adequate, if the actual
loss from a loss contingency is significantly different from the estimated loss,
our results of operations may be overstated or understated.
IMPAIRMENTS OF LONG-LIVED ASSETS. We record impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted future cash flows estimated to
be generated by those assets are less than the carrying amount of those assets.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated future net cash flows to be generated
by the asset. If the asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the estimated fair value of the asset. Assets to be disposed are
reported at the lower of the carrying amount or fair value less estimated costs
to sell. If the actual value is significantly less than the estimated fair
value, our assets may be overstated.
INVENTORIES. We record the value of inventories at the lower of cost or
market, and periodically review the book value of products and product lines to
determine if they are properly valued. We also periodically review the
composition of our inventories and seek to identify slow-moving inventories. In
connection with those reviews, we seek to identify products that may not be
properly valued and assess the ability to dispose of them at a price greater
than cost. If it is determined that cost is less than market value, then cost is
used for inventory valuation. If a write down to current market value is
necessary, the market value cannot be greater than the net realizable value,
sometimes called the ceiling (defined as selling price less costs to complete
and dispose), and cannot be lower than the net realizable value less a normal
profit margin, sometimes called the floor. Generally, we do not experience
issues with obsolete inventory due to the nature of our products. If the actual
value is significantly less than the recorded value, our assets may be
overstated.
ACCOUNTING FOR INCOME TAXES. When we prepare the Consolidated Financial
Statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. We record this amount as a provision for our
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." This
process requires us to make the following assessments:
o We estimate our actual current tax liability in each jurisdiction.
o We estimate our temporary differences resulting from differing
treatment of items, such as lease revenue and related
depreciation, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which we include
within our Consolidated Balance Sheet.
100
<page>
o We assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, if we believe that
recovery is not likely, we establish a valuation allowance.
If our estimates are incorrect, our assets or liabilities may be overstated or
understated.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We do not believe that adoption of SFAS No. 148 will have a significant
impact on our results of operations or financial position because the impact
will be limited to additional disclosure.
In November 2002, FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others." The initial recognition and
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, and require that we
record a liability, if any, for the fair value of such guarantees in the
Consolidated Balance Sheet. As required, at December 31, 2002, we have enhanced
our disclosures for certain guarantees, indemnification arrangements and product
warranties. We provide insurance coverage and are required to indemnify
directors and officers for actions taken on our behalf.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue No. 94-3, a
liability for an exit cost as defined in Issue No. 94-3 is recognized at the
date an entity commits to an exit plan. We are currently evaluating the impact
of SFAS No. 146 on our consolidated financial position and results of
operations.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The provisions of SFAS No. 145 related to the rescission of SFAS
No. 4 shall be applied in fiscal years beginning after May 15, 2002. The
provisions of SFAS No. 145 related to SFAS No. 13 shall be effective for
transactions occurring after May 15, 2002 and all other provisions of SFAS No.
145 shall be effective for financial statements issued on or after May 15, 2002.
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment thereto, and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Currently,
generally accepted accounting principles require that gains and losses from
extinguishment of debt be classified as an extraordinary item, net of related
income tax effect. Based on SFAS No. 145, gains and losses from extinguishment
of debt are classified as extraordinary items only if they meet the criteria of
Accounting Principle Boards Opinion 30
101
<page>
("APB 30"), "Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
provisions of APB 30 distinguish transactions that are part of an entity's
recurring operations from those that are unusual or infrequent or that meet the
criteria for classification as an extraordinary item. As such, those that do not
meet the criteria of APB 30 are included in the statement of operations before
income (loss) before provisions (benefits) for income taxes, minority interest
and extraordinary items. All prior periods presented that do not meet the
criteria in APB 30 for classification as an extraordinary item shall be
reclassified. SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. We do not expect the
provisions of SFAS No. 145 relating to SFAS No. 4 to have a material impact on
our consolidated financial position and results of operations. The provisions of
SFAS No. 145 relating to SFAS No. 13 and the other provisions of SFAS No. 145,
excluding the provisions relating to SFAS No. 4, did not have a significant
impact on our consolidated financial position or results of operations.
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 are currently evaluating the impact of SFAS
No. 143 on our consolidated financial position or results of operations.
In June 2001, FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separately
from goodwill. SFAS No. 142 requires that goodwill and certain other intangibles
no longer be amortized, but instead be tested for impairment at least annually.
SFAS No. 142 was 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 $2 million in 2001. We have performed the goodwill
impairment reviews required by SFAS 142 and the results of these reviews did not
require our existing goodwill to be written down.
102
<page>
COSTS RELATING TO PROTECTION OF THE ENVIRONMENT
We have been and are subject to increasingly stringent environmental
protection laws and regulations. In addition, we have an on-going commitment to
rigorous internal environmental protection standards. Environmental
considerations are part of all significant capital expenditure decisions. The
following table sets forth certain information regarding environmental expenses
and capital expenditures.
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Expenses relating to environmental protection......................... $14 $12 $10
Capital expenditures related to environmental protection.............. 6 3 2
</table>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks primarily from changes in interest rates
and currency exchange rates. We routinely enter into various transactions that
have been authorized according to documented policies and procedures to manage
well-defined risks. We do not use derivatives to generate income.
Our exposure to changes in interest rates results primarily from
floating rate long-term debt tied to LIBOR or euro LIBOR. 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 the 2002 second quarter, we entered into two ten-year interest rate swaps for
a total notional amount of $250 million to effectively convert that amount of
fixed rate debt (represented by Senior Notes) to variable rate debt. These
interest rate swaps are fair value swaps and are accounted for based on the
short-cut method. These swaps reduced our interest expense in the 2002 by $6
million. In the 2002 third quarter, we reset our interest rate swaps to allow
the accelerated collection of $10 million in cash. The collection of this cash
will be amortized over the term of the Senior Notes and recorded as a credit
against interest expense. The adjustment for the fair value of the hedged debt
obligations was $8 million at December 31, 2002 and has been recorded as part of
other assets in the Consolidated Balance Sheet. The weighted average pay rate on
the swaps is 5.11% plus the six month LIBOR in arrears and the weighted average
receive rate is 10.25%.
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;
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
activities and financial instruments. Financial instruments may be used to
attempt to hedge existing exposures, firm commitments and, potentially,
anticipated transactions. We use these instruments to reduce risk by essentially
103
<page>
creating offsetting currency exposures. These instruments, include, but not
limited to, forward exchange contracts and purchased currency options, are
primarily used to attempt to hedge global currency exposures, net, relating to
euro-denominated debt, identifiable foreign currency receivables, payables and
commitments held by our foreign and domestic subsidiaries. Forward exchange
contracts are agreements to exchange different currencies at a specified future
date and at a specified rate. Purchased foreign currency options are instruments
which give the holder the right, but not the obligation, to exchange different
currencies at a specified rate at a specified date or over a range of specified
dates. The result is the creation of a range in which a best and worst price is
defined, while minimizing option cost.
We held contracts against these risks with an aggregate net notional
amount of about $56 million at December 31, 2002 and $37 million at December 31,
2001. All of our contracts mature within one year. All of our contracts are
marked to market monthly. Gains and losses are included in other (income)
expense, net. Unrealized gains and losses on outstanding foreign currency
contracts were a loss of $3 million at December 31, 2002 and nil at December 31,
2001.
We used a sensitivity analysis to assess the potential effect of
changes in currency exchange rates and interest rates on reported earnings at
December 31, 2002. Based on this analysis, a hypothetical 10% weakening or
strengthening in the dollar across all other currencies would have changed our
reported gross margin for 2002 by about $4 million. A hypothetical increase in
interest rates of 100 basis points across all maturities would have increased
our interest expense for 2002 by about $7 million.
104
<page>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Independent Auditors' Reports.................................... 106
Consolidated Balance Sheets...................................... 108
Consolidated Statements of Operations............................ 109
Consolidated Statements of Cash Flows............................ 110
Consolidated Statements of Stockholders' Equity (Deficit)........ 111
Notes to Consolidated Financial Statements....................... 112
105
<page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
GrafTech International Ltd.
Wilmington, Delaware
We have audited the accompanying consolidated balance sheets of GrafTech
International Ltd. (formerly UCAR International Inc.) and subsidiaries (the
"Company") as of December 31, 2001 and 2002, and the related consolidated
statements of operations, cash flows and stockholders' equity (deficit) for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2001
and 2002, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 14, 2003, except for Note 18,
as to which the date is March 25, 2003
106
<page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
UCAR International Inc.:
We have audited the accompanying Consolidated Statements of Operations, Cash
Flows and Stockholders' Equity (Deficit) of UCAR International Inc. and
subsidiaries for the year ended December 31, 2000. These Consolidated Financial
Statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these Consolidated Financial
Statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of UCAR International Inc. and Subsidiaries for the year ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
Nashville, Tennessee
February 15, 2001
107
<page>
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
<table>
<caption>
AT DECEMBER 31,
---------------
2001 2002
---- ----
ASSETS
<s> <c> <c>
Current assets:
Cash and cash equivalents........................................ $ 38 $ 11
Notes and accounts receivable, net............................... 95 108
Inventories:
Raw materials and supplies..................................... 33 40
Work in process................................................ 111 103
Finished goods................................................. 33 30
------- ---------
177 173
Prepaid expenses and deferred income taxes....................... 12 21
------- ---------
Total current assets........................................... 322 313
------- ---------
Property, plant and equipment........................................ 931 1,008
Less: accumulated depreciation...................................... 650 700
------- ---------
Net fixed assets............................................... 281 308
Deferred income taxes................................................ 140 171
Goodwill............................................................. 17 17
Other assets......................................................... 37 50
------- ---------
Total assets................................................... $ 797 $ 859
======= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................. $ 101 $ 106
Short-term debt.................................................. 7 18
Accrued income and other taxes................................... 45 24
Other accrued liabilities........................................ 57 57
------- ---------
Total current liabilities...................................... 210 205
Long-term debt:
Carrying value.................................................. 631 699
Fair value of hedged debt obligation............................ - 8
Unamortized bond premium........................................ - 6
------- ---------
Total long-term debt...................................... 631 713
Other long-term obligations.......................................... 231 258
Deferred income taxes................................................ 32 34
Minority stockholders' equity in consolidated entities............... 25 30
Commitments and contingencies........................................ - -
Stockholders' deficit:
Preferred stock, par value $.01, 10,000,000 shares authorized,
none issued................................................... - -
Common stock, par value $.01, 100,000,000 shares authorized,
58,532,209 shares issued at December 31, 2001, 59,120,160
shares issued at December 31, 2002............................ 1 1
Additional paid-in capital....................................... 629 636
Accumulated other comprehensive loss............................. (269) (304)
Accumulated deficit.............................................. (602) (620)
Less: cost of common stock held in treasury, 2,322,412 shares
at December 31, 2001, 2,542,539 shares at December 31, 2002... (85) (88)
Common stock held in employee benefit trust, 426,400 shares at
December 31, 2001 and December 31, 2002....................... (6) (6)
------- ---------
Total stockholders' deficit...................................... (332) (381)
------- ---------
Total liabilities and stockholders' deficit.................... $ 797 $ 859
======= =========
See accompanying Notes to Consolidated Financial Statements.
</table>
108
<page>
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
<s> <c> <c> <c>
Net sales............................................................... $ 776 $ 654 $ 613
Cost of sales........................................................... 560 469 473
---------- ----------- ----------
Gross profit......................................................... 216 185 140
Research and development................................................ 11 12 13
Selling, administrative and other expenses.............................. 86 78 78
Restructuring charges................................................... 6 12 6
Impairment losses on long-lived and other assets ....................... 3 80 17
Restricted stock vesting................................................ - - 5
Antitrust investigations and related lawsuits and claims................ - 10 -
Corporate realignment and related expenses................................. - 2 3
Other expense (income), net............................................. (1) 1 (16)
Interest expense........................................................ 75 60 60
---------- ----------- ----------
180 255 166
Income (loss) before provision for income taxes, minority interest
and extraordinary item............................................... 36 (70) (26)
Provision for (benefit from) income taxes............................... 10 15 (13)
---------- ----------- ----------
Income (loss) before minority interest and extraordinary item........ 26 (85) (13)
Less: minority stockholders' share of income........................... 3 2 2
---------- ----------- ----------
Income (loss) before extraordinary item.............................. 23 (87) (15)
Extraordinary item, net of tax.......................................... 13 - 3
---------- ----------- ----------
Net income (loss).................................................. $ 10 $ (87) $ (18)
========== =========== ==========
Income (loss) per common share:
Basic:
- -----
Income (loss) before extraordinary item............................ $ 0.51 $ (1.75) $ (0.28)
Extraordinary item, net of tax..................................... (0.29) - (0.05)
---------- ----------- ----------
Net income (loss) per share ....................................... $ 0.22 $ (1.75) $ (0.33)
========== =========== ==========
Diluted:
- -------
Income (loss) before extraordinary item............................ $ 0.50 $ (1.75) $ (0.28)
Extraordinary item, net of tax..................................... (0.28) - (0.05)
---------- ----------- ----------
Net income (loss) per share........................................ $ 0.22 $ (1.75) $ (0.33)
========== =========== ==========
See accompanying Notes to Consolidated Financial Statements.
</table>
109
<page>
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions, except per share data)
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 2001 2002
---- ---- ----
<s> <c> <c> <c>
Cash flow from operating activities:
Net income (loss)................................................... $ 10 $ (87) $ (18)
Extraordinary item, net of tax...................................... 13 - 3
Non-cash (credits) charges to net income (loss):
Depreciation and amortization..................................... 43 36 29
Deferred income taxes............................................. (25) (9) (26)
Securities class action and stockholder derivative lawsuits....... (1) - -
Antitrust investigations and related lawsuits and claims....... - 10 -
Restructuring charges............................................. 6 12 6
Impairment losses on long-lived and other assets.................. 3 80 17
Restricted stock vesting.......................................... - - 5
Other non-cash charges............................................ 6 13 (24)
Working capital*.................................................... 43 (32) (40)
Long-term assets and liabilities.................................... (4) (6) (12)
------- ------- -------
Net cash provided by (used in) operating activities............... 94 17 (60)
Cash flow from investing activities:
Capital expenditures................................................ (52) (40) (50)
Purchase of investment.............................................. (1) (2) -
Maturities of short-term investments................................ 2 - -
Sale of assets...................................................... 1 3 -
------- ------- -------
Net cash used in investing activities............................. (50) (39) (50)
Cash flow from financing activities:
Short-term debt borrowings, net..................................... 3 3 11
Revolving credit facility borrowings, net........................... 56 7 (86)
Long-term debt borrowings........................................... 661 2 557
Long-term debt reductions........................................... (707) (96) (392)
Minority interest investment....................................... - 9 -
Financing costs..................................................... (28) (4) (21)
Proceeds from reset of interest rate swap.......................... - - 10
Sale of common stock................................................ 2 94 1
Dividends paid to minority stockholder.............................. - - (1)
------- ------- -------
Net cash provided by (used in) financing activities............... (13) 15 79
------- ------- -------
Net increase (decrease) in cash and cash equivalents................... 31 (7) (31)
Effect of exchange rate changes on cash and cash equivalents........... (1) (2) 4
Cash and cash equivalents at beginning of period....................... 17 47 38
------- ------- -------
Cash and cash equivalents at end of period............................. $ 47 $ 38 $ 11
======= ======= =======
Supplemental disclosures of cash flow information:
Net cash paid during the year for:
Interest expense.................................................. $ 81 $ 56 $ 48
Income taxes...................................................... $ 13 $ 25 $ 24
* Net change in working capital due to the following components:
(Increase) decrease in current assets:
Notes and accounts receivable..................................... $ 30 $ 20 $ (6)
Inventories....................................................... 18 (20) 11
Prepaid expenses.................................................. 3 - (2)
Payments for antitrust investigations and related lawsuits
and claims........................................................ (23) (16) (3)
Restructuring payments.............................................. (7) (18) (4)
Increase (decrease) in payables and accruals........................ 22 2 (36)
------- ------- -------
Working capital.............................................. $ 43 $ (32) $ (40)
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
</table>
110
<page>
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in millions, except share data)
<table>
<caption>
ADDITIONAL OTHER
COMMON PAID-IN COMPRENENSIVE ACCUMULATED
STOCK CAPITAL LOSS DEFICIT
----- ------- ------------- -------
<s> <c> <c> <c> <c>
Balance at January 1, 2000....... $ - $ 523 $ (205) $ (525)
------- -------- ------- ------
Comprehensive income (loss):
Net income.................... - - - 10
Other comprehensive income:
Unrealized loss on
available-for-sale
securities.............. - - (1) -
Foreign currency
translation adjustments. - - (35) -
-------- -------- ------- ------
Total comprehensive income
(loss)..................... - - (36) 10
Sale of common stock -
stock options.............. - 2 - -
Sale of common stock -
treasury stock............. - - - -
-------- -------- ------- ------
Balance at December 31, 2000..... $ - $ 525 $ (241) $ (515)
-------- -------- ------- ------
Comprehensive income (loss):
Net loss...................... - - - (87)
Other comprehensive income:
Recognized loss on
available-for-sale
securities............. - - 1 -
Foreign currency
translation
adjustments......... - - (29) -
------- -------- ------- ------
Total comprehensive income
(loss)..................... - - (28) (87)
Sale of 2.5% equity interest
in AET..................... - 4 - -
Common stock issued to
employee benefit trust..... - 6 - -
Sale of common stock, net.... 1 94 - -
------- -------- ------- ------
Balance at December 31, 2001..... $ 1 $ 629 $ (269) $ (602)
------- -------- ------- ------
Comprehensive loss:
Net loss...................... - - - (18)
Other comprehensive loss:
Minimum pension
liability.......... - - (15) -
Foreign currency
translation
adjustments........ - - (20) -
------- -------- ------- ------
Total comprehensive income
(loss)..................... - - (35) (18)
Issuance of restricted stock. - 6 - -
Amortization of restricted
stock...................... - - - -
Accelerated vesting of
restricted stock........... - - - -
Sale of common stock under
stock options.............. - 1 - -
Repurchase of treasury stock. - - - -
------- -------- ------- ------
Balance at December 31, 2002..... $ 1 $ 636 $ (304) $ (620)
======= ======== ======= ======
</table>
See accompanying Notes to Consolidated Financial Statements.
111
<page>
<table>
<caption>
ACCUMULATED
SHARES OF ADDITIONAL OTHER
COMMON COMMON PAID-IN COMPRENENSIVE ACCUMULATED
STOCK STOCK CAPITAL LOSS DEFICIT
----- ----- ------- ------------- -------
<s> <c> <c> <c> <c> <c>
Balance at January 1, 2000....... 45,102,498 $ - $ 523 $ (205) $ (525)
---------- ------- -------- ------- ------
Comprehensive income (loss):
Net income.................... - - - - 10
Other comprehensive income:
Unrealized loss on
available-for-sale
securities.............. - - - (1) -
Foreign currency
translation adjustments. - - - (35) -
----------- -------- -------- ------- ------
Total comprehensive income -
(loss)..................... - - - (36) 10
Sale of common stock -
stock options.............. 50,473 - 2 - -
Sale of common stock -
treasury stock............. 18,556 - - - -
------------ -------- -------- ------- ------
Balance at December 31, 2000..... 45,171,527 $ - $ 525 $ (241) $ (515)
------------ -------- -------- ------- ------
Comprehensive income (loss):
Net loss...................... - - - - (87)
Other comprehensive income:
Recognized loss on
available-for-sale
securities............. - - - 1 -
Foreign currency
translation
adjustments......... - - - (29) -
----------- ------- -------- ------- ------
Total comprehensive income
(loss)..................... - - - (28) (87)
Sale of 2.5% equity interest
in AET..................... - - 4 - -
Common stock issued to
employee benefit trust..... - - 6 - -
Sale of common stock, net.... 11,138,270 1 94 - -
------------ ------- -------- ------- ------
Balance at December 31, 2001..... 56,309,797 $ 1 $ 629 $ (269) $ (602)
------------ ------- -------- ------- ------
Comprehensive loss:
Net loss...................... - - - - (18)
Other comprehensive loss:
Minimum pension
liability.......... - - - (15) -
Foreign currency
translation
adjustments........ - - - (20) -
------------ ------- -------- ------- ------
Total comprehensive income
(loss)..................... - - - (35) (18)
Issuance of restricted stock. 412,200 - 6 - -
Amortization of restricted
stock...................... - - - - -
Accelerated vesting of
restricted stock........... - - - - -
Sale of common stock under
stock options.............. 175,751 - 1 - -
Repurchase of treasury stock. (220,127) - - - -
------------ ------- -------- ------- ------
Balance at December 31, 2002..... 56,677,621 $ 1 $ 636 $ (304) $ (620)
============ ======= ======== ======= ======
COMMON
STOCK
HELD IN
UNEARNED EMPLOYEE TOTAL
RESTRICTED TREASURY BENEFIT STOCKHOLDER
STOCK STOCK TRUST DEFICIT
----- ----- -----
<c> <c> <c> <c>
$ - $ (86) $ - $ (293)
------ ------ ----- ------
- - - 10
- - - (1)
- - - (35)
------ ------ ----- ------
- - (26)
- - - 2
- 1 1
------ ------ ----- ------
$ - $ (85) $ - $ (316)
------ ------ ----- ------
- - - (87)
- - - 1
- - - (29)
------ ------ ----- ------
- - (115)
- - - 4
- - (6) -
- - - 95
------ ------ ----- ------
- $ (85) $ (6) $ (332)
------ ------ ----- ------
- - - (18)
- - - (15)
- - - (20)
------ ------ ----- ------
- - - (53)
(6) - - -
1 - - 1
5 - - 5
- - - 1
- (3) - (3)
------ ------ ----- ------
$ - $ (88) $ (6) $ (381)
====== ====== ===== ======
See accompanying Notes to Consolidated Financial Statements.
</table>
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<page>
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DISCUSSION OF BUSINESS AND STRUCTURE
Important Terms
We use the following terms to identify various companies or groups of
companies in the Consolidated Financial Statements.
"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 and
the Senior Facilities. Prior to our Annual Meeting of Stockholders for 2002, GTI
was named UCAR International Inc.
"GRAFTECH GLOBAL" refers to GrafTech Global Enterprises Inc. only.
GrafTech Global is a direct, wholly owned subsidiary of GTI and the direct or
indirect holding company for all of our operating subsidiaries. GrafTech Global
is a guarantor of the Senior Notes and the Senior Facilities. Prior to June 7,
2002, GrafTech Global Enterprises Inc. was named UCAR Global Enterprises Inc.
"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. UCAR Carbon is a guarantor of the Senior Notes and the Senior
Facilities.
"GRAFTECH FINANCE" refers to GrafTech Finance Inc. only. GrafTech
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"). GrafTech Finance is the issuer of our 10.25% senior notes
due 2012 (the "SENIOR NOTES"). The Senior Notes were issued under an Indenture
dated February 15, 2002, as supplemented on April 30, 2002 (as supplemented, the
"INDENTURE"). Prior to June 7, 2002, GrafTech Finance was named UCAR Finance
Inc.
"AET" refers to Advanced Energy Technology Inc. only. AET is our 97.5%
owned subsidiary engaged in the development, manufacture and sale of natural
graphite-based products. Prior to January 1, 2003, AET was 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 cathodes.
"SUBSIDIARIES" refers to those companies that, 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, 2000 through December 31, 2002, except for:
o Carbone Savoie, which has been and is 70% owned; and
o AET, which was 100% owned until it became 97.5% owned in June 2001.
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<page>
Our 100% owned Brazilian cathode manufacturing operations were
contributed to Carbone Savoie and, as a result, became 70% owned on March 31,
2001. In 2002, we substantially completed a realignment of our foreign
subsidiaries. Most of the operations and net sales of our synthetic graphite
line of business are located outside the U.S. and are held by our Swiss
subsidiary or its subsidiaries. Most of our technology is held by our U.S.
subsidiaries. We may in the future realign the corporate organizational
structure of our U.S. subsidiaries.
"WE," "US" or "OUR" refers to GTI and its subsidiaries collectively or,
if the context so requires, GTI, GrafTech Global or GrafTech Finance,
individually.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements include the financial statements
of GTI and its majority-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Cash Equivalents
Cash equivalents consist of overnight repurchase agreements and
certificates of deposit with an initial term of less than three months. For
purposes of the Consolidated Statements of Cash Flow, we consider all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
Investments
Investments in marketable debt and equity securities are generally
classified and accounted for as investment, held-to-maturity or
available-for-sale securities. We determine the appropriate classification of
debt and equity securities at the time of purchase and reassess the
classification at each reporting date. Debt securities classified as
held-to-maturity are reported at amortized cost plus accrued interest.
Securities classified as available-for-sale are reported at fair value with
unrealized gains and losses, net of related tax, recorded as a separate
component of comprehensive income in the Consolidated Statement of Stockholders'
Equity (Deficit) until realized. Interest plus accrued interest and amortization
of premiums and discounts for debt securities are included in interest expense.
Gains and losses on securities sold are determined based on the specific
identification method and are included in other (income) expense, net.
Unrealized losses on investment securities that are other than temporary are
recognized in net income (loss). We do not hold securities for speculative or
trading purposes.
Revenue Recognition
Sales of our products and technology are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, title has passed, the
revenue amount is determinable and collection is reasonably assured. Licenses of
technology are recognized over the term of the license agreements. Revenue from
service transactions is recognized based upon performance.
Inventories
Inventories are stated at cost or market, whichever is lower. Cost is
determined on the "first-in first-out" ("FIFO") or the "average cost" method.
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Fixed Assets and Depreciation
Fixed assets are carried at cost. Expenditures for replacements are
capitalized and the replaced assets are retired. Gains and losses from the sale
of property are included in other (income) expense, net.
Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets. We generally use accelerated depreciation methods
for tax purposes, where appropriate.
The average estimated useful lives are as follows:
YEARS
-----
Buildings.................................. 25
Land improvements.......................... 20
Machinery and equipment.................... 20
Furniture and fixtures..................... 10
Transportation equipment................... 6
The carrying value of fixed assets is assessed when events and
circumstances indicating impairment are present. We determine such impairment by
measuring undiscounted estimated future cash flows. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of the
assets to future net cash flows expected to be generated by the assets. If the
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. At December 31, 2002, accumulated depreciation
included about $216 million related to previously impaired long-lived assets.
Assets to be disposed are reported at the lower of the carrying amount or fair
value less costs to sell. We capitalized $1 million in interest in 2001 and
2002.
Derivative Financial Instruments
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. The adoption did not
have a significant impact on our consolidated financial position or results of
operations. We do not use derivative financial instruments for trading purposes.
They are used to manage well-defined currency exchange rate risks and interest
rate risks.
We enter into foreign currency instruments to manage exposure to
currency exchange rate fluctuations. These instruments, which include, but not
limited to, forward exchange contracts and purchased currency options, are
primarily used to attempt to hedge global currency exposures, net, relating to
euro-denominated debt, identifiable foreign currency receivables, payables and
commitments held by our foreign and domestic subsidiaries. Forward exchange
contracts are agreements to exchange different currencies at a specified future
date and at a specified rate. Purchased foreign currency options are instruments
which give the holder the right, but not the obligation, to exchange different
currencies at a specified rate at a specified date or over a range of specified
dates. Forward exchange contracts and purchased currency options are carried at
market value. Gains and losses due to the recording of such contracts at fair
value are recognized currently as other (income) expense, net.
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We enter into agreements with financial institutions that are intended
to limit, or cap, our exposure to the incurrence of additional interest expense
due to increases in variable interest rates. Since we deal with counterparties
that are major banks, we do not anticipate credit-related losses from
non-performance by such counterparties.
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded when it is determined that it
is more likely than not that any portion of a recorded deferred tax asset will
not be realized.
Stock-Based Compensation Plans
We account for stock-based compensation plans using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). As such, compensation expense is recorded
on the date of grant only if the market price of the underlying stock exceeded
the exercise price or if ultimate vesting is subject to performance conditions.
If an award results in recordable compensation expense, the total amount of
recorded compensation expense is based on the number of awards that eventually
vest. No compensation expense is recognized for forfeited awards, including
awards forfeited due to a failure to satisfy a service requirement or failure to
satisfy a performance condition. Our accruals of compensation expense for awards
subject to performance conditions are based on our assessment of the probability
of satisfying the performance conditions.
No compensation expense has been recognized for our time vesting
options granted with exercise prices at not less than market price on the date
of grant. At December 31, 2002, all awards subject to performance conditions
were fully vested. If compensation expense for our stock-based compensation
plans was determined by the fair value method prescribed by SFAS No. 123,
"Accounting for Stock Based Compensation," our net income (loss) and net income
(loss) per share would have been reduced or increased to the pro forma amounts
indicated below:
<table>
<caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions,
except per share data)
<s> <c> <c> <c>
Net income (loss) as reported................................. $ 10 $ (87) $ (18)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects.............................................. (1) (7) (7)
------ ------ ------
</table>
115
<page>
<table>
<caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions,
except per share data)
<s> <c> <c> <c>
Pro forma net income (loss)................................... 9 (94) (25)
Earnings per share:
Basic - as reported...................................... $ 0.22 $ (1.75) $ (0.33)
Basic - pro forma........................................ 0.20 (1.88) (0.45)
Diluted - as reported.................................... $ 0.22 $ (1.75) $ (0.33)
Diluted - pro forma...................................... 0.20 (1.88) (0.45)
</table>
Retirement Plans
The cost of pension benefits under our retirement plans is recorded in
accordance with SFAS No. 87, "Employee Accounting for Pensions," as determined
by independent actuarial firms using the "projected unit credit" actuarial cost
method. Contributions to the qualified U.S. retirement plan are made in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974. Benefits under the non-qualified retirement plan have been accrued, but
not funded. Plan settlements and curtailments are recorded in accordance with
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and Termination Benefits." In the 2003 first quarter, we
announced that we will freeze our U.S. qualified defined benefit plan effective
March 31, 2003. We started a new defined contribution plan on January 1, 2002
for U.S. employees.
Postretirement Health Care and Life Insurance Benefits
The estimated cost of future postretirement medical and life insurance
benefits is determined by independent actuarial firms using the "projected unit
credit" actuarial cost method. Such costs are recognized as employees render the
service necessary to earn the postretirement benefits. Benefits have been
accrued, but not funded. Effective November 1, 2001, the U.S. plan was modified
to limit our cost of future annual postretirement medical benefits to the cost
2001. Effective March 31, 2003, we will discontinue the Medicare supplement plan
(for retirees 65 years or older or those eligible for Medicare benefits). This
change will apply to all current employees not covered by a collective
bargaining agreement when they retire, as well as those retirees who retired
under a former collective bargaining agreement. These modifications are
accounted for prospectively.
Environmental, Health and Safety Matters
Our operations are governed by laws addressing protection of the
environment and worker safety and health. These laws provide for civil and
criminal penalties and fines, as well as injunctive and remedial relief, for
noncompliance and require remediation at sites where hazardous substances have
been released into the environment.
We have been in the past, and may become in the future, the subject of
formal or informal enforcement actions or proceedings regarding noncompliance
with these laws or the remediation of company-related substances released into
the environment. Historically, such matters have been resolved by negotiation
with regulatory authorities resulting in commitments to compliance, abatement or
remediation programs and in some cases payment of penalties.
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Historically, neither the commitments undertaken nor the penalties imposed on us
have been material.
Environmental considerations are part of all significant capital
expenditure decisions. Environmental remediation, compliance and management
expenses were approximately $14 million in 2000, $12 million in 2001 and $10
million in 2002. The accrued liability relating to environmental remediation was
$5 million at December 31, 2001 and December 31, 2002. A charge to income is
recorded when it is probable that a liability has been incurred and the cost can
be reasonably estimated. Our environmental liabilities do not take into
consideration possible recoveries of insurance proceeds. Because of the
uncertainties associated with environmental remediation activities at sites
where we may be potentially liable, future expenses to remediate sites could be
considerably higher than the accrued liability. However, while neither the
timing nor the amount of ultimate costs associated with known environmental
remediation matters can be determined at this time, we do not expect that these
matters will have a material adverse effect on our financial position, results
of operations or cash flows.
Post-employment Benefits
We accrue the estimated cost of post-employment benefits expected to be
paid before retirement, principally severance, over employees' active service
periods.
Use of Estimates
We have made a number of estimates and assumptions relating to the
recording and disclosure of assets and liabilities, including contingent assets
and liabilities, to prepare the Consolidated Financial Statements in conformity
with accounting principles generally accepted in the United States. Actual
amounts and values could differ from those estimates.
Reclassification
Certain amounts previously reported have been reclassified to conform
to the current year presentation.
Foreign Currency Translation
Generally, except for operations in Russia where high inflation has
existed, unrealized gains and losses resulting from translation of the financial
statements of our foreign subsidiaries from their functional currencies into
dollars are accumulated in other comprehensive income on the Consolidated
Balance Sheets until such time as the operations are sold or substantially or
completely liquidated. Translation gains and losses relating to operations,
where high inflation has existed, are included in other (income) expense, net in
the Consolidated Statements of Operations. Our Mexican subsidiary began using
the dollar as its functional currency during 1999 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. We have intercompany
loans between GrafTech Finance and some of our subsidiaries. Some of these loans
are denominated in currencies other than the dollar and, accordingly, are
subject to translation gains and losses due to changes in currency exchange
rates. Some of these intercompany loans are deemed to be essentially permanent
and, as a result, translation gains and losses on these loans are reflected in
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<page>
accumulated other comprehensive income (loss) on the Consolidated Balance
Sheets. The remaining intercompany loans are expected to be repaid in the
foreseeable future and, as a result, translation gains and losses on these loans
are reflected in other (income) expense, net on the Consolidated Statement of
Operations. Translation gains (losses) on these intercompany loans amounted to a
$24 million gain in 2001 and a $35 million gain in 2002 recorded in accumulated
other comprehensive income (loss), and a $8 million gain in 2000, a $4 million
loss in 2001 and a $21 million gain in 2002 recorded in other (income) expense,
net.
Goodwill
Goodwill represents the excess of the purchase price over the fair
value of net assets acquired and amounted to $17 million at December 31, 2001
and December 31, 2002. Prior to January 1, 2002, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally 20
years. Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." The adoption of 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 $2 million in
2001. We have performed the goodwill impairment reviews required by SFAS No. 142
and the results of these reviews did not require our existing goodwill to be
written down.
<table>
<caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions,
except per share data)
<s> <c> <c> <c>
Reported net income (loss).................................... $ 10 $ (87) $ (18)
Add back: Goodwill amortization (net of tax)................. 2 1 -
------ ------ ------
Adjusted net income........................................... $ 12 $ (86) $ (18)
====== ====== ======
Basic earnings per share:
Reported net income (loss)............................... $ 0.22 $ (1.75) $ (0.33)
Goodwill amortization (net of tax)....................... 0.03 0.03 -
------ ------ ------
Adjusted net income...................................... $ 0.25 $ (1.72) $ (0.33)
====== ====== ======
Diluted earnings per share:
Reported net income (loss)............................... $ 0.22 $ (1.75) $ (0.33)
Goodwill amortization (net of tax)....................... 0.03 0.03 -
------ ------ ------
Adjusted net income...................................... $ 0.25 $ (1.72) $ (0.33)
====== ====== ======
</table>
Impairment review
Periodically, we assess the carrying value of our long-lived and
intangible assets. Our assessment involves comparing the carrying value of the
asset on our Consolidated Balance Sheet to the cash flows we expect to generate
in the future by that asset. We forecast the cash flows based on our assessment
of our business. If the expected cash flows are less than the asset's carrying
value, we record an impairment loss on that asset.
At December 31, 2002, there were no additional impairments required
that we have not already recorded in our Consolidated Statement of Operations.
However, future events and circumstances, some of which are described below, may
result in an impairment charge:
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o new technological developments that provide
significantly enhanced benefits over our current
technology;
o significant negative economic or industry trends;
o changes in our business strategy that alter the
expected usage of the related assets;
o significant increase or decrease in our cost of
capital; and
o future economic results that are below our
expectations used in the current assessments.
New Accounting Standards
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We do not
believe that adoption of SFAS No. 148 will have a significant impact on our
results of operations or financial position because the impact will be limited
to additional disclosure.
In November 2002, FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others." The initial recognition and
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, and require that we
record a liability, if any, for the fair value of such guarantees in the
Consolidated Balance Sheet. As required, at December 31, 2002, we have enhanced
our disclosures for certain guarantees, indemnification arrangements and product
warranties. We provide insurance coverage and are required to indemnify
directors and officers for actions taken on our behalf.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue No. 94-3, a
liability for an exit cost as defined in Issue No. 94-3 is recognized at the
date an entity commits to an exit plan. We are currently evaluating the impact
of SFAS No. 146 on our consolidated financial position and results of
operations.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The provisions of SFAS No. 145 related to the rescission of SFAS
No. 4 shall be applied in fiscal years beginning after May 15, 2002. The
provisions of SFAS No. 145 related to SFAS No. 13 shall be effective for
transactions occurring after May 15, 2002 and all other provisions of SFAS No.
145 shall be
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<page>
effective for financial statements issued on or after May 15, 2002. SFAS No. 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and an amendment thereto, and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." Currently, generally accepted accounting
principles require that gains and losses from extinguishment of debt be
classified as an extraordinary item, net of related income tax effect. Based on
SFAS No. 145, gains and losses from extinguishment of debt are classified as
extraordinary items only if they meet the criteria of Accounting Principle
Boards Opinion 30 ("APB 30"), "Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The provisions of APB 30 distinguish transactions that are part
of an entity's recurring operations from those that are unusual or infrequent or
that meet the criteria for classification as an extraordinary item. As such,
those that do not meet the criteria of APB 30 are included in the statement of
operations before income (loss) before provisions (benefits) for income taxes,
minority interest and extraordinary items. All prior periods presented that do
not meet the criteria in APB 30 for classification as an extraordinary item
shall be reclassified. SFAS No. 145 also rescinds SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers." SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions of SFAS No. 145 relating to SFAS No. 4 will result in the
reclassification of our extraordinary items to other expense. The provisions of
SFAS No. 145 relating to SFAS No. 13 and the other provisions of SFAS No. 145,
excluding the provisions relating to SFAS No. 4, did not have a significant
impact on our consolidated financial position or results of operations.
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 June 2001, FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separately
from goodwill. SFAS No. 142 requires that goodwill and certain other intangibles
no longer be amortized, but instead be tested for impairment at least annually.
SFAS No. 142 was 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,
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except that we no longer amortize goodwill. Goodwill amortization was $2 million
in 2001. We have performed the goodwill impairment reviews required by SFAS No.
142 and the results of these reviews did not require our existing goodwill to be
written down.
(3) FINANCIAL INSTRUMENTS
We do not use derivative financial instruments for trading purposes.
They are used to manage well-defined currency exchange rate and interest rate
risks.
Foreign Currency Contracts
The amount of foreign exchange contracts used by us to minimize foreign
currency exposure was $37 million at December 31, 2001 and $99 million at
December 31, 2002. Of the total foreign exchange contracts outstanding,
approximately $4 million (11%) were offsetting at December 31, 2001 and
approximately $43 million (43%) were offsetting at December 31, 2002.
Sale of Receivables
Certain of our U.S. and foreign subsidiaries sold receivables of $223
million in 2001 and $187 million in 2002. Receivables sold and remaining on the
Consolidated Balance Sheets were $1 million at December 31, 2001 and December
31, 2002.
Interest Rate Risk 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 the 2002 second quarter, we entered into two ten-year
interest rate swaps for a total notional amount of $250 million to effectively
convert that amount of fixed rate debt (represented by Senior Notes) to variable
rate debt. These interest rate swaps are fair value swaps and are accounted for
based on the short-cut method. These swaps reduced our interest expense in 2002
by $6 million. In the 2002 third quarter, we reset our interest rate swaps to
allow for the accelerated collection of $10 million in cash. The collection of
this cash will be amortized over the term of the Senior Notes and recorded as a
credit against interest expense. The adjustment for the fair value of the hedged
debt obligations was $8 million at December 31, 2002 and has been recorded as
part of other assets in the Consolidated Balance Sheet. The weighted average pay
rate on the swaps is 5.11% plus the six month LIBOR in arrears and the weighted
average receive rate is 10.25%.
Fair Market Value Disclosures
SFAS No. 107, "Disclosure about Fair Market Value of Financial
Instruments," defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. Such fair values must often be determined by using one or more methods
that indicate value based on estimates of quantifiable characteristics as of a
particular date. Values were estimated as follows:
Cash and cash equivalents, short-term notes and accounts receivables,
accounts payable and other current payables-The carrying amount
approximates fair value because of the short maturity of these instruments.
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Debt-Fair value of debt was approximately $631 million at December 31, 2001
and $707 million at December 31, 2002.
Foreign currency contracts-Foreign currency contracts are carried at market
value. The market value of the contracts was approximately nil at December
31, 2001 and $3 million at December 31, 2002.
Interest Rate Swaps-See above under Interest Rate Risk Management.
(4) SEGMENT REPORTING
We evaluate the performance of our operating segments based on gross
profit. Intersegment sales and transfers are not material. We may in the future
evaluate performance based on additional or different measures. The accounting
policies of the reportable segments are the same as those described in Note 2.
The following tables summarize financial information concerning our
reportable segments.
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Net sales to external customers:
Graphite Power Systems Division................. $ 651 $ 525 $ 504
Advanced Energy Technology Division............. 125 129 109
------ ------ ------
Consolidated net sales....................... $ 776 $ 654 $ 613
====== ====== ======
Gross profit:
Graphite Power Systems Division................. $ 184 $ 147 $ 116
Advanced Energy Technology Division............. 32 38 24
------ ------ ------
Consolidated gross profit.................... $ 216 $ 185 $ 140
====== ====== ======
Depreciation and amortization:
Graphite Power Systems Division................. $ 40 $ 31 $ 23
Advanced Energy Technology Division............. 3 5 6
------ -------- -------
Consolidated depreciation and $ 43 $ 36 $ 29
====== ====== =======
amortization...............................
</table>
We do not report assets by reportable segment. Assets are managed based
on geographic location because both reportable segments share certain
facilities. The following tables summarize information as to our operations in
different geographic areas:
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Net sales (a):
U.S.......................................... $ 240 $ 196 $ 181
Canada....................................... 34 21 12
Mexico....................................... 43 33 37
Brazil....................................... 46 44 33
France....................................... 142 137 150
Italy........................................ 39 30 22
Switzerland ................................. 104 79 77
South Africa................................. 59 53 47
Spain........................................ 31 29 30
</table>
122
<page>
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Other countries.............................. 38 32 24
-------- -------- --------
Total...................................... $ 776 $ 654 $ 613
-------- ======== ========
</table>
(a) Net sales are based on location of seller.
<table>
<caption>
AT DECEMBER 31,
---------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Long-lived assets (b):
U.S.......................................... $ 115 $ 76 $ 72
Mexico....................................... 38 37 48
Brazil....................................... 37 34 25
France....................................... 93 94 109
Italy........................................ 31 6 7
South Africa................................. 43 27 37
Switzerland.................................. 23 7 8
Other countries.............................. 20 17 20
------- ------- -------
Total...................................... $ 400 $ 298 $ 326
======= ======= =======
</table>
(b) Long-lived assets represent fixed assets net of accumulated
depreciation and goodwill.
(5) LONG-TERM DEBT AND LIQUIDITY
The following table presents our long-term debt:
<table>
<caption>
DECEMBER 31, DECEMBER 31,
2001 2002
---- ----
(DOLLARS IN MILLIONS)
<s> <c> <c>
Senior Facilities:
Tranche A euro facility.................................... $ 194 $ -
Tranche A U.S. dollar facility............................. 23 -
Tranche B U.S. dollar facility............................. 313 137
Revolving credit facility.................................. 95 10
---------- ---------
Total Senior Facilities.................................. 625 147
Other European debt............................................. 6 2
Senior Notes:
Senior Notes due 2012...................................... - 550
Fair value of hedged debt obligations...................... - 8
Unamortized bond premium................................... - 6
---------- ---------
Total Senior Notes....................................... - 564
---------- ---------
Total................................................ $ 631 $ 713
========== =========
</table>
The aggregate maturities of long-term debt (excluding the fair value of
hedged debt obligations and unamortized bond premium relating to our Senior
Notes) for each of the five years subsequent to December 31, 2002 are:
2007
2003 2004 2005 2006 (AND THEREAFTER) TOTAL
---- ---- ---- ---- ---------------- -----
$ 1 $ - $ - $ 10 $688 $699
Senior Notes
On February 15, 2002, GrafTech Finance issued $400 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.
In April 2002, 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
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<page>
from the issuance of up to $150 million aggregate principal amount of additional
Senior Notes to make intercompany loans to our foreign subsidiaries. On April
30, 2002, we entered into a Supplemental Indenture.
On May 6, 2002, GrafTech Finance issued $150 million aggregate
principal amount of additional Senior Notes at a purchase price of 104.5% of
principal amount, plus accrued interest from February 15, 2002, under the same
Indenture pursuant to which it issued the Senior Notes in February 2002. The
Senior Notes constitute one class of debt securities under the Indenture. The
additional Senior Notes bear interest at the same rate and mature on the same
date as the Senior Notes issued in February 2002. The $7 million premium
received upon issuance of the additional Senior Notes was added to the principal
amount of the Senior Notes shown on the Consolidated Balance Sheets and is
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%.
On June 5, 2002, GrafTech Finance offered to exchange new registered
Senior Notes (and related guarantees) that are substantially identical to the
previously outstanding Senior Notes (and related guarantees), except that
certain transfer restrictions and registration rights relating to the previously
outstanding Senior Notes would not apply to the new registered Senior Notes (and
related guarantees). All of the previously outstanding Senior Notes (and related
guarantees) were exchanged under the exchange offer.
Except as described below, GrafTech Finance may not redeem the Senior
Notes prior to February 15, 2007. On or after that date, GrafTech 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 100.00% 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, GrafTech Finance is entitled at
its option on one or more occasions to redeem Senior Notes in an aggregate
principal amount not to exceed 35% of the aggregate principal amount of Senior
Notes originally issued by GrafTech Finance 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 offerings 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 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, GrafTech Finance will be
required to make an offer to repurchase the Senior Notes at a price equal to
101.00% of the principal amount redeemed, plus accrued and unpaid interest to
the redemption date. For this purpose, a change in control occurs on:
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<page>
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 (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 GrafTech Global, UCAR Carbon and
GrafTech Finance.
The Senior Notes rank senior to present and future subordinated debt
and equally with present and future senior debt and obligations of GrafTech
Finance. The Senior Notes are effectively subordinated to present and future
secured debt and obligations of GrafTech 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.
GTI, GrafTech Global and UCAR Carbon and other U.S. subsidiaries
holding a substantial majority of our U.S. assets have guaranteed the Senior
Notes on a senior unsecured basis, except that the guarantee by UCAR Carbon is
secured as described below.
Unsecured intercompany term notes in an aggregate principal amount
equal to $448 million (based on currency exchange rates in effect at December
31, 2002) and guarantees of those unsecured intercompany term notes issued to
GrafTech Finance by certain of our foreign subsidiaries have been pledged by
GrafTech 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, the principal amount of unsecured intercompany term notes
pledged to secure the Senior Notes equals $399 million, or about 73% of the
principal amount of the outstanding Senior Notes. The remaining unsecured
intercompany term notes held by GrafTech Finance in an aggregate principal
amount of $49 million (based on currency exchange rates in effect at December
31, 2002), and any pledged unsecured intercompany term notes that cease to be
pledged due to a reduction in the principal amount of the then outstanding
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 GrafTech 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.
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<page>
The guarantee by UCAR Carbon has been secured by a pledge of all of our
shares of AET, 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 AET is junior to the pledge of the same
shares to secure UCAR Carbon's guarantee of the Senior Facilities.
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 when due or to
repurchase Senior Notes when required, events of default under the Senior Notes
include: failure to comply with applicable covenants; failure to pay at maturity
or upon acceleration 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 consist of:
o A Tranche A Facility which provided for initial term loans of
$137 million and (euro)161 million (equivalent to $158 million
based on currency exchange rates in effect at February 22,
2000) to GrafTech Finance. At December 31, 2002, the Tranche A
Facility had been fully repaid and terminated.
O A Tranche B Facility providing for initial term loans of $350
million to GrafTech Finance. At December 31, 2002, the
principal amount of term loans outstanding under the Tranche B
Facility was $137 million, all of the scheduled principal
payments of which are due in 2007.
O A Revolving Facility providing for dollar and euro-denominated
revolving and swing line loans to, and the issuance of
dollar-denominated letters of credit for the account of,
GrafTech Finance and certain of our other subsidiaries in an
aggregate principal and stated amount at any time not to
exceed, initially,(euro)250 million and, at December 31,
2002,(euro)200 million ((euro)25 million of which can only be
used to pay or secure payment of the fine assessed by the EU
Competition Commission). 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
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<page>
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 ($22 million of which debt was outstanding at
December 31, 2002)).
We are generally required to make mandatory prepayments in the amount
of:
O Either 75% or 50% (depending on our net debt 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).
GrafTech Finance has made and may make secured and guaranteed
intercompany loans of the net proceeds of borrowings under the Senior Facilities
to GrafTech Global's subsidiaries. The obligations of GrafTech 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 that 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
GrafTech Finance under the Senior Facilities. This guarantee is secured, with
certain exceptions, by first priority security interests in all of the
outstanding capital stock of GrafTech Global and GrafTech Finance, all of the
intercompany debt owed to GTI and GTI's interest in the lawsuit initiated by us
against our former parents.
GTI, GrafTech Global and each of GrafTech Global's subsidiaries
guarantees, with certain exceptions, the obligations of GrafTech 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 GrafTech 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.
At December 31, 2002, the interest rate applicable to the Revolving
Facility is, at our option, either euro LIBOR plus a margin ranging from 1.375%
to 3.375% (depending on our
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<page>
leverage ratio) or the alternate base rate plus a margin ranging from 0.375% to
2.375% (depending on our leverage ratio). At December 31, 2002, 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%. GrafTech Finance pays a per annum fee ranging from 0.375% to 0.500%
(depending on our leverage ratio) on the undrawn portion of the commitments
under the Revolving Facility. At December 31, 2002, the interest rates on
outstanding debt under the Senior Facilities were: Tranche B Facility, 5.4%;
dollar-denominated borrowings under the Revolving Facility, 4.8%; and
euro-denominated borrowings under the Revolving Facility, 6.4%. The weighted
average interest rate on the Senior Facilities was 5.6% during 2002.
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 financial covenants relating to specified minimum interest coverage
ratios and maximum net senior secured debt leverage ratios (which is the ratio
of our net senior secured debt to our EBITDA), 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 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.
Certain Amendments to the 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. After giving effect to subsequent amendments to the
Senior Facilities, payments within the $340 million charge recorded in 1997 are
excluded from the calculation of financial covenants and charges over and above
the $340 million charge are excluded from the calculation of financial covenants
(until paid) up to a maximum of $75 million reduced by the amount of certain
debt (other than the Senior Notes) incurred by us that is not incurred under the
Senior Facilities ($22 million of which debt was outstanding at December 31,
2002). As a result,
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<page>
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), are excluded from such
calculations.
In July 2001, in connection with an underwritten public offering of
common stock, the Senior Facilities were amended to, among other things, change
our financial covenants so that they were less restrictive than would otherwise
have been the case. In connection therewith, we agreed that our investments in
unrestricted subsidiaries after this amendment will be made in the form of
secured loans, which will be pledged to secure the Senior Facilities. In
connection therewith, we paid an amendment fee of $2 million and the margin that
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 a 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. The amendment also changed the manner in which net debt and EBITDA
are calculated to exclude any letter of credit issued to secure payment of the
antitrust fine assessed against us by the EU Competition Authority. In addition,
the amendment expanded our ability to make certain investments, including
investments in AET, and eliminated provisions relating to a spin-off of AET. In
connection therewith, we paid an amendment fee of $1 million and the margin that
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 to, among other things,
permit us to issue up to $150 million aggregate principal amount of Senior
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
Authority) and reduced the basket for certain debt incurred by us that is not
incurred under the Senior Facilities (excluding the Senior Notes) to $75 million
from $130 million ($22 million of which debt was outstanding at December 31,
2002). In connection with the amendment and the consent, we paid fees and costs
of $1 million.
Leverage
We are highly leveraged and, as discussed in Note 14, have substantial
obligations in connection with antitrust investigations, lawsuits and claims (in
respect of which we have an unfunded reserve totaling $98 million). We had total
debt of $731 million (including $6 million for unamortized bond premium and $8
million for fair value of hedged debt obligations) and a stockholders' deficit
of $381 million at December 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 2002, certain of our subsidiaries sold receivables totaling $186
million. If we had not sold such receivables, our accounts receivable
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<page>
and our debt would have been about $46 million higher at December 31, 2002. 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 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, subject to 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. While our revolving credit facility provides
for maximum borrowings of up to (euro)200 million ($210 million, based on
currency exchange rates in effect at December 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 net senior secured debt leverage
ratio permitted or minimum interest coverage ratio required under the Senior
Facilities.
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 covenants and other provisions under
the Senior Facilities. These covenants and provisions include financial
covenants and representations regarding absence of material adverse changes
affecting us. 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.
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<page>
Equity Offering
On July 31, 2001, we sold an aggregate of 10,350,000 shares of our
common stock in a registered public offering at a public offering price of $9.50
per share. The gross proceeds from the offering were $98 million and the net
proceeds to us were $91 million. Sixty percent of the net proceeds were used to
prepay term loans under the Senior Facilities. Prepayments of $23 million under
the Tranche A Facility and $32 million under the Tranche B Facility were applied
against scheduled maturities of each Tranche in the order in which they were
due. The balance of the net proceeds were applied to reduce the outstanding
balance under the Revolving Facility.
Extraordinary Item
In February 2000, we recorded an extraordinary charge of $21 million
($13 million after tax) related to our debt recapitalization. The extraordinary
charge includes $5 million of bank and third party fees and expenses, $9 million
of redemption premium on our previously outstanding senior subordinated notes,
and write off of $7 million of deferred debt issuance costs.
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 Senior Notes.
In May 2002, we recorded an extraordinary charge 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 Senior Notes.
(6) INCOME TAXES
The following table summarizes the U.S. and non-U.S. components of
income (loss) before provision for income taxes, minority interest and
extraordinary items:
<table>
<caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
U.S...................................................... $ (69) $ (136) $ (81)
Non-U.S.................................................. 105 66 55
------- ------- -------
$ 36 $ (70) $ (26)
======= ======= ========
</table>
Total income taxes were allocated as follows:
<table>
<caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Income from operations................................... $ 10 $ 15 $ (14)
Extraordinary items...................................... (8) - (1)
------- ------- --------
$ 2 $ 15 $ (15)
======= ======= ========
</table>
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<page>
Income tax expense attributable to income from operations consists of:
<table>
<caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
U.S. federal income taxes:
Current......................................... $ 8 $ 1 $ 9
Deferred........................................ (23) (10) (25)
------- ------- -------
$ (15) $ (9) $ (34)
======= ======= =======
Non-U.S. income taxes
Current......................................... $ 27 $ 23 $ 22
Deferred........................................ (2) 1 (1)
------- ------- --------
$ 25 $ 24 $ 21
======= ======= =======
</table>
We have an income tax exemption from the Brazilian government on income
generated from graphite electrode and cathode production through 2006 and 2005,
respectively. The exemption reduced the net expense associated with income taxes
by $2 million in 2000 and $1 million in 2001 and 2002.
In 1998, we obtained an income tax exemption from the Swiss government.
The exemption reduced the net expense associated with income taxes by $8 million
in 2000, $8 million in 2001 and nil in 2002.
Income tax expense attributable to income from operations differed from
the amounts computed by applying the U.S. federal income tax rate of 35% to
pretax income from operations as follows:
<table>
<caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Tax at statutory U.S. federal rate................................ $ 13 $ (24) $ (9)
Nondeductible expenses associated with antitrust
investigations and related lawsuits and claims................. 1 5 -
State tax expense (benefit) (net of federal tax benefit).......... - (5) (13)
Restructuring charges with no tax benefit......................... - 9 3
Adjustments related to investment in subsidiaries................. - 26 -
Impact of dividend of foreign earnings ........................... 22 9 8
Non-U.S. net operating losses..................................... - - (1)
Non-U.S. tax exemptions and holidays.............................. (10) (9) -
Adjustments to deferred tax asset valuation allowance............. (20) (3) 16
Other............................................................. 4 7 (17)
---- ----- ------
$ 10 $ 15 $ (13)
==== ===== =====
</table>
The significant components of deferred income tax expense attributable
to income from operations are as follows:
<table>
<caption>
FOR THE YEAR ENDED
DECEMBER 31,
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Deferred tax expense (exclusive of the effects of changes
in the valuation allowance described below)............. $ (5) $ (6) $ (42)
Increase (decrease) in beginning of the year balance of
the valuation allowance for deferred tax assets.......... (20) (3) 16
------- ------- -------
$ (25) $ (9) $ (26)
======= ======= =======
</table>
132
<page>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2001 and December 31, 2002 are as follows:
AT DECEMBER 31,
2001 2002
---- ----
(Dollars in millions)
Deferred tax assets:
Fixed assets................................... $ 46 $ 38
Estimated liabilities and expenses associated
with antitrust investigations and related
lawsuits and claims.......................... 1 1
Postretirement and other employee benefits..... 55 65
Foreign tax credit and other carryforwards..... 52 97
Provision for scheduled plant closings and
other restructurings......................... 4 2
Other.......................................... 35 38
------ ------
Total gross deferred tax assets.............. 193 241
Less: valuation allowance................... (27) (43)
------ -------
Total deferred tax assets.................. $ 166 $ 198
====== ======
Deferred tax liabilities:
Fixed assets........................................ $ 44 $ 44
Inventory........................................... 6 6
Other............................................... 4 1
------ ------
Total deferred tax liabilities...................... 54 51
------ ------
Net deferred tax asset..................... $ 112 $ 147
====== ======
Deferred income tax assets and liabilities are classified on a net
current and non-current basis within each tax jurisdiction. Net deferred income
tax assets are included in prepaid expenses in the amount of $9 million at
December 31, 2001 and $14 million at December 31, 2002 and in other assets in
the amount of $140 million at December 31, 2001 and $171 million at December 31,
2002. Net deferred tax liabilities are included in accrued income and other
taxes in the amount of $5 million at December 31, 2001 and $4 million at
December 31, 2002 and separately stated as deferred income taxes in the amount
of $32 million at December 31, 2001 and $34 million at December 31, 2002.
During the 2000 fourth quarter, we entered into an intercompany
sale-leaseback transaction between two subsidiaries relating to a U.S. graphite
electrode facility, which allowed for utilization of foreign tax credits. This
transaction resulted in a tax effect of a book gain of $22 million being
classified as a deferred charge, which was included in other assets and was to
be amortized into income. In June 2001, as a result of the decision to shutdown
this facility, the facility was sold back to the original subsidiary owner and
impaired. Accordingly, we then recognized a deferred tax asset for the resulting
tax basis in excess of the amount for financial reporting.
The net change in the total valuation allowance for 2002 was an
increase of $16 million. The change results primarily from the determination
that certain of our foreign tax credits and state net operating losses may not
be utilizable prior to expiration and the provision of an allowance related to
the impairment and restructuring of our Italian graphite electrode operations
for which the realization of a tax benefit is not probable.
We have total excess foreign tax credit carryforwards of $79 million at
December 31, 2002. Of these tax credit carryforwards, $20 million expire in
2003, $15 million expire in 2004,
133
<page>
$6 million expire in 2006 and $38 million expire in 2007 and beyond. On a
recomputed basis, we used foreign tax credits to reduce U.S. current tax
liabilities in the amount of $16 million in 2001 and $2 million in 2002. Based
upon the level of historical taxable income and projections for future taxable
income over the periods during which these credits are utilizable, we believe it
is more likely than not that we will realize the tax benefits of these deferred
tax assets net of the corresponding $22 million of valuation allowances that
exist at December 31, 2002. Specifically, it is our intention to pursue tax
planning strategies and one-time events in order to utilize our foreign tax
credit carryforwards prior to expiration.
U.S. income taxes have not been provided on undistributed earnings of
foreign subsidiaries. Our intention is to reinvest these undistributed earnings
indefinitely. To the extent that our circumstances change or future earnings are
repatriated, we will provide for income tax on the earnings of the affected
foreign subsidiaries. We believe that any U.S. income tax on repatriated
earnings would be substantially offset by U.S. foreign tax credits.
(7) OTHER (INCOME) EXPENSE, NET
The following table presents an analysis of other (income) expense,
net:
<table>
<caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Interest income............................................... $ (6) $ (2) $ (2)
Currency (gains) losses....................................... (4) (2) (28)
Bank fees..................................................... 2 2 2
Loss on sale of accounts receivable........................... 1 3 2
Legal expenses and settlements................................ - - 3
Employee benefit curtailment costs............................ - - 1
Former parent company lawsuit legal expenses.................. 3 1 1
Amortization of goodwill...................................... 2 2 -
(Gain) loss on sale of assets................................. 2 (1) -
Insurance related gains....................................... (5) - -
Expenses for withdrawn initial public offering of AET......... 2 - -
Securities class action and stockholder derivative lawsuits... (1) - -
Other......................................................... 3 (2) 5
------- ------- --------
Total other (income) expense, net............................. $ (1) $ 1 $ (16)
======= ======= ========
</table>
We have intercompany loans between GrafTech Finance and some of our
subsidiaries. Some of these loans are denominated in currencies other than the
dollar and, accordingly, are subject to translation gains and losses due to
changes in currency exchange rates. Some of these intercompany loans are deemed
to be essentially permanent and, as a result, translation gains and losses on
these loans are reflected in accumulated other comprehensive income (loss) on
the Consolidated Balance Sheets. The remaining intercompany loans are expected
to be repaid in the foreseeable future and, as a result, translation gains and
losses on these loans are reflected in other (income) expense, net on the
Consolidated Statement of Operations. In 2002, we had $28 million in currency
gains, $21 million of which gain was due to currency translation on intercompany
loans and translation of financial statements of foreign subsidiaries which use
the dollar as their functional currency and $7 million of which related to
transactions with third parties.
134
<page>
(8) INTEREST EXPENSE
The following table presents an analysis of interest expense:
<table>
<caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Interest incurred on debt..................................... $ 69 $ 54 $ 56
Amortization of debt issuance costs........................... 2 2 3
Interest imputed on antitrust fine............................ 4 4 1
------- ------- -------
Total interest expense................................... $ 75 $ 60 $ 60
======= ======= =======
</table>
(9) SUPPLEMENTARY BALANCE SHEET DETAIL
The following tables present supplementary balance sheet details.
<table>
<caption>
AT DECEMBER 31,
---------------
2001 2002
---- ----
(Dollars in millions)
<s> <c> <c>
Notes and accounts receivable:
Trade............................................................. $ 81 $ 89
Other............................................................. 19 24
------ ------
100 113
Allowance for doubtful accounts................................... (5) (5)
------ -------
$ 95 $ 108
====== ======
Property, plant and equipment:
Land and improvements............................................. $ 38 $ 41
Buildings......................................................... 158 166
Machinery and equipment and other................................. 708 766
Construction in progress.......................................... 27 35
------ ------
$ 931 $ 1,008
====== ======
Other assets:
Fair value of interest rate swap.................................. - 8
Pension assets.................................................... 4 4
Long-term receivables............................................. 6 2
Long-term investments............................................. 6 2
Capitalized bank fees............................................. 14 28
Cash surrender value of executive life insurance.................. 2 3
Other............................................................. 5 3
------ ------
$ 37 $ 50
====== ======
Accounts payable:
Trade............................................................. $ 96 $ 83
135
AT DECEMBER 31,
---------------
2001 2002
---- ----
Interest.......................................................... 5 23
------ ------
$ 101 $ 106
====== ======
Other accrued liabilities:
Accrued accounts payable.......................................... $ 19 $ 14
Accrued imputed interest.......................................... 6 5
Payrolls.......................................................... 3 4
Restructuring..................................................... 12 14
Employee compensation and benefits................................ 9 9
Liabilities and expenses associated with antitrust investigations
and related lawsuits and claims............................... 2 3
Other......................................................... 6 8
------ ------
$ 57 $ 57
====== ======
Other long-term obligations:
Postretirement benefits....................................... $ 80 $ 70
Employee severance costs...................................... 4 4
Pension and related benefits.................................. 26 59
Liabilities and expenses associated with antitrust
investigations and related lawsuits and claims............ 52 49
Long-term portion of DOJ fine................................. 47 46
Long-term environmental liabilities........................... 5 5
Unamortized gain on interest rate swap........................ - 9
Other......................................................... 17 16
------ ------
$ 231 $ 258
====== ======
</table>
The following table presents an analysis of the allowance for doubtful
accounts:
AT DECEMBER 31,
---------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Balance at beginning of year........ $ 5 $ 4 $ 5
Additions........................... 1 2 1
Deductions.......................... (2) (1) (1)
------- ------ ------
Balance at end of year.............. $ 4 $ 5 $ 5
======= ====== =====
(10) LEASES AND OTHER LONG TERM OBLIGATIONS
Lease commitments under noncancelable operating leases extending for
one year or more will require the following future payments:
(Dollars in millions)
2003.............................. $1
2004.............................. 1
2005.............................. 1
2006.............................. -
2007.............................. -
After 2007........................ 1
Total lease and rental expenses under noncancelable operating leases
extending one month or more were $4 million in 2000, $3 million in 2001 and $1
million in 2002.
During 2001, we outsourced our information technology function to CGI
Group Inc. ("CGI"). Under this ten-year agreement, CGI will manage our data
services, networks, desktops, telecommunications and legacy systems. The
following is a schedule of future payments for base services:
(Dollars in millions)
2003............................... $6
2004............................... 6
2005............................... 5
2006............................... 5
2007............................... 5
After 2007......................... 17
136
<page>
In addition, we have a remaining commitment to purchase $3 million in
services above the base level over the remaining term of the agreement.
In September 2002, we entered into a ten-year outsourcing contract
with CGI to provide finance and accounting business process services valued at
$36 million. The following is a schedule of future payments for base services:
(Dollars in millions)
2003..................................... $2
2004..................................... 3
2005..................................... 4
2006..................................... 4
2007..................................... 4
After 2007............................... 18
(11) BENEFIT PLANS
Retirement Plans and Postretirement Benefit Plans
Until February 25, 1991, we participated in the U.S. retirement plan of
Union Carbide Corporation ("UNION CARBIDE"). Effective February 26, 1991, we
formed our own U.S. retirement plan which covers substantially all U.S.
employees. Retirement and death benefits related to employee service through
February 25, 1991 are covered by the Union Carbide plan. Benefits paid by the
Union Carbide plan are based on final average pay through February 25, 1991,
plus salary increases (not to exceed 6% per year) until January 26, 1995 when
Union Carbide ceased to own at least 50% of the equity of GTI. All our
employees who retired prior to February 25, 1991 are covered under the Union
Carbide plan. Pension benefits under our plan are based primarily on years of
service and compensation levels prior to retirement. Net pension cost for our
plan was $7 million in 2000 and 2001 and $6 million in 2002. Prior to January 1,
2002, our plan was a defined benefit plan. Effective January 1, 2002, a new
defined contribution plan was established for U.S. employees. Some employees
will have the option to remain in the defined benefit plan for five more years.
At the end of five years, the value of the employees' retirement benefit will be
frozen, and the employee will then begin participating in the defined
contribution plan. Those employees without the option to remain in the defined
benefit plan will begin participating in the defined contribution plan and their
benefits under the defined benefit plan were frozen as of December 31, 2001.
Under the new defined contribution plan, we will make quarterly contributions to
each individual employee account equal to 2.5% of the employee's pay up to the
social security wage base ($84,000 in 2002) plus 5% of their pay above the
social security wage base.
Pension coverage for employees of foreign subsidiaries is provided, to
the extent deemed appropriate, through separate plans. Obligations under such
plans are systematically provided for by depositing funds with trustees, under
insurance policies or by book reserves. Net pension costs for plans of foreign
subsidiaries amounted to nil in 2000, $4 million in 2001 (which includes a $4
million settlement loss for the Canadian pension plan) and $1 million in 2002.
137
<page>
The components of our consolidated net pension costs are as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Service cost............... $ 7 $ 7 $ 6
Interest cost.............. 15 14 11
Expected return on assets.. (15) (14) (11)
Amortization .............. - - -
Settlement (gain) loss..... - 4 1
Curtailment loss........... - - -
----- ----- ---------
Net pension cost...... $ 7 $ 11 $ 7
===== ===== =====
We also provide health care and life insurance benefits for eligible
retired employees. These benefits are provided through various insurance
companies and health care providers. We accrue the estimated net postretirement
benefit costs during the employees' credited service periods. The components of
our consolidated net postretirement benefit costs are as follows:
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
<s> <c> <c> <c>
Service cost................................................ $ 2 $ 2 $ -
Interest cost............................................... 6 6 4
Amortization of prior service cost.......................... (1) (2) (8)
---- ----- -----
Net postretirement benefit cost........................ $ 7 $ 6 $ (4)
==== ===== =====
</table>
The reconciliation of beginning and ending balances of benefit
obligations under, and fair value of assets of, all of our pension and
postretirement benefit plans, and the funded status of the plans, are as
follows:
<table>
<caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
AT DECEMBER 31, AT DECEMBER 31,
--------------- ---------------
2001 2002 2001 2002
---- ---- ---- ----
(Dollars in millions)
<s> <c> <c> <c> <c>
Changes in benefit obligation:
Net benefit obligation at beginning of year.... $ 205 $ 177 $ 83 $ 63
Service cost................................... 7 6 2 -
Interest cost.................................. 14 11 6 4
Impact of plan amendments...................... - - (68) (9)
Foreign currency exchange rate changes......... (8) 6 (2) (1)
Actuarial loss................................. 4 14 48 (3)
Curtailment.................................... - (8) - -
Settlement..................................... (36) (6) - -
Gross benefits paid............................ (9) (8) (6) (7)
------ ------ ------ ------
Net benefit obligation at end of year.... $ 177 $ 192 $ 63 $ 47
====== ====== ====== ======
Changes in plan assets:
Fair value of plan assets at beginning of year. $ 179 $ 127 $ - $ -
Actual return on plan assets................... (5) (11) - -
Foreign currency exchange rate changes......... (10) 5 - -
Employer contributions......................... 8 5 6 7
Participants contributions..................... - - - -
Settlement..................................... (36) (6) - -
Gross benefits paid............................ (9) (8) (6) (7)
------ ------ ------ ------
Fair value of plan assets at end of year. $ 127 $ 112 $ - $ -
====== ====== ====== ======
</table>
138
<page>
<table>
<caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
AT DECEMBER 31, AT DECEMBER 31,
--------------- ---------------
2001 2002 2001 2002
---- ---- ---- ----
(Dollars in millions)
<s> <c> <c> <c> <c>
Reconciliation of funded status:
Funded status at end of year $ (50) $ (80) $ (63) $ (47)
Unrecognized net transition
asset....................................... (2) (1) - -
Unrecognized prior service cost................ 1 1 (67) (64)
Unrecognized net actuarial loss................ 21 49 50 41
------ ------ ------ ------
Net amount recognized at end of year........ $ (30) $ (31) $ (80) $ (70)
====== ====== ====== ======
Amounts recognized in the statement of financial
position consist of:
Prepaid benefit cost........................... $ 4 $ 4 $ (3) $ -
Accrued benefit liability...................... (36) (60) (77) (70)
Intangible asset............................... - 1 - -
Accumulated other comprehensive income......... 2 24 - -
------ ------ ------ ------
Net amount recognized....................... $ (30) $ (31) $ (80) $ (70)
====== ====== ====== ======
</table>
Assumptions used to determine net pension costs, pension projected
benefit obligation, net postretirement benefit costs and postretirement benefits
projected benefit obligation are as follows:
<table>
<caption>
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
AT DECEMBER 31, AT DECEMBER 31,
--------------- ---------------
2001 2002 2001 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Weighted average assumptions as of measurement date:
Discount rate............................... 7.34% 6.71% 7.79% 7.04%
Expected return on plan assets ............. 8.59% 7.80% - -
Rate of compensation increase............... 4.73% 4.04% 3.39% -
Health care cost trend on covered charges:
Initial.............................. N/A N/A 6.88% 6.68%
Ultimate............................. N/A N/A 5.34% 5.38%
Years to ultimate.................... N/A N/A 6 6
</table>
Assumed health care cost trend rates have a significant effect on the
amounts reported for net postretirement benefits. A one percentage point change
in the health care cost trend rate would change the accumulated postretirement
benefits net benefit obligation by approximately $5 million at December 31, 2001
and December 31, 2002 and change net postretirement benefit costs by
approximately $1 million for both 2001 and 2002.
Other Non-Qualified Plans
Since January 1, 1995, we have established various unfunded,
non-qualified supplemental retirement and deferred compensation plans for
certain eligible employees. We established benefits protection trusts (the
"Trust") to partially provide for the benefits of employees participating in
these plans. At December 31, 2001 and December 31, 2002, the Trust had assets of
approximately $2 million, which are included in other assets on the Consolidated
Balance Sheets. These assets include 426,400 shares of common stock which we
contributed to the Trust in March 2001. These shares, if later sold, could be
used for partial funding of our future obligations under certain of our
compensation and benefit plans. The shares held in Trust are not considered
outstanding for purposes of calculating earnings per share until they are
committed to be sold or otherwise used for funding purposes.
139
<page>
Savings Plan
Our employee savings plan provides eligible employees the opportunity
for long term savings and investment. Participating employees can contribute
1.0% to 7.5% of employee compensation as basic contributions and an additional
0.5% to 10.0% of employee compensation as supplemental contributions. For 2001
and 2002, we contributed on behalf of each participating employee an amount
equal to 50% of the employee's basic contribution. We contributed $2 million in
2000 and $1 million in 2001 and 2002.
Incentive Plans
In 1998, we implemented a global profit sharing plan for our worldwide
employees. This plan is based on our global financial performance. The cost for
this plan was $2 million in 2000 and nil in 2001 and 2002.
(12) RESTRUCTURING AND IMPAIRMENT CHARGES
We have had several restructuring and impairment charges during the
past few years. At December 31, 2002, the outstanding balance of our
restructuring reserve was $14 million. The components of this balance are $8
million related to the mothballing of our graphite electrode operations in
Caserta, Italy, $4 million related primarily to remaining lease payments on our
former corporate headquarters, and $2 million related to plant closure cost
associated with the closure of our Canadian graphite electrode operations.
In the 2002 fourth quarter, we recorded $3 million ($2 million after
tax) of impairment charges relating to our investment in our joint venture with
Jilin Carbon Co. (together with its affiliates, "JILIN"). The impairment results
from uncertainty about the completion and start-up of the planned graphite
electrode facility in Changchun, China due to the effects that the challenging
2002 graphite electrode industry conditions have had on Jilin. We also recorded
a $1 million (nil after tax) change in estimate for the restructuring charge for
our graphite electrode operations in Caserta, Italy.
In the 2002 third quarter, we recorded a $1 million charge related to
the impairment of available-for-sale securities.
In the 2002 second quarter, we recorded a $13 million ($8 million after
tax) charge primarily related to the impairment of our long-lived carbon
electrode assets in Columbia, Tennessee as a result of a decline in demand and
loss of market share. The primary end market for carbon electrodes is silicon
metal, which remains very depressed in the U.S. where our main customer base is
located. This charge also includes $1 million related to the impairment of
available-for-sale securities.
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 included 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,
140
<page>
Italy. $24 million of the impairment loss on long-lived assets related to assets
located at our facility in Caserta, Italy. The remaining $3 million related to
the 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 a corporate
realignment of our businesses, the relocation of our corporate headquarters and
the shutdown of our coal calcining operations located in Niagara Falls, New
York. The relocation was substantially completed in 2001. The charge includes
severance and related benefits associated with a workforce reduction of 24
employees and impairment of leasehold improvement assets.
In 2001 third quarter, we reversed $2 million of prior restructuring
charges based on revised lower estimates of workforce reductions and plant
closure costs, and we reclassified $4 million of prior restructuring charges
related to on-site waste disposal post-monitoring costs to other long term
obligations.
In the 2001 second quarter, we recorded a $58 million charge for
restructuring and impairment loss on long-lived assets related to the shutdown
of our graphite electrode manufacturing operations in Clarksville and Columbia,
Tennessee and our coal calcining operations in Niagara Falls, New York. The $58
million charge includes restructuring charges of $2 million for severance and
related benefits associated with a workforce reduction of 171 employees and $3
million in plant shutdown and related costs. The remaining $53 million relates
to the impairment loss on long-lived assets. The shutdown was completed in 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 cash charge related to the write-off of certain
long-lived assets located at one of our facilities in the U.S.
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.
141
<page>
The fair value of the long-lived assets was calculated on the basis of
discounted estimated future cash flows. Estimates of the discounted future cash
flows are subject to significant uncertainties and assumptions. Accordingly,
actual values could vary significantly from such estimates.
The following table summarizes activity relating to the accrued expense
in connection with the restructuring charges.
<table>
<caption>
PLANT
SHUTDOWN AND
SEVERANCE AND RELATED POST MONITORING AND
RELATED COSTS COSTS RELATED COSTS TOTAL
------------- ------------ ------------------- -----
(Dollars in millions)
<s> <c> <c> <c> <c>
BALANCE AT JANUARY 1, 2000............... $ 13 $ 10 $ 5 $ 28
-------- -------- -------- ------
Restructuring charges in 2000............ 6 3 1 10
Payments in 2000......................... (5) (1) (1) (7)
Change in estimate and impact of currency
rate changes in 2000................. (1) (3) (1) (5)
--------- ---------- --------- ---------
BALANCE AT DECEMBER 31, 2000............. $ 13 $ 9 $ 4 $ 26
Restructuring charges in 2001............ 4 8 - 12
Payments in 2001......................... (13) (5) - (18)
Non-cash write-offs in 2001.............. - (4) - (4)
Reclassification of on-site disposal and
monitoring costs..................... - - (4) (4)
--------- -------- --------- ---------
BALANCE AT DECEMBER 31, 2001............. $ 4 $ 8 $ - $ 12
Restructuring charges in 2002............ 6 - - 6
Payments in 2002......................... (5) 1 - (4)
--------- ---------- --------- ---------
BALANCE AT DECEMBER 31, 2002............. $ 5 $ 9 $ - $ 14
========= ========== ========= =========
</table>
The restructuring accrual is included in other accrued liabilities on
the Consolidated Balance Sheets.
(13) MANAGEMENT COMPENSATION AND INCENTIVE PLANS
We have adopted several stock incentive plans. The aggregate number of
shares reserved under the plans since their initial adoption was 14,500,000
shares at December 31, 2001 and December 31, 2002. The plans permit options and
restricted stock to be granted to employees and, in the case of one plan since
March 1998, also to non-employee directors.
Stock Options
In 1995, we granted 12-year options to management to purchase 4,761,000
shares at an exercise price of $7.60 per share, of which options for 3,967,400
shares vested at the time of our initial public offering in 1995, and the
balance were performance options, one half of which were to vest in each of 1998
and 1999 on achievement of designated EBITDA targets. In December 1997,
GTI's Board of Directors accelerated the vesting of the 1998 performance
options. We did not achieve the 1999 performance targets and, accordingly, the
1999 performance options were cancelled.
142
<page>
In 1996, we granted 10-year options to mid-management to purchase
960,000 shares at an exercise price of $35.00 per share, and granted additional
10-year options to mid-management to purchase 4,000 shares at an exercise price
of $40.44 per share. In 1997, we granted 10-year options to mid-management to
purchase 61,500 shares at an exercise price of $39.31 per share. The options
vest eight years from the grant date. Accelerated vesting occurs if the market
price of the common stock equals or exceeds specified amounts. At December 31,
2002, 451,350 of such options were vested.
In 1997, we granted vested 10-year options to management to purchase
155,000 shares at an exercise price of $37.59 per share. At December 31, 2002,
all such options were vested.
In 1998, we granted 10-year options to purchase shares as follows:
O Options for 641,000 shares were granted to certain officers
and directors at exercise prices ranging from $29.22 to $34.36
per share. Options for 320,000 shares vest one year from the
grant date, options for 221,000 shares vest two years from the
grant date and options for 100,000 shares vest three years
from the grant date. At December 31, 2002, all of such options
were vested.
O Options for 1,935,000 shares were granted to certain officers
and management at exercise prices ranging from $15.50 to
$17.06 per share. Options for 17,000 shares vested on the
grant date, options for 628,000 shares vest after one year
from the grant date, and all remaining options vest seven
years from the grant date, subject to accelerated vesting if
the market price for the common stock equals or exceeds
specified amounts. At December 31, 2002, 1,834,732 of such
options were vested.
In 1999, we granted 10-year options to purchase shares as follows:
O Options for 409,000 shares were issued to certain officers,
management and directors at exercise prices ranging from
$14.13 to $25.81 per share. Options for 45,359 shares vested
on the grant date, options for 274,101 shares vest one year
from the grant date, and all remaining options vest seven
years from the grant date, subject to accelerated vesting if
the market price for the common stock equals or exceeds
specified amounts. At December 31, 2002, 345,232 of such
options were vested.
In 2000, we granted 10-year options to purchase shares as follows:
O Options for 2,615,511 shares were issued to certain officers,
management and directors at exercise prices ranging from $8.56
to $19.06 per share. Options for 2,070,100 shares vest two
years from the grant date, options for 200,000 shares vest
five years from the grant date, 175,901 shares vest one year
from the grant date, options for 12,200 vested at the grant
date, options for 35,040 shares vested ratably over the course
of 2000 and all remaining options vest seven years from the
grant date, subject to accelerated vesting if the market price
for the common stock equals or exceeds specified amounts. At
December 31, 2002, 2,136,645 of such options were vested.
In 2001, we granted 10-year options to purchase shares as follows:
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O Options for 1,755,170 shares were issued to certain officers,
management and directors at exercise prices ranging from $8.56
to $11.95 per share. Options for 1,644,300 shares vest two
years from the grant date and options for 110,870 shares
vested on the grant date. At December 31, 2002, 120,870 of
these options were vested.
In 2002, we granted 10-year options to purchase shares as follows:
O Options for 114,101 shares were issued to certain officers,
management and directors at exercise prices ranging from $5.13
to $10.77 per share. Options for 19,400 shares vest in two
years from the grant date, options for 31,000 shares vest as
of January 1, 2003, options for 10,321 shares vest as of
February 26, 2003, options for 30,000 shares vest as of
September 17, 2004, options for 5,000 shares vest as of
November 12, 2004, options for 8,380 shares vested at one
grant date and options for 10,000 shares vested as of December
31, 2002. At December 31, 2002, 18,380 of these options were
vested.
The following table summarizes the status of our stock-based
compensation plans at the dates and for the period indicated:
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
------------------------- -------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
(Shares in thousands)
<s> <c> <c> <c> <c> <c> <c>
Time vesting options:
Outstanding at beginning of
year............................... 5,277 $ 20.15 7,842 $ 16.55 9,194 $ 15.28
Granted at market price.............. 2,615 9.53 1,755 8.99 114 9.42
Granted at price exceeding
market............................. - - - - - -
Granted at price below market........ - - - - - -
Exercised............................ (16) 13.81 (188) 7.60 (134) 7.60
Forfeited/canceled................... (34) 32.37 (215) 17.12 (221) 13.49
-------- -------- --------
Outstanding at end of year......... 7,842 16.55 9,194 15.28 8,953 15.36
======== ======== ========
Options exercisable at year
end................................ 4,710 $ 18.65 5,309 $ 18.11 6,797 $ 16.19
Weighted-average fair value of
options granted during year:
At market.......................... 5.97 5.58 6.01
Exceeding market................... - - -
Below market....................... - - -
Performance vesting options:
Outstanding at beginning of
year............................... 546 $ 7.60 401 $ 7.60 378 $ 7.60
Granted.............................. - - - - - -
Exercised............................ (22) 7.60 (23) 7.60 - -
Forfeited/canceled................... (123) 7.60 - - - -
-------- -------- --------
Outstanding at end of year......... 401 7.60 378 7.60 378 7.60
======== ======== ========
</table>
144
<page>
<table>
<caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
------------------------- -------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
(Shares in thousands)
<s> <c> <c> <c> <c> <c> <c>
Options exercisable at year
end................................ 401 $ 7.60 378 $ 7.60 378 $ 7.60
</table>
The fair value of each stock option is estimated on the grant date
using the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 2000, 2001 and 2002, respectively: dividend yield of
0.0% for all years; expected volatility of 50% in 2000, 52% in 2001 and 55% in
2002; risk-free interest rates of 5.5% in 2000, 4.8% in 2001 and 4.3% in 2002;
and expected lives of 8 years for all years.
The following table summarizes information about stock options
outstanding at December 31, 2002:
<table>
<caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICES EXERCISABLE PRICES
--------------- ----------- ---------------- --------------- ----------- ------
(Shares in thousands)
<s> <c> <c> <c> <c> <c>
Time vesting options:
$5.13-10.77 4,728 7 years $ 8.48 3,166 $ 8.26
$11.60 to $19.06 2,587 6 years 16.38 2,254 16.87
$22.81 to $29.22 142 6 years 25.74 141 25.74
$30.59 to $40.44 1,496 4 years 34.37 1,236 34.15
----- -----
8,953 15.36 6,797 16.19
===== =====
Performance vesting options:
$7.60 378 5 years $ 7.60 378 $ 7.60
</table>
Other
In 1998, we entered into a five-year employment agreement with our
current chairman of the board.
In 2000, we granted 100,000 restricted shares to our current chairman
of the board, and we are amortizing the value of those shares as of the grant
date ($2 million) over the vesting period which extends through 2004.
In 2002, we granted 512,200 shares of restricted stock to employees. We
also recorded a $5 million non-cash compensation charge associated with the
accelerated vesting of those shares.
Under our executive employee loan program, certain members of
management borrowed less than $1 million in 2000 and none in 2001 or 2002.
During 2002, all these loans were repaid as described below. Under our executive
employee stock purchase programs, certain members of management purchased, at
the fair market value on the date of purchase, 18,556 shares in
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2000 and none in 2001 or 2002. In 2002, management participating in these
programs repaid all outstanding loans with shares of common stock valued at fair
market value on the date of repayment and cash. These programs have been
discontinued.
(14) CONTINGENCIES
Antitrust Investigations
In April 1998, pursuant to a plea agreement between 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. 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 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. At December 31,
2002, the statutory rate of interest was 1.41% 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 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 had assessed a
fine against us in the amount of 676 million KRW ($569,000, based on currency
exchange rates in effect at the time of payment) and assessed fines against five
other graphite electrode producers in amounts ranging up to 4,396 million KRW
(approximately $3.3 million, based on currency exchange rates in effect at the
time of the decision imposing the fine). 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 our cooperation with that
authority during its investigation. In May 2002, we appealed the decision. In
July 2002, the Korean antitrust authority affirmed its decision on appeal. We
paid the fine together with accrued interest, an aggregate of $584,000, in
August 2002.
In January 2000, 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. In July 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 $53 million,
based on exchange rates in effect at December 31, 2002) against us and assessed
fines against seven other graphite electrode producers in amounts 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
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<page>
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 have had
discussions with the EU Competition Authority regarding the appropriate form of
collateral security during the pendency of the appeal. If the EU Competition
Authority seeks to require payment of the fine or provision of collateral
security therefor, we may file an interim appeal to the Court to waive or modify
such requirement. We cannot predict how or when the Court would rule on such an
interim appeal.
In May 2001, 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 have provided that information.
In May 2002, the EU Competition Authority issued a statement of
objections initiating proceedings against us and other producers of specialty
graphite. The statement alleges that we and other producers violated European
antitrust laws in connection with the sale of specialty graphite. In December
2002, the EU Competition Authority issued its decision regarding the
allegations. Under the decision, the EU Competition Authority assessed no fine
against us and assessed fines against seven other producers in amounts ranging
up to (euro)28 million. We received a 100% reduction from the amount that
otherwise would have been assessed against us due to our cooperation.
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, the EU Competition Authority 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.
To the extent that antitrust investigations involving us have been
resolved with guilty pleas or by adverse decisions, such guilty pleas and
decisions make it more difficult for us to defend against other investigations
as well as civil lawsuits and claims. We have been vigorously protecting, and
intend to continue to vigorously protect, our interests in connection with the
investigations described above. We may, however, at any time settle any possible
unresolved charges.
Antitrust Lawsuits
Through December 31, 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 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
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<page>
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 payments due have been timely paid.
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 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 the U.S. Court
of Appeals for the Third Circuit with regard to these dismissals. The U.S. Court
of Appeals for the Third Circuit heard oral argument on these appeals on March
11, 2003, and we are awaiting its decision. The third complaint was dismissed
without prejudice to refile pending the resolution of such appeals. We filed a
motion to stay the lawsuit commenced by the fourth complaint pending resolution
of appeals in the other foreign customer lawsuits and such motion was granted in
July 2002.
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, initially filed in the U.S.
Bankruptcy Court for the Northern District of Ohio and subsequently transferred
to the U.S. District Court for the Northern District of Ohio, Eastern Division,
is now entitled Cohen & Co., Distribution Trustee v. UCAR International Inc., et
al. (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.
In October 2001, we settled the lawsuit commenced by the third complaint. In
September 2002, we settled the lawsuit commenced by the first complaint. In
January 2003, we settled the lawsuit commenced by the second complaint. The
guilty pleas and decisions described above do not relate to carbon electrodes.
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In the 2002 first quarter, we and other producers of cathodes were
served with a complaint commencing a civil antitrust lawsuit in the U.S.
District Court for the District of Oregon entitled Northwest Aluminum Company,
et al. vs. VAW Aluminum A.G., et al (the "CARBON CATHODE LAWSUIT"). The
complaint was filed by two producers of aluminum. Other producers of cathodes
are also named as defendants in the complaint. In the complaint, the plaintiffs
allege that the defendants violated U.S. federal antitrust law in connection
with the sale of cathodes and seek, among other things, an award of treble
damages resulting from such alleged violations. In November 2002, we settled
this lawsuit. The guilty pleas and decisions described above do not relate to
cathodes.
In December 2002 and January 2003, we and other producers of bulk
graphite were served with two complaints commencing two civil class action
antitrust lawsuits. The first complaint, filed in the U.S. District Court for
the District of New Jersey, is entitled Industrial Graphite Products, Inc. v.
Carbone Lorraine North America Corporation, et al. The second complaint, filed
in the same court, is entitled Ceradyne, Inc. v. Carbone Lorraine North America
Corporation, et al. In February 2003, we learned that a class action complaint
commencing a civil class action antitrust lawsuit had been filed against us and
other producers of bulk graphite in the District Court entitled General
Refractories Company v. GrafTech International Ltd., et al. In March 2003, this
lawsuit was dismissed by the District Court without prejudice. In March 2003, we
learned that two complaints commencing civil class action antitrust lawsuits had
been filed against us and other producers of bulk graphite in the U.S. District
Court for the District of New Jersey entitled General Refractories Company v.
GrafTech International Ltd., et al. and Midwest Graphite Co., Inc. v. SGL
Carbon, LLC, et al., respectively. The lawsuits commenced by the first, second,
fourth and fifth complaints, along with a lawsuit commenced by a sixth complaint
filed only against SGL Carbon, LLC, SGL Carbon A.G. and SGI Carbon GmbH, were
subsequently consolidated or are subject to consolidation into a single lawsuit
in the United States District Court for the District of New Jersey entitled In
re: Bulk [Extruded] Graphite Products Antitrust Litigation (the "BULK GRAPHITE
LAWSUITS"). In the bulk graphite lawsuit, the plaintiffs allege that the
defendants violated U.S. federal antitrust law in connection with the sale of
bulk graphite and seek, among other things, an award of treble damages resulting
from such alleged violations. In March 2003, we reached an agreement to settle
the bulk graphite lawsuits.
The foreign customer lawsuits and the bulk graphite 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.
Antitrust Earnings Charges
We have recorded pre-tax charges of $350 million against results of
operations as a reserve for potential liabilities and expenses in connection
with antitrust investigations and related lawsuits and claims. The 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.
The fines and net settlements and expenses are within the amounts we used to
evaluate the aggregate charge of $350 million. To the extent that aggregate
liabilities and expenses, net, are known or reasonably estimable, at December
31, 2002, $350 million represents our estimate of these liabilities and
expenses. Our
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<page>
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 December 31, 2002, we have paid an aggregate of $252 million of
fines and net settlement and expense payments and $14 million of imputed
interest. At December 31, 2002, $98 million remained in the reserve. The balance
of the reserve is available for the fine payable to the DOJ (excluding imputed
interest thereon), the fine assessed by the EU Competition Authority and other
matters. The aggregate amount of remaining committed payments payable to the DOJ
for imputed interest at December 31, 2002 was about $6 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.
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.
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The defendants have filed motions to dismiss this lawsuit and a motion
to disqualify certain of our counsel from representing us in this lawsuit. Oral
hearings were held on those motions in the 2001 first and second quarters. The
court approved a motion to disqualify certain of our counsel in November 2002,
and denied our motion to reconsider that decision. We do not believe that either
that decision or the adverse ruling on such motion for reconsideration will
adversely affect this lawsuit. The court has not ruled on the motions to
dismiss.
We expect to incur $10 million to $20 million for legal expenses to
pursue this lawsuit from the date of filing the complaint through trial. Through
December 31, 2002, we had incurred about $5 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.
(15) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of SFAS No. 128, adopted in 1997, using the following share data:
<table>
<caption>
2000 2001 2002
---- ---- ----
<s> <c> <c> <c>
Weighted-average common shares outstanding for basic
calculation.......................................... 45,224,204 49,719,938 55,941,878
Add: Effect of stock options............................. 589,208 - -
------------- ----------- -----------
Weighted-average common shares outstanding, adjusted
for diluted calculation.............................. 45,813,412 49,719,938 55,941,878
============= ========== ==========
</table>
As a result of the net loss from operations reported in 2002, all
779,051 potential common shares underlying dilutive securities have been
excluded from the calculation of diluted earnings (loss) per share because their
effect would reduce the loss per share. The calculation of weighted average
common shares outstanding for the diluted calculation excludes options for
3,669,498 shares in 2000, 5,243,593 shares in 2001 and 5,524,535 shares in 2002
because they were not dilutive due to the fact that the exercise prices were
greater than the weighted average market price of the common stock.
<page>
(16) STOCKHOLDER RIGHTS PLAN
Effective August 7, 1998, GTI adopted a Stockholder Rights Plan (the
"RIGHTS PLAN"). Under the Rights Plan, one preferred stock purchase right (a
"RIGHT") was distributed on September 21, 1998 to stockholders of record on
August 20, 1998 as a dividend on each share of common stock outstanding on the
record date. Each share of common stock issued after the record date is
accompanied by a Right.
When a Right becomes exercisable, it entitles the holder to buy one
one-thousandth of a share of a new series of preferred stock for $110. The
Rights are subject to adjustment upon the occurrence of certain dilutive events.
The Rights will become exercisable only when a person or group becomes the
beneficial owner of 15% or more of the outstanding shares of common stock or 10
days after a person or group announces a tender offer to acquire beneficial
ownership of 15% or more of the outstanding shares of common stock. No
certificates representing the Rights will be issued, and the Rights are not
transferable separately from the common stock, unless the Rights become
exercisable.
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<page>
Under certain circumstances, holders of Rights, except a person or
group described above and certain related parties, will be entitled to purchase
shares of common stock (or, in certain circumstances, other securities or
assets) at 50% of the price at which the common stock traded prior to the
acquisition or announcement (or 50% of the value of such other securities or
assets). In addition, if GTI is acquired after the Rights become exercisable,
the Rights will entitle those holders to buy the acquiring company's common
shares at a similar discount.
GTI is entitled to redeem the Rights for one cent per Right prior to
the time when the Rights become exercisable. If not redeemed, the Rights will
expire on August 7, 2008.
The preferred stock issuable upon exercise of Rights consists of Series
A Junior Participating Preferred Stock, par value $.01 per share, of GTI. In
general, each share of that preferred stock will be entitled to a minimum
preferential quarterly dividend payment equal to the greater of $10.00 per share
or 1,000 times the quarterly dividend declared on the common stock, will be
entitled to a liquidation preference of $110,000 and will have 1,000 votes,
voting together with the common stock.
(17) 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, GrafTech Finance (the "ISSUER") issued $400
million aggregate principal amount of Senior Notes and, on May 6, 2002, $150
million aggregate principal amount of additional Senior Notes. The Senior Notes
have been guaranteed on a senior basis by GTI (the "PARENT") and GrafTech
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 AET, 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. GTI and our other subsidiaries, which are not
guarantors, are called the "NON-GUARANTORS." The following table sets forth
condensed consolidating balance sheets at December 31, 2001 and December 31,
2002 and condensed consolidating statements of operations and cash flows for the
years ended December 31, 2001 and 2002 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 December 31,
2002, retained earnings of our subsidiaries subject to such restrictions were
approximately $459 million. Investments in subsidiary companies are recorded on
the equity basis.
152
<page>
CONDENSED CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 2002
<table>
<caption>
At December 31, 2002
--------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ - $ - $ 4 $ 7 $ - $ 11
Notes and accounts receivable, net.......... - 752 470 255 (1,369) 108
Inventories:
Raw materials and supplies.............. - - 3 38 (1) 40
Work in process......................... - - 31 71 1 103
Finished goods.......................... - - 10 23 (3) 30
--------- ---------- ---------- --------- --------- ---------
- - 44 132 (3) 173
Prepaid expenses and deferred income taxes.. - - 8 13 - 21
--------- ---------- ---------- --------- --------- ---------
Total current assets.................... - 752 526 407 (1,372) 313
Net fixed assets............................ - - 44 268 (4) 308
Deferred income taxes and other assets......... 47 34 (33) 120 70 238
--------- ---------- ---------- --------- --------- ---------
Total assets................................ $ 47 $ 786 $ 537 $ 795 $ (1,306) $ 859
========= ========== ========== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ 21 $ 26 $ 31 $ 89 $ (61) $ 106
Short-term debt............................. 416 - 231 668 (1,297) 18
Accrued income and other taxes.............. (24) (3) 37 18 (4) 24
Other accrued liabilities................... - - 36 39 (18) 57
--------- ---------- ---------- --------- --------- ---------
Total current liabilities............... 413 23 335 814 (1,380) 205
--------- ---------- ---------- --------- --------- ---------
Long-term debt................................. - 711 - 2 - 713
Other long-term obligations.................... - 9 203 45 1 258
Deferred income taxes.......................... - (5) - 36 3 34
Minority stockholders' equity in consolidated -
entities..................................... - - - 30 30
Stockholders' equity (deficit)................. (366) 48 (1) (132) 70 (381)
--------- ---------- ---------- --------- --------- ---------
Total liabilities and stockholders' equity $ 47 $ 786 $ 537 $ 795 $ (1,306) $ 859
(deficit).................................
========= ========== ========== ========= ========= =========
</table>
153
<page>
CONDENSED CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 2001
<table>
<caption>
At December 31, 2001
--------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ - $ 16 $ 8 $ 14 $ - $ 38
Notes and accounts receivable, net.......... - 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
-------- ---------- ---------- --------- --------- ---------
Net fixed assets............................ - - 52 233 (4) 281
Deferred income taxes and 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).................................
======== ========== ========== ========= ========= =========
</table>
154
<page>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
<table>
<caption>
For the Year Ended December 31, 2002
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
Net sales.......................................... $ - $ - $ 228 $ 529 $ (144) $ 613
Cost of sales...................................... - - 187 408 (122) 473
-------- ---------- ---------- --------- --------- --------
Gross profit.................................... - - 41 121 (22) 140
Research and development, selling, administrative
and other expenses, restructuring charges,
impairment losses on long-lived and other
assets, restricted stock vesting, antitrust
investigations and related lawsuits and claims,
corporate realignment and related expenses, and
other (income) expense, net..................... 7 12 (51) 23 115 106
Interest income.................................... - (59) - (4) 63 -
Interest expense................................... 21 62 5 35 (63) 60
-------- ---------- ---------- --------- --------- --------
Income (loss) before provision for (benefits
from) income taxes............................ (28) (15) 87 67 (137) (26)
Provision for (benefit from) income taxes.......... (10) (5) (17) 19 - (13)
-------- ---------- ---------- --------- --------- --------
Income (loss) of consolidated entities.......... (18) (10) 104 48 (137) (13)
Minority stockholders' share of income............. - - - 2 - 2
Equity in earnings of subsidiaries................. - - 91 - (91) -
-------- ---------- ---------- --------- --------- --------
Income (loss) before extraordinary item......... (18) (10) 13 46 (46) (15)
Extraordinary item, net of tax..................... - 3 - - - 3
-------- ---------- ---------- --------- --------- --------
Net income (loss)............................ $ (18) $ (13) $ 13 $ 46 $ (46) $ (18)
======== ========== ========== ========= ========= ========
</table>
<table>
<caption>
For the Year Ended December 31, 2001
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
Net sales.......................................... $ - $ - $ 246 $ 547 $ (139) $ 654
Cost of sales...................................... - - 215 372 (118) 469
-------- ---------- ---------- --------- --------- --------
Gross profit.................................... - - 31 175 (21) 185
Research and development, selling, administrative
and other expenses, restructuring charges,
impairment losses on long-lived and other
assets, restricted stock vesting, antitrust
investigations and related lawsuits and claims,
corporate realignment and related expenses, and
other (income) expense, net..................... 4 (2) 113 93 (13) 195
Interest income.................................... - (73) (4) (21) 98 -
Interest expense................................... 34 74 25 24 (97) 60
-------- ---------- ---------- --------- --------- --------
Income (loss) before provision for (benefits
from) income taxes............................ (38) 1 (103) 79 (9) (70)
Provision for (benefit from) income taxes.......... (15) - 9 21 - 15
-------- ---------- ---------- --------- --------- --------
Income (loss) of consolidated entities.......... (23) 1 (112) 58 (9) (85)
Minority stockholders' share of income............. - - - 2 - 2
Equity in earnings of subsidiaries................. 64 - (47) - (17) -
-------- ---------- ---------- --------- --------- --------
Net income (loss)............................ $ (87) $ 1 $ (65) $ 56 $ 8 $ (87)
======== ========== ========== ========= ========= ========
</table>
155
<page>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(CONTINUED)
<table>
<caption>
For the Year Ended December 31, 2000
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
Net sales.......................................... $ - $ - $ 306 $ 626 $ (156) $ 776
Cost of sales...................................... - - 275 422 (137) 560
-------- ---------- ---------- --------- --------- --------
Gross profit.................................... - - 31 204 (19) 216
Research and development, selling, administrative
and other expenses, restructuring charges,
impairment losses on long-lived and other
assets, restricted stock vesting, antitrust
investigations and related lawsuits and claims,
corporate realignment and related expenses, and
other (income) expense, net..................... 1 (4) (2) 73 37 105
Interest income................................. (8) (60) (32) (21) 121 -
Interest expense................................... 38 61 74 23 (121) 75
-------- ---------- ---------- --------- --------- --------
Income (loss) before provision for (benefits
from) income taxes............................ (31) 3 (9) 129 (56) 36
Provision for (benefit from) income taxes.......... - 2 (20) 28 - 10
-------- ---------- ---------- --------- --------- --------
Income (loss) of consolidated entities.......... (31) 1 11 101 (56) 26
Minority stockholders' share of income............. - - - 3 - 3
Equity in earnings of subsidiaries................. (41) - (42) - 83 -
-------- ---------- ---------- --------- --------- --------
Income (loss) before extraordinary item......... 10 1 53 98 (139) 23
Extraordinary item, net of tax..................... - 3 10 - - 13
-------- ---------- ---------- --------- --------- --------
Net income (loss)............................ $ 10 $ (2) $ 43 $ 98 $ (139) $ 10
======== ========== ========== ========= ========= ========
</table>
156
<page>
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
<table>
<caption>
For the Year Ended December 31, 2002
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
Net cash provided by (used in) operating activities. $ (20) $ 76 $ 81 $ (188) $ (9) $ (60)
Net cash provided by (used in) investing activities. - 127 91 77 (345) (50)
Net cash provided by (used in) financing activities. 20 (219) (176) 100 354 79
-------- ---------- ---------- --------- --------- -------
Net increase (decrease) in cash and cash equivalents - (16) (4) (11) - (31)
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - 4 - 4
Cash and cash equivalents at beginning of period.... - 16 8 14 - 38
-------- ---------- ---------- --------- --------- -------
Cash and cash equivalents at end of period.......... $ - $ - $ 4 $ 7 $ - $ 11
======== ========== ========== ========= ========= =======
</table>
<table>
<caption>
For the Year Ended December 31, 2001
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
Net cash provided by (used in) operating activities. $ (38) $ 15 $ 186 $ (63) $ (83) $ 17
Net cash provided by (used in) investing activities. - 18 (427) (71) 441 (39)
Net cash provided by (used in) financing activities. 38 (48) 242 141 (358) 15
-------- ---------- ---------- --------- --------- -------
Net increase in cash and cash equivalents........... - (15) 1 7 - (7)
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - (2) - (2)
Cash and cash equivalents at beginning of period.... - 31 7 9 - 47
-------- ---------- ---------- --------- --------- -------
Cash and cash equivalents at end of period.......... $ - $ 16 $ 8 $ 14 $ - $ 38
======== ========== ========== ========= ========= =======
</table>
<table>
<caption>
For the Year Ended December 31, 2000
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
Net cash provided by (used in) operating activities. $ (169) $ (26) $ 353 $ 96 $ (160) $ 94
Net cash provided by (used in) investing activities. 97 (873) 283 (58) 501 (50)
Net cash provided by (used in) financing activities. 72 930 (630) (44) (341) (13)
Net increase in cash and cash equivalents........... - 31 6 (6) - 31
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - (1) - (1)
Cash and cash equivalents at beginning of period.... - - 1 16 - 17
-------- ---------- ---------- --------- --------- -------
Cash and cash equivalents at end of period.......... $ - $ 31 $ 7 $ 9 $ - $ 47
======== ========== ========== ========= ========= =======
</table>
157
<page>
Unsecured intercompany term notes in an aggregate principal amount, at
December 31, 2002, equal to $492 million (based on currency exchange rates in
effect at December 31, 2002), and guarantees of those unsecured intercompany
term notes, issued to GrafTech Finance by certain of our foreign subsidiaries
have been pledged by GrafTech 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 AET, 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 an annual report on Form 10-K. 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 AET 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.
(18) SUBSEQUENT EVENTS
In the 2003 first quarter, we contributed 500,000 shares of common
stock into the trust for our qualified U.S. retirement plan. These shares may be
sold by the trust in the future to provide funding to meet obligations under the
plan. Such transaction was exempt from the registration under Section 4(2) of
the Securities Act of 1933 because such transaction did not involve the public
offering of securities.
In the 2003 first quarter, we entered into an additional $200 million
notional amount interest rate swap through the remaining term of our Senior
Notes effectively converting that amount of fixed rate debt to variable rate
debt. In the 2003 first quarter, we also entered into five-year interest rate
caps for a notional amount of $300 million, which extend through August 2007.
Subsequently, in the 2003 first quarter, we sold the entire $450 million
notional amount of our interest rate swaps for $11 million in cash. The
adjustment of the carrying amount of Senior Notes will be amortized over the
term of the Senior Notes and recorded as a credit against interest expense.
Following the sale of the swaps, in March 2003, we entered into $350 million
notional amount of interest rate swaps through the remaining term of our Senior
Notes.
158
<page>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported in a Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 15, 2001, on May 8, 2001, we selected
Deloitte & Touche LLP as independent auditors to replace KPMG LLP as the
independent accountant to audit our consolidated financial statements.
159
<page>
PART III
ITEMS 10 TO 13 (INCLUSIVE)
The information required by Items 10, 11, 12 and 13 will appear in the
GrafTech International Ltd. Proxy Statement for the Annual Meeting of
Stockholders to be held on May 28, 2003, which will be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934 and is incorporated by
reference in this Report pursuant to General Instruction G(3) of Form 10-K
(other than the portions thereof not deemed to be "filed" for the purpose of
Section 18 of the Securities Exchange Act of 1934). In addition, the information
set forth below is provided as required by Item 10.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to our current
executive officers and directors, including their ages, as of March 1, 2003.
There are no family relationships between any of our executive officers.
Craig S. Shular........... 50 Chief Executive Officer and President
Corrado F. De Gasperis.... 37 Vice President, Chief Financial Officer and
Chief Information Officer
Scott Mason............... 43 President, Graphite Power Systems
Karen G. Narwold.......... 43 Vice President, General Counsel, Human
Resources and Secretary
John J. Wetula............ 44 President, Advanced Energy Technology
Gilbert E. Playford....... 55 Chairman of the Board
R. Eugene Cartledge....... 73 Director
Mary B. Cranston.......... 55 Director
John R. Hall.............. 70 Director
Harold E. Layman.......... 56 Director
Thomas Marshall........... 74 Director
Ferrell P. McClean........ 56 Director
Michael C. Nahl........... 60 Director
Craig S. Shular became Chief Executive Officer and a director in
January 2003 and has served as President in May 2002. From August 2001 to
December 2002, he served as Executive Vice President of our former Graphite
Power Systems Division. He served as Vice President and Chief Financial Officer
from January 1999, with the additional duties of Executive Vice President,
Electrode Sales and Marketing from February 2000. From 1976 through 1998, he
held various financial, production and business management positions at Union
Carbide, including the Carbon Products Division from 1976 to 1979.
Corrado F. De Gasperis became Chief Financial Officer in May 2001 in
addition to his duties as Vice President and Chief Information Officer, which he
assumed in February 2000. He served as Controller from June 1998 to February
2000. From 1987 through June 1998, he was with KPMG LLP, and most recently as
Senior Assurance Manager in the Manufacturing, Retail
160
<page>
and Distribution Practice. KPMG had announced his admittance into their
partnership effective July 1, 1998.
Scott C. Mason became President, Graphite Power Systems, our synthetic
graphite line of business, in January 2003. From February 2001 through December
2002, he was Executive Vice President of our former Advanced Energy Technology
Division. He served as Chief Financial Officer and Vice President of AET and our
Director of Mergers and Acquisitions from April 2000 to March 2001. Prior to
joining us, Mr. Mason was Vice President-Supply Chain Logistics for Union
Carbide. From 1996 to 1999, Mr. Mason served as Director of Operations and then
as Business Director for the Unipol Polymers Business of Union Carbide. Mr.
Mason served from 1981 to 1996 in various financial, sales and marketing,
operations and mergers and acquisition management positions at Union Carbide. He
began his career in 1981 in the Chemicals and Plastics Division of Union
Carbide.
Karen G. Narwold became Vice President, General Counsel and Secretary
in September 1999 and also assumed responsibility for the human resources
department effective January 2002. She joined our Law Department in July 1990
and served as Assistant General Counsel from June 1995 to January 1999 and
Deputy General Counsel from January 1999 to September 1999. She was an associate
with Cummings & Lockwood from 1986 to 1990.
John J. Wetula became President, Advanced Energy Technology, in January
2003. From July 1999 to December 2002, he served as President of AET. From July
1998 to June 1999, he served as our Director of Export Sales. From October
1996 to June 1998, he was General Manager of our GRAFOIL(R) product line. He
is a chemical engineering and MBA graduate of Cleveland State University.
Gilbert E. Playford has served as the Chairman of the Board since 1999.
Mr. Playford served as Chief Executive Officer from June 1998 until January 2003
and as President from June 1998 until May 2002. From January 1996 to June 1998,
he was the President and Chief Executive Officer of LionOre Mining International
Ltd., a Toronto Stock Exchange company, which he founded and which is engaged in
mining nickel in Botswana and nickel/gold in Australia. Prior to founding
LionOre Mining International Ltd., of which he continues to serve as a director
and non-executive Deputy Chairman, Mr. Playford spent his career with Union
Carbide Corporation. We are the successor to the Carbon Products Division of
Union Carbide. Mr. Playford began his career in 1972 with Union Carbide in
Canada. In 1989, after several years in Europe and Canada, he was appointed
Corporate Vice President, Strategic Planning of Union Carbide. In 1990, he
became Vice President, Corporate Holdings of Union Carbide. He assumed the
additional responsibility of President and Chief Executive Officer of Union
Carbide's Canadian subsidiary in 1991. Mr. Playford was named Vice President,
Treasurer and Principal Financial Officer of Union Carbide in 1992. In his
capacity as Principal Financial Officer of Union Carbide, he also served as a
nominee of Union Carbide on GTI's Board of Directors from 1992 until our
leveraged equity recapitalization in January 1995. He took on additional duties
as Vice President for Union Carbide's latex and paint business in 1993. Mr.
Playford left Union Carbide in January 1996.
R. Eugene Cartledge became a director in February 1996. From 1986 until
his retirement in 1994, Mr. Cartledge was the Chairman of the Board and Chief
Executive Officer of Union
161
<page>
Camp Corporation. Mr. Cartledge retired as Chairman of the Board of Savannah
Foods & Industries Inc. in December 1997, and retired as a director of Delta
Airlines, Inc. and Sunoco, Inc. in May 2002. He is currently a director of Chase
Industries, Inc., Formica Corporation and Blount International, Inc., and
President of the Cartledge Foundation. Mr. Cartledge is Chairman of the
Nominating Committee and a member of the Organization, Compensation and Pension
Committee of GTI's Board of Directors.
Mary B. Cranston became a director in January 2000. Ms. Cranston is a
partner and has served since 1999 as Chairperson of Pillsbury Winthrop LLP, an
international law firm. Ms. Cranston is based in San Francisco, California. Ms.
Cranston has been practicing complex litigation, including antitrust,
telecommunications and securities litigation, with Pillsbury Winthrop LLP since
1975. She is a director of the San Francisco Chamber of Commerce, the Bay Area
Council and the Commonwealth Club, and a trustee of the San Francisco Ballet and
Stanford University. Ms. Cranston is a member of the Organization, Compensation
and Pension Committee and the Nominating and Governance Committee of GTI's Board
of Directors.
John R. Hall became a director in November 1995. From 1981 until his
retirement in 1997, Mr. Hall was Chairman of the Board and Chief Executive
Officer of Ashland Inc. Mr. Hall had served in various engineering and
managerial capacities at Ashland Inc. since 1957. He retired as Chairman of Arch
Coal Inc. in 1998. He served as a director of Reynolds Metals Company from 1985
to 2000. Mr. Hall currently serves as a member of the Boards of Bank One
Corporation, Canada Life Assurance Company, CSX Corporation, Humana Inc. and
USEC Inc. Mr. Hall graduated from Vanderbilt University in 1955 with a degree in
Chemical Engineering and later served as Vanderbilt's Board Chairman from 1995
to 1999. Mr. Hall also serves as Chairman of the BlueGrass Community Foundation
and the Commonwealth Fund for Kentucky Educational Television, and as President
of the Markey Cancer Center Foundation. Mr. Hall is Chairman of the
Organization, Compensation and Pension Committee and a member of the Nominating
and Governance Committee of GTI's Board of Directors.
Harold E. Layman became a director in March 2003. From 2001 until his
retirement in 2002, Mr. Layman was President and Chief Executive Officer of
Blount International, Inc. Prior thereto, Mr. Layman served in other capacities
with Blount International, Inc., including President and Chief Operating
Officers from 1999 to 2001, Executive Vice President and Chief Financial Officer
from 1997 to 2000, and Senior Vice President and Chief Financial Officer from
1993 to 1997. From 1981 through 1992, he held various financial management
positions with VME Group/Volvo AB. From 1970 to 1980, Mr. Layman held various
operations and financial management positions with Ford Motor Company. He is
currently a director of Blount International, Inc. and Von Hoffman Holdings Inc.
Mr. Layman is a member of the Audit and Finance Committee and the Nominating and
Governance Committee of GTI's Board of Directors.
Thomas Marshall became a director in June 1998. Mr. Marshall retired in
1995 as Chairman of the Board and Chief Executive Officer of Aristech Chemical
Corporation, a spinoff of USX Corporation, which positions he had held since
1986. Mr. Marshall had previously served as President of the U.S. Diversified
Group, a unit covering 18 divisions and subsidiaries, including Manufacturing,
Fabricating and Chemicals, of USX Corporation. Mr. Marshall serves on the Board
of the National Flag Foundation. He is a trustee of the University of Pittsburgh
and Chairman of the Thomas Marshall Foundation. Mr. Marshall is a member of the
Organization, Compensation and Pension Committee of GTI's Board of Directors.
162
<page>
Ferrell P. McClean became a director in February 2002. Ms. McClean was
the Managing Director and Senior Advisor to the head of the Global Oil & Gas
Group in Investment Banking at J.P. Morgan Chase & Co. from 2000 through the end
of 2001. She joined J.P. Morgan & Co. Incorporated in 1969 and founded the
Leveraged Buyout and Restructuring Group within the Mergers & Acquisitions Group
in 1986. From 1991 until 2000, Ms. McClean was the Managing Director and
co-headed the Global Energy Group within the Investment Banking Group at J.P.
Morgan & Co. Ms. McClean is currently a director of Unocal Corporation. She is a
member of the Audit and Finance Committee of GTI's Board of Directors.
Michael C. Nahl became a director in January 1999. Mr. Nahl is Senior
Vice President and Chief Financial Officer of Albany International Corporation,
a manufacturer of paper machine clothing, which are the belts of fabric that
carry paper stock through the paper production process. Mr. Nahl joined Albany
International Corporation in 1981 as Group Vice President, Corporate and was
appointed to his present position in 1983. Mr. Nahl is a director of Lindsay
Manufacturing Co. and a member of the Chase Manhattan Corporation Northeast
Regional Advisory Board. Mr. Nahl is Chairman of the Audit and Finance Committee
of GTI's Board of Directors.
ITEM 14. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this Report, and,
based on that evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that these controls and procedures are effective. There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of that
evaluation.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See Index to Consolidated Financial Statements at page of
this Report.
163
<page>
(2) Financial Statement Schedules
None.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the 2002 fourth quarter.
(c) Exhibits
The exhibits listed in the following table have been filed with
this Report.
<table>
<caption>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<s> <c> <c>
2.1.0(1) - Recapitalization and Stock Purchase and Sale Agreement dated as of November 14, 1994 among
Union Carbide Corporation, Mitsubishi Corporation, GrafTech International Ltd. and
GrafTech International Acquisition Inc. and Guaranty made by Blackstone Capital Partners
II Merchant Banking Fund L.P. and Blackstone Offshore Capital Partners II L.P.
2.2.0(2) - Amended and Restated Stockholders' Agreement dated as of February 29, 1996 among
Blackstone Capital Partners II Merchant Banking Fund L.P., Blackstone Offshore Capital
Partners II L.P., Blackstone Family Investment Partnership II L.P., Chase Equity
Associates and GrafTech International Ltd.
2.3.0(1) - Exchange Agreement dated as of December 15, 1993 by and among Union Carbide Corporation,
Union Carbide Chemicals and Plastics Company Inc., Mitsubishi Corporation and GrafTech
International Ltd.
2.4.0(1) - Stock Purchase and Sale Agreement dated as of November 9, 1990 among Mitsubishi
Corporation, Union Carbide Corporation and UCAR Carbon Company Inc.
2.5.0(1) - Letter Agreement dated January 26, 1995 with respect to termination of the Stockholders'
Agreement dated as of November 9, 1990 among Mitsubishi Corporation, Union Carbide
Corporation and UCAR Carbon Company Inc.
2.6.0(1) - Settlement Agreement dated as of November 30, 1993 among Mitsubishi Corporation, Union
Carbide Corporation and UCAR Carbon Company Inc.
2.7.0(1) - Transfer Agreement dated January 1, 1989 between Union Carbide Corporation and UCAR Carbon
Company Inc.
2.7.1(1) - Amendment No. 1 to such Transfer Agreement dated December 31, 1989.
2.7.2(1) - Amendment No. 2 to such Transfer Agreement dated July 2, 1990.
2.7.3(1) - Amendment No. 3 to such Transfer Agreement dated as of February 25, 1991.
2.8.0(1) - Amended and Restated Realignment Indemnification Agreement dated as of June 4, 1992 among
Union Carbide Corporation, Union Carbide Chemicals and Plastics Company Inc., Union
Carbide Industrial Gases Inc., UCAR Carbon Company Inc. and Union Carbide Coatings Service
Corporation.
</table>
164
<page>
<table>
<caption>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<s> <c> <c>
2.9.0(1) - Environmental Management Services and Liabilities Allocation Agreement dated as of January
1, 1990 among Union Carbide Corporation, Union Carbide Chemicals and Plastics Company
Inc., UCAR Carbon Company Inc., Union Carbide Industrial Gases Inc. and Union Carbide
Coatings Service Corporation.
2.9.1(1) - Amendment No. 1 to such Environmental Management Services and Liabilities Allocation
Agreement dated as of June 4, 1992.
2.10.0(4) - Trade Name and Trademark License Agreement dated March 1, 1996 between Union Carbide
Corporation and UCAR Carbon Technology Corporation.
2.11.0(1) - Employee Benefit Services and Liabilities Agreement dated January 1, 1990 between Union
Carbide Corporation and UCAR Carbon Company Inc.
2.11.1(1) - Amendment to such Employee Benefit Services and Liabilities Agreement dated January 15,
1991.
2.11.2(1) - Supplemental Agreement to such Employee Benefit Services and Liabilities Agreement dated
February 25, 1991.
2.12.0(1) - Letter Agreement dated December 31, 1990 among Union Carbide Chemicals and Plastics
Company Inc., UCAR Carbon Company Inc., Union Carbide Grafito, Inc. and Union Carbide
Corporation.
3.1.0(3) - Amended and Restated Certificate of Incorporation of GrafTech International Ltd.
3.1.1(9) - Certificate of Designations of Series A Junior Participating Preferred Stock.
3.1.2(17) - Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
GrafTech International Ltd. (formerly known as UCAR International Inc.)
3.2.0* - Amended and Restated By-Laws of GrafTech International Ltd. dated December 13, 2002
4.1.0(16) - Indenture dated as of February 15, 2002 among GrafTech Finance Inc., GrafTech
International Ltd., GrafTech Global Enterprises Inc., UCAR Carbon Company Inc., and the
Subsidiary Guarantors from time to time party thereto
and State Street Bank and Trust Company, as Trustee.
4.1.1(17) - 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.
4.2.0(16) - Registration Rights Agreement dated as of February 15, 2002 among GrafTech International
Ltd., each of the Subsidiaries listed therein, Credit Suisse First Boston Corporation,
J.P. Morgan Securities Inc., ABN AMRO Incorporated, Fleet Securities Inc. and Scotial
Capital (USA) Inc.
</table>
165
<page>
<table>
<caption>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<s> <c> <c>
4.3.0(17) - 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.
4.4.0(9) - Rights Agreement dated as of August 7, 1998 between GrafTech International Ltd. and The
Bank of New York, as Rights Agent.
4.4.1(16) - Amendment No. 1 to such Rights Agreement dated as of November 1, 2000.
4.4.2(18) - Amendment No. 2 to such Rights Agreement dated as of May 21, 2002.
10.1.0(11) - Credit Agreement dated as of February 22, 2000 among GrafTech International Ltd.,
GrafTech Global Enterprises Inc., GrafTech 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, as
Administrative Agent.
10.1.1(12) - First Amendment to such Credit Agreement dated as of October 11, 2000.
10.1.2(13) - Second Amendment to such Credit Agreement dated as of April 25, 2001.
10.1.3(13) - Third Amendment to such Credit Agreement dated as of July 10, 2001.
10.1.4(16) - Forth Amendment to such Credit Agreement dated as of December 6, 2001.
10.1.5(16) - Fifth Amendment to such Credit Agreement dated as of January 18, 2002.
10.1.6(17) - Sixth Amendment to such Credit Agreement dated as of February 22, 2000.
10.2.0(16) - Reaffirmation Agreement dated as of February 15, 2002 among GrafTech International Ltd.,
GrafTech Global Enterprises Inc., GrafTech Finance,
Inc., each Subsidiary Loan Party named therein, each
LC Subsidiary named therein and JPMorgan Chase Bank as
Administrative Agent and Collateral Agent under the
Credit Agreement.
10.3.0(17) - 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 Carbon Technology LLC, UCAR
Holdings III Inc. and UCAR International Trading Inc. and State Street Bank and Trust
Company.
10.4.0(11) - Guarantee Agreement dated as of February 22, 2000 made by GrafTech International Ltd.,
GrafTech Global Enterprises Inc., GrafTech Finance Inc. and each Domestic Subsidiary party
thereto in favor of Morgan Guaranty Trust Company of New York, as Collateral Agent for the
Secured Parties.
10.5.0(11) - Security Agreement dated as of February 22, 2000 made by GrafTech International Ltd.,
GrafTech Global Enterprises Inc., GrafTech Finance Inc. and the subsidiaries of GrafTech
from time to time party thereto, in favor of Morgan Guaranty Trust Company of New York, as
Collateral Agent for the Secured Parties.
10.6.0(11) - Indemnity, Subrogation And Contribution Agreement dated as of February 22, 2000 among
GrafTech International Ltd., GrafTech Global Enterprises Inc., GrafTech Finance Inc., each
of the Domestic Subsidiaries party thereto and Morgan Guaranty Trust Company of New York,
as Collateral Agent for the Secured Parties.
</table>
166
<page>
<table>
<caption>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<s> <c> <c>
10.7.0(11) - Pledge Agreement dated as of February 22, 2000 by GrafTech International Ltd., GrafTech
Global Enterprises Inc., GrafTech Finance Inc. and the direct and indirect subsidiaries of
GrafTech that are signatories thereto in favor of Morgan Guaranty Trust Company of New
York, as Collateral Agent for the Secured Parties.
10.8.0(11) - Intellectual Property Security Agreement dated as of February 22, 2000 made by GrafTech
International Ltd., GrafTech Global Enterprises Inc., GrafTech Finance Inc. and the
subsidiaries of GrafTech from time to time party thereto in favor of Morgan Guaranty Trust
Company of New York, as Collateral Agent for the Secured Parties.
10.9.0(16) - Pledge Agreement dated as of February 15, 2002, by UCAR SA in favor of GrafTech Finance
Inc.
10.10.0(9) - GrafTech International Ltd. Management Stock Incentive Plan (formerly GrafTech
International Ltd. Management Stock Option Plan) as amended and restated through September
29, 1998.
10.10.1(14) - Amendment to the GrafTech International Ltd. Management Stock Incentive Plan (formerly GrafTech
International Ltd. Management Stock Option Plan)(Original Version) effective as of June 29, 2000.
10.10.2(1) - Form of Non-Qualified Stock Option Agreement (Original Version).
10.11.0* - GrafTech International Ltd. Management Stock Incentive Plan (formerly GrafTech
International Ltd. Management Stock Option Plan) as amended and restated through January
16, 2003 (Senior Version).
10.11.1(9) - Forms of Non-Qualified Stock Option Agreement (Standard Option Version and Directors
Version).
10.12.0* - GrafTech International Ltd. Management Stock Incentive Plan (formerly GrafTech
International Ltd. Management Stock Option Plan) as amended and restated through January
16, 2003 (Mid-Management Version).
10.12.1* - Form of Restricted Stock Agreement for GrafTech International Ltd. Management Stock
Incentive Plan (formerly GrafTech International Ltd. Management Stock Option Plan)
(Mid-Management Version).
10.13.0* - GrafTech International Ltd. 1995 Equity Incentive Plan as amended and restated through
January 16, 2003.
10.13.1* - Form of Restricted Stock Agreement for GrafTech International Ltd. 1995 Equity Incentive
Plan.
10.14.0* - GrafTech International Ltd. 1996 Mid-Management Equity Incentive Plan as amended and
restated through January 16, 2003.
10.14.1* - Form of Non-Qualified Stock Option Agreement for GrafTech International Ltd. 1996
Mid-Management Equity Incentive Plan.
10.14.2* - Form of Restricted Stock Agreement for GrafTech International Ltd. 1996 Mid-Management
Equity Incentive Plan.
10.15.0(11) - GrafTech International Ltd. Compensation Deferral Program effective January 1, 2000.
10.15.1(14) - UCAR Carbon Company Inc. Compensation Deferral Program Trust effective as of November 1,
2000.
</table>
167
<page>
<table>
<caption>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<s> <c> <c>
10.15.2(16) - First Amendment to such Deferral Program Trust effective as of November 20, 2000.
10.16.0(11) - GrafTech International Ltd. Management Incentive Plan amended and restated as of January
1, 1999.
10.17.0(9) - GrafTech International Ltd. Executive Employee Stock Purchase Program (Senior Management
Version).
10.17.1* - GrafTech International Ltd. Executive Employee Stock Purchase Program (Mid-Management
Version).
10.18.0(9) - GrafTech International Ltd. Executive Employee Loan Program.
10.19.0(14) - Forms of Severance Compensation Agreement (U.S. Version and International Version).
10.20.0(11) - UCAR Carbon Company Inc. Equalization Benefit Plan amended and restated as of October 1,
1998.
10.20.1(11) - First Amendment to Equalization Benefit Plan effective, as to paragraph 1, January 1, 2000
and, as to paragraph 2, October 1, 1998.
10.20.2(16) - Second Amendment to such Equalization Benefit Plan effective as of January 1, 2001. 10.20.3(16) - Third
Amendment to such Equalization Benefit Plan effective as of May 23, 2001. 10.21.0(11) - UCAR Carbon
Company Inc. Supplemental Retirement Income Plan amended and restated as of July 1, 1998.
10.21.1(11) - First Amendment to Supplemental Retirement Income Plan effective, as to paragraph 1, January 1, 2000
and, as to paragraph 2, July 1, 1998.
10.21.2(16) - Second Amendment to such Supplemental Retirement Income Plan effective as of January 1,
2001.
10.21.3(16) - Third Amendment to such Supplemental Retirement Income Plan effective as of May 23, 2001.
10.22.0(11) - UCAR Carbon Company Inc. Enhanced Retirement Income Plan amended and restated as of July
1, 1998.
10.22.1(11) - First Amendment to such Enhanced Retirement Income Plan effective, as to paragraph 1, January 1, 2000
and, as to paragraph 2, July 1, 1998.
10.22.2(16) - Second Amendment to such Enhanced Retirement Income Plan effective as of January 1, 2001.
10.22.3(16) - Third Amendment to such Enhanced Retirement Income Plan effective as of May 23, 2001.
10.23.0(14) - UCAR Carbon Company Inc. Benefits Protection Trust amended and restated as of November 20,
2000.
10.23.1(16) - First Amendment to such Benefits Protection Trust effective as of November 20, 2000.
10.24.0(8) - Employment Agreement dated as of June 22, 1998 between GrafTech International Ltd. and
Gilbert E. Playford.
10.24.1(14) - Restricted Stock Agreement dated as of January 1, 2000 between GrafTech International Ltd.
and Gilbert E. Playford.
</table>
168
<page>
<table>
<caption>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<s> <c> <c>
10.24.2(15) - Amendment to Employment and Restricted Stock Agreements between GrafTech International Ltd. and
Gilbert E. Playford dated as of August 25, 2001.
10.24.3(18) - Letter amending Employment and Restricted Stock Agreements between GrafTech International Ltd. and
Gilbert E. Playford dated as of July 22, 2002.
10.25.0(7) - Plea Agreement between the U.S. of America and GrafTech International Ltd. executed April
7, 1998.
10.25.1(10) - Stipulation and Agreement of Settlement dated October 13, 1999 among David Jaroslawicz and Robert P.
Krass, Robert J. Hart, Peter B. Mancino, William P. Wiemels, Fred C. Wolf, Eugene Cartledge, John R. Hall,
Glenn H. Hutchins, Robert D. Kennedy, Howard A. Lipson, Peter G. Peterson, Stephen A. Schwarzman and
GrafTech International Ltd.
10.25.2(10) - Stipulation and Agreement of Settlement dated October 13, 1999 among the Florida State Board of
Administration and GrafTech International Ltd., Peter G. Peterson, Stephen A. Schwarzman, Howard A.
Lipson, Glenn H. Hutchins, Robert P. Krass, Robert J. Hart, William P. Wiemels, Fred C. Wolf and Peter
B. Mancino.
10.26.0(13) - Outsourcing Services Agreement, dated as of March 30, 2001, effective April 2001, between CGI
Information Systems and Management Consultants, Inc. and GrafTech International Ltd. (Confidential
treatment requested as to certain portions.)
10.27.0(13) - Joint Development and Collaboration Agreement, effective June 5, 2001, among UCAR Carbon Company
Inc., Graftech Inc., and Ballard Power Systems Inc. (Confidential treatment requested as to certain
portions)
10.27.1(13) - Master Supply Agreement, effective June 5, 2001 between UCAR Carbon Company Inc. and Ballard Power
Systems Inc. (Confidential treatment requested as to certain portions)
10.28.0(13) - Agreement, effective as of January 1, 2001, between ConocoPhillips Limited and UCAR S.A. (Confidential
treatment requested as to certain portions.)
10.28.1(13) - Agreement, effective as of January 1, 2001, between Cononco Inc. and UCAR Carbon Company Inc. and UCAR
S.A. (Confidential treatment requested as to certain portions)
21.1.0* - List of subsidiaries of GrafTech International Ltd.
23.1.0* - Consent of KPMG LLP.
23.2.0* - Consent of Deloitte & Touche LLP.
24.1.0* - Powers of Attorney (included on signature pages).
</table>
- ---------------
* Filed herewith.
(1) Incorporated by reference to the Registration Statement of GrafTech
International Ltd. and GrafTech Global Enterprises Inc. on Form S-1
(Registration No. 33-84850).
(2) Incorporated by reference to the Annual Report of the registrant on Form
10-K for the year ended December 31, 1995 (File No. 1-13888).
169
<page>
(3) Incorporated by reference to the Registration Statement of the registrant
on Form S-1 (Registration No. 33-94698).
(4) Incorporated by reference to the Quarterly Report of the registrant on
Form l0-Q for the quarter ended March 31, 1996 (File No. 1-13888).
(5) Incorporated by reference to the Quarterly Report of the registrant on
Form 10-Q for the quarter ended June 30, 1996 (File No. 1-13888).
(6) Incorporated by reference to the Quarterly Report of the registrant on
Form l0-Q for the quarter ended September 30, 1997 (File No. 1-13888).
(7) Incorporated by reference to the Quarterly Report of the registrant on
Form 10-Q for the quarter ended March 31, 1998 (File No. 1-13888).
(8) Incorporated by reference to the Annual Report of the registrant on Form
10-K for the year ended December 31, 1997 (File No. 1-13888).
(9) Incorporated by reference to the Annual Report of the registrant on Form
10-K for the year ended December 31, 1998 (File No. 1-13888).
(10) Incorporated by reference to the Quarterly Report of the registrant on
Form 10-Q for the quarter ended September 30, 1999 (File No. 1-13888).
(11) Incorporated by reference to the Annual Report of the registrant on Form
10-K for the year ended December 31, 1999 (File No. 1-13888).
(12) Incorporated by reference to the Quarterly Report of the registrant on
Form 10-Q for the quarter ended September 30, 2000 (File No. 1-13888).
(13) Incorporated by reference to the Quarterly Report of the registrant on
Form 10-Q for the quarter ended June 30, 2001 (File No. 1-13888).
(14) Incorporated by reference to the Annual Report of the registrant on Form
10-K for the year ended December 31, 2000 (File No. 1-13888).
(15) Incorporated by reference to the Quarterly Report of the registrant on
Form 10-Q for the quarter ended September 30, 2001 (File No. 1-13888).
(16) Incorporated by reference to the Annual Report of the registrant on Form
10-K for the year ended December 31, 2001 (File No. 1-3888).
(17) Incorporated by reference to the Quarterly Report of the registrant on
Form 10-Q for the quarter ended March 31, 2002 (File No. 1-13888).
(18) Incorporated by reference to the Quarterly Report of registrant on Form
10-Q for the quarter ended June 30, 2002 (File No. 1-13888).
170
<page>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
GRAFTECH INTERNATIONAL LTD.
March 31, 2003 By: /s/ Corrado F. De Gasperis
------------------------------------
Corrado F. De Gasperis
Title: Vice President, Chief Financial Officer
and Chief Information Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints Craig S. Shular, Corrado F. De
Gasperis and Karen G. Narwold, and each of them individually, his or her true
and lawful agent, proxy and attorney-in-fact, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to (i) act on, sign and file with the Securities and
Exchange Commission any and all amendments to this Report together with all
schedules and exhibits thereto, (ii) act on, sign and file with the Securities
and Exchange Commission any and all exhibits to this Report and any and all
exhibits and schedules thereto, (iii) act on, sign and file any and all such
certificates, notices, communications, reports, instruments, agreements and
other documents as may be necessary or appropriate in connection therewith and
(iv) take any and all such actions which may be necessary or appropriate in
connection therewith, granting unto such agents, proxies and attorneys-in-fact,
and each of them individually, full power and authority to do and perform each
and every act and thing necessary or appropriate to be done, as fully for all
intents and purposes as he or she might or could do in person, and hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact, any of them or any of his, her or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<table>
<caption>
SIGNATURES TITLE DATE
<s> <c> <c>
/s/ Craig S. Shular Chief Executive Officer and March 31, 2003
-------------------------
Craig Shular President and Director (Principal
Executive Officer)
/s/ Corrado F. De Gasperis Vice President, Chief Financial and March 31, 2003
---------------------------
Corrado F. De Gasperis Chief Information Officer (Principal
Accounting Officer)
</table>
171
<page>
<table>
<caption>
SIGNATURES TITLE DATE
<s> <c> <c>
/s/ Gilbert E. Playford Director March 26, 2003
---------------------------
Gilbert E. Playford
/s/ R. Eugene Cartledge Director March 25, 2003
---------------------------
R. Eugene Cartledge
/s/ Mary B. Cranston Director March 24, 2003
---------------------------
Mary B. Cranston
/s/ John R. Hall Director March 31, 2003
--------------------------
John R. Hall
Director March __, 2003
---------------------------
Harold E. Layman
/s/ Thomas Marshall Director March 31, 2003
---------------------------
Thomas Marshall
/s/ Ferrell P. McClean Director March 27, 2003
---------------------------
Ferrell P. McClean
/s/ Michael C. Nahl Director March 25, 2003
-------------------------
Michael C. Nahl
</table>
172
<page>
CERTIFICATIONS
I, Craig S. Shular, certify that:
1. I have reviewed this Annual Report on Form 10-K;
2. based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report;
3. based on my knowledge, the financial statements and other financial
information included in this Annual Report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Annual Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
(c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. the registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. the registrant's other certifying officers and I have indicated in
this Annual Report whether there was significant changes in internal controls or
in other factors that could
173
<page>
CERTIFICATIONS (CONT'D)
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/ Craig S. Shular
-------------------------------------
Craig S. Shular
President and Chief Executive Officer
174
<page>
CERTIFICATIONS (CONT'D)
I, Corrado F. De Gasperis, certify that:
1. I have reviewed this Annual Report on Form 10-K;
2. based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report;
3. based on my knowledge, the financial statements and other financial
information included in this Annual Report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Annual Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
(c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. the registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. the registrant's other certifying officers and I have indicated in
this Annual Report whether there was significant changes in internal controls or
in other factors that could
175
<page>
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/ Corrado F. De Gasperis
-------------------------------------------
Corrado F. De Gasperis
Vice President, Chief Financial Officer and
Chief Information Officer (Principal
Accounting Officer)
176
<page>
EXHIBIT INDEX
<table>
<caption>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<s> <c> <c>
3.2 - Amended and Restated By-laws of GrafTech International Ltd. Dated December 13, 2002
10.11.0 - GrafTech International Ltd. Management Stock Incentive Plan (formerly GrafTech
International Ltd. Management Stock Option Plan) as amended and restated through January
16, 2003 (Senior Version).
10.12.0 - GrafTech International Ltd. Management Stock Incentive Plan (formerly GrafTech
International Ltd. Management Stock Option Plan) as amended and restated through January
16, 2003 (Mid-Management Version)
10.12.1 - Form of Restricted Stock Agreement for GrafTech International Ltd. Management Stock
Incentive Plan (formerly GrafTech International Ltd. Management Stock Option Plan)
(Mid-Management Version).
10.13.0 - GrafTech International Ltd. 1995 Equity Incentive Plan as amended and restated through
January 16, 2003
10.13.1 - Form of Restricted Stock Agreement for GrafTech International Ltd. 1995 Equity Incentive
Plan.
10.14.0 - GrafTech International Ltd. 1996 Mid-Management Equity Incentive Plan as amended and restated
through January 16, 2003
10.14.1 - Form of Non-Qualified Stock Option Agreement for GrafTech International Ltd. 1996
Mid-Management Equity Incentive Plan.
10.14.2 - Form of Restricted Stock Agreement for GrafTech International Ltd. 1996 Mid-Management
Equity Incentive Plan.
10.17.1 - GrafTech International Ltd. Executive Employee Stock Purchase Program (Mid-Management
Version)
21.1 - List of subsidiaries of GrafTech International Ltd.
23.1 - Consent of KPMG LLP
23.2 - Consent of Deloitte & Touche LLP
24.1 - Powers of Attorney (included on signature pages)
</table>
177